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What the new consolidators can learn from the past

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With new firms trying to prove that accounting consolidators are on track to succeed, Philip Fisher advises the new consolidators on the lessons learned from the past. 

1st Dec 2022
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Have you heard of Gravita? The new kid on the accountancy block has been set up by Tenzing, who have little history in the accountancy sector - with a portfolio including software for transport management, cybersecurity and HR and Payroll - but the investors now want to get a share of the action.

Consolidation theory

Gravita is not the only consolidator sweeping through the profession, with Exponent-backed Xeinadin and Waterland-backed Cooper Parry also increasing their share of the sector. The sudden rise in consolidators can be traced back to Hg-backed Azets which broke into the scene in August 2016 (although at the time they were consolidating under the Baldwins group banner). 

The moves are hardly surprising with the profession proving incredibly attractive to private equity due to highly recurring fees and the profession lending itself to firms that know how to keep hold of clients. To add to the appeal, recent research from PwC’s Strategy& that was revealed at AccountingWEB Live Expo found that the UK SME market spends £9.6bn on accounting services. 

However, the theory of consolidating accountancy practices has been around for years, and the problem is that, for the most part, it has never quite worked out the way that the entrepreneurs expect.

Lessons from the past

Having seen the likes of Tenon, Numerica and Vantis come and go, the consolidators of the past offer some important lessons for the latest generation. 

Consolidators start at a disadvantage, since in order to acquire the underlying practices, they need to pay out hard cash to the existing partners, who are also their businesses’ greatest assets.

In many cases, these ageing individuals’ eyes light up as they spot an opportunity to sell out, get rich and enjoy themselves in early retirement. Clearly, that is hardly the best recipe for the ongoing success of the firms that they had built up over decades.

At the same time, by taking on a name like Azets, Gravita or Xeinadin, the new owners are potentially sacrificing the brand awareness and goodwill that comes with having been called Arram Berlyn Gardner, Wilkins Kennedy or Baldwins for so many years. 

Three goals

As the consolidators of the past have demonstrated, in order to make more money from an accumulation of small practices than they would have achieved without their intervention, it is often necessary to achieve one or more of three goals:

  1. Raise fee levels
  2. Reduce costs
  3. Increase productivity.

In the current economic climate, there is no particular reason why a bigger, consolidated firm can do the first without losing clients.

As the government has demonstrated so spectacularly in the past decade or more, while increasing productivity sounds good in theory, achieving it in the real world is not that easy. In our sector, most employees work hard, while firms are generally up-to-date on the best technology available without breaking the bank.

That leaves cost-cutting as the primary measure that could make the project viable.

As we all know, accountants have two major elements of cost – staff and property. There is no question that by merging businesses, it is possible to cut property costs by moving employees from constituent firms into existing or new buildings. This makes commercial sense, especially if more are permitted to work from home.

However, the other route to greater profitability is to cut staff. On the administration side, there is an argument that consolidators combining small practices together do not, for example, need as many credit controllers as one large firm.

The same might apply to professional staff, although since they are at such a premium at the moment, the big advantage here could be generating a larger pool of very capable staff to fill in gaps with which the underlying firms were struggling. This was evident from the majority of Accounting Excellence entrants listing recruitment as their biggest challenge. 

Merging matters

The biggest issue in any exercise of this type is the people.

Most readers who have ever worked for larger firms will have been through one or more mergers and know exactly what happens: the majority of mergers end with the larger firm becoming dominant.

As seen with consolidators of the past, the natural consequence is that most of the employees and partners of the smaller firm are either paid off or leave of their own volition in the months or early years after the businesses come together. 

The cost of raising fees

The other solution is to ramp up charges on the basis that clients are now getting what should be a better service from a more impressive business.

However, like workers, the typical client very consciously chooses the size of accountancy practice that they wish to use and the culture that they prefer.

If you have placed your business with a small, friendly firm where you get on extremely well with the partners and staff and are used to paying fees that you already regard as challenging then on discovering that everything has changed, at the very least you will review the situation.

Let’s say that your favourite partners on both the audit and tax side have moved on, nobody answers the phone and the replacements clearly regard your company as a very small fish in a very large pool. That makes a bad start. When you then discover that fee rates double overnight, that is tantamount to waving goodbye.

This explains why so few of the consolidators have been successful over the years. Time will tell if the new generation will make the same mistakes or whether the new consolidators have learned the lessons of the past. 

Editor's note: A version of this article was previously published 1 December, but was removed and changed for a piece that provided more historical context to the accounting firm consolidation scene.

Replies (5)

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Mark Lee headshot 2023
By Mark Lee
01st Dec 2022 16:11

Good summary Philip. There's another factor that some people overlook when forecasting the profits of consolidated firms. That is the additional 13.8% NIC charges on the salaries of what were previously partners' profit shares. I have never understood how anyone can seriously expect that the overhead savings following a consolidation would be sufficient to cover this additional cost AND provide a reasonable return for the investors.

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Replying to bookmarklee:
Mark Lee headshot 2023
By Mark Lee
01st Dec 2022 18:01

One way this could be achieved is if numerous partners leave so that the consolidated firm moves to a business model with something like 10-20 staff per remaining partner (vs 2-9) then perhaps it can (appear to) work financially....

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By ireallyshouldknowthisbut
01st Dec 2022 17:07

Great news for small accountants

They will be haemorrhaging clients, and probably staff too if hiking the price as you suspect and 'sausage machining' the clients using tech to replace the human touch.

Hurrah.

Local firm to me regularly buys up blocks of fees and loses a good chunk of them. Nearly all the work is done by bookkeepers, and they have two qualifieds for several thousands clients. The quality we see on the way in reflects that.

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John Toon
By John Toon
06th Dec 2022 11:28

"In our sector, most employees work hard, while firms are generally up-to-date on the best technology available without breaking the bank."

Are they? I've met very few firms that are generally up to date on the best technology available and when you start building a complex group through acquisition this only compounds the problem.

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paddle steamer
By DJKL
07th Dec 2022 10:02

"Consolidators start at a disadvantage, since in order to acquire the underlying practices, they need to pay out hard cash to the existing partners, who are also their businesses’ greatest assets."

Of course they also can list their company on AIM, offer shares with a lock in period to the acquired firms' former partners and then watch their shares drop to 6.5p; it was never all paying out hard cash.

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