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Private Equity Is Eyeing Up SMPs: Opportunity or Threat

24th May 2024
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In the ongoing quest to acquire and develop businesses, private equity (PE) firms are increasingly turning to small to medium accounting practices (SMPs). This trend has been accelerating in recent years. Here, we look at what this trend means for SMPs and how you can make the most of the opportunity if it suits you.

PE interest in SMP
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The idea, in theory, is that by combining groups of smaller practices, firms can unlock efficiency and scale gains to turn them into profitable groups for potential sale later. For practitioners, this is a double-edged sword – during the sluggish economic environment, PE could be a valuable exit strategy for SMPs unable to pursue significant growth. However, it also marks a change in culture for many firms that have previously operated at a smaller scale, with a heavy focus on personal relationships and service.  

Why are PE firms looking at UK accountants? 

Private equity firms are drawn to established, integrable businesses with potential for investment and value-accrual. The accountancy sector is a natural fit due to its stability and potential for growth through improved management, processes and technology. SMPs, in particular, offer several attractive features: 

  1. Client Stickiness and Recurring Revenues: SMPs have high client retention and steady income streams from recurring services, making them reliable investments. 
  2. Connecting a Fragmented Market: The accountancy sector remains highly scattered among smaller practices, providing ample opportunities for consolidation and economies of scale. 
  3. Digital Transformation: The shift towards digital solutions in accountancy has made modernised practices more appealing to investors. Firms that have embraced technology are particularly attractive​​​​due to their ability to grow faster with fewer overheads. 

What’s in it for accountants? 

For firms facing a tough growth market or owners who want a break from the stresses of making every decision in their practice, PE investment has the potential to grow client fees, increasing the value of their equity. 

  1. Access to Capital: Private equity investment can provide crucial funds for expansion, technology upgrades, and other growth initiatives, such as pursuing a more aggressive acquisition strategy. 
  2. Operational Expertise: Private equity firms often bring valuable expertise and strategic guidance. This can help practices improve operations, adopt best practices, and enhance profitability. 
  3. Enhanced Value for Sale: Private equity can offer a viable and lucrative exit strategy for owners looking to exit. By aligning with a private equity partner, practice owners can position their firms for a higher valuation upon sale. 

Challenges and Considerations 

While the readily available cash and expertise of the PE sector may seem like a welcome lifeboat to some practices, it’s also important to remember that it comes with its own focuses and practices that may not align with your own. 

  1. Loss of Control: Private equity firms typically seek significant influence over the businesses they invest in, leading to a loss of autonomy for practice owners​​ who may be used to making their own decisions. 
  2. Focus on Short-term Gains: PE investors often aim to maximise returns within a specific timeframe, which can sometimes conflict with the practice's long-term interests. 
  3. Cultural Fit: It is crucial to ensure that the private equity partner shares the firm's values and vision—a mismatch can lead to conflicts and disrupt the practice's operations. 

Leveraging technology for growth and value 

The more scalable and processed your practice, the more attractive an acquisition opportunity it presents. That’s why investing in technology is critical for SMPs looking to attract private equity investment or simply enhance their market position. Automation and digital solutions improve efficiency and make practices more appealing to investors. 

Receipt Bot is an increasingly popular choice for practices looking to remove the burden of manual data entry, document management and AP management. By automating the processes that can hold your firm back from efficient growth, you can ensure your firm is ready to scale and reap the full benefit of investment. 

  1. Cutting-Edge OCR Technology: Receipt Bot utilises AI-powered OCR to ensure accurate data extraction from even low-quality scans.  This includes receipts from faded ink, crumpled paper, or even smartphone photos. 
  2. Seamless Integration: Receipt Bot integrates with accounting software programs, allowing for effortless data import and streamlined workflows.  
  3. Unlimited Client Management: Receipt Bot enables you to manage unlimited clients with a single subscription. You only pay for the documents processed per client, keeping costs predictable and scalable. 

Developing a strategic approach 

When considering whether PE investment is right for you, it’s key to make the decision carefully. A rushed choice can have long-lasting consequences. 

  1. Assess Readiness: Evaluate whether the firm is in a position to benefit from private equity investment. This includes having a clear understanding of the firm's financial health, growth potential, and operational efficiency. 
  2. Enhance Value: Invest in technology and improve operational processes to increase the firm’s value. 
  3. Seek the Right Partner: Choose a private equity firm that aligns with the practice's goals and values, including thorough due diligence to ensure a good fit. 
  4. Prepare for Change: Be ready to adapt to new management structures and strategies that private equity partners may bring. This includes being open to operational changes and strategic shifts aimed at boosting profitability. 

Choosing your path forward 

Private equity's growing interest in SMPs presents a unique opportunity for practice owners to enhance their operations, achieve growth, and plan an effective exit. However, that doesn’t mean it’s right for every firm. 

By approaching the idea methodically and with your personal goals in mind, you can leverage private equity to your advantage, ensuring long-term success and increased practice value, or invest on your terms to remain independent and forge your own path.