Consolidators and disruption increase practice M&A
Not since the days of Tenon have we seen such a rush of mergers and takeovers, as firms with Big Four ambitions sweep up the competition.
Leading the trend is regional firm Baldwins. Before the end of 2017, news of another Baldwins acquisition reached AccountingWEB’s editorial desk as it picked up Cassons, the practice best renowned for its annual festive videos.
As this acquisition marks the firm’s 60th office following the recent major acquisitions of Campbell Dallas and Springfords, are we set for the return of the consolidators?
Rise of the consolidators
Jeremy Clarke CA, ICAS assistant director of practice, doesn’t think these movements will be an isolated case. If anything, Clarke anticipates more acquirers and bigger deals over the next couple of years.
“The current trend, led by Baldwins, seems to be driven by decent-sized regional firms looking to grow by increasing their geographical spread, taking advantage of economies of scale, and building a national brand with local expertise,” he said. “They believe that they have well-run businesses and brands that they can leverage and that the time is right to go for it.”
The consolidation activity stepped up a gear when the former head of Deloitte John Connolly and the CogitalGroup bought Baldwins and Blick Rothenberg. “With his stated Big Four challenger ambitions, backed by the VC funding behind Cogital, the deals are getting bigger, which makes for interesting times,” Clarke explained.
More deals on the horizon
“There is clear demand from firms to use cash piles as they know the returns they can achieve, and some are gearing up too with a mix of debt and equity,” commented M&A expert and AccountingWEB regular Norman Younger.
What most firms with a taste for acquisition are looking for is a regional footprint, Younger added. “But some firms will consider anything that is ‘good’. There are wealth advisory services keen for high net-worth individuals and are circling.”
So, more firms within the £1m to £5m turnover bracket across the UK are now, naturally, going to become targets for firms like Baldwins. “I know of several acquirers who are in active talks with firms of that size. So, there will be more consolidators around in the next few years,” Clarke said.
But unlike consolidators of the past such as Tenon, Numerica and Vantis, the deals will be structured differently this time around, Clarke said.
Even the Practice Growth category in last year’s Practice Excellence Awards saw “strategic mergers” named as one of the main attributes for these firms growth. Mercer and Hole, for example, credited a recent merger with extending the firm’s business and general practice services, which is one of the firm’s core service offerings.
But Younger doesn’t think we are set for the return of the consolidators. “I don't see the return of consolidation as we knew it, rather independent firms seeking to grow rapidly for themselves as opposed to external investors on the stock market,” he said.
But this rapid scaling wouldn’t have been possible without the foot-tapping upheaval caused by the current accountancy landscape coaxing willing sellers to the surface.
Disruption hits smaller practices
While smaller practices won’t be in the cross-hairs for the likes of Baldwins, that’s not to say the current legislative and technological disruption to the market hasn’t caused a significant number of these firms to try selling up.
Smaller practices are struggling with fees, expensive staff and time-consuming compliance burdens, not to mention working longer hours and earning less. That’s why sole practitioners and smaller firms are starting to review their succession plans.
“With all the hassle and stress of running a practice like cashflow issues, RTI, auto enrolment, FRS102, MTD, the new AML regulations and GDPR, practice owners are beginning to ask, ‘why do I bother?’” Clarke said.
According to Clarke, sole practitioners between £100,000 to £500,000 levels will be looking at forming a consolidation of sorts with local two-to-five partners to share the “admin hassle”."
“I can also see the two-to-five partner practices, many of whom have succession issues, coming together to form larger regional firms."
But the problem these small firms and sole practitioners will encounter is that many won’t be able to afford to do this, Clarke said. “They have little or no pension provision – their pension is their practice. So, they put off selling in the forlorn hope that things will change, and the market will pick up. Ironically, while they keep working, often their businesses are becoming less and less profitable, and that makes them even less attractive to prospective purchasers.”
Coming soon on AccountingWEB, Della Hudson who recently sold her practice, will reveal the steps she took to make her practice saleable.