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Does private equity hold the key to accountancy's future?

5th Aug 2019
Director Principle Point
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Stock market and finance economic

With a consolidator resurgence brewing, Richard Sergeant examines if we can learn from the lessons of the past and if there is a stable model for the future.

The recent rumblings that Cogital is up for sale could give an indication about how the private equity market could be crucial in deciding how the accounting market (rather than profession) develops over the next ten years.

The history of the UK accounting consolidator has not been a glorious one, however. Firms have grown and evolved through acquisition, but those that have tried to do it at a scale rarely succeed.

Struggling early consolidator Numerica found a home mainly within Vantis, which itself went to the wall in 2010. RSM Tenon then picked up part of this business and grew in a similar way, until they fell too in 2013.

In recent times Cogital has been M&A masters using Baldwins to buy up practices large and small. Elsewhere, the Xeinadin Group boasted an ‘overnight merger’ of 120 firms, yet details are opaque at this stage.

But these are not the only examples. The TC Group has seen acquisitions as a major part of its growth strategy.

Meanwhile, private equity business Cow Corner plans to invest "substantial resources" into the newly rebranded Sussex firm Galloways, with the intent to "grow the business to be the fastest-growing and largest accountancy firm in the country”.

Why the model has struggled

There seem to be many reasons why the ‘old model’ didn’t work. Perhaps ironically for an accountancy business, one of these reasons was financial.

As Ian Hewitt, a partner at TC Group and formerly of Vantis, explained: “The old consolidator models were on a leveraged basis: Vantis was up to £100m syndicated debt against something like £100-140m fees, and that was a big issue.

"To fulfil the model, they had to keep on buying and buying. The more you buy, the more you had to finance - and it becomes a never-ending circle”.

Consultant and accounting journalist Kevin Reed also suggests governance as an issue due to their listed status. “These businesses were listed, which in itself creates a reporting regime that becomes transparent and onerous," he said. 

"From an operational perspective, you have to be structured to catch the right information, and then have the CFO and CEO relaying this to the markets. Given the way that they had grown, I don’t think they were rigorous enough.”


The inherent issues of bringing together disparate entities are also a problem. “The problem was that there were so many people coming in but no clear identity or purpose," said TC Group's Hewitt. "Directors acted still in silos, and there was no drive to create something common."

It's a point Reed agrees with. “Within a normal practice the owners are directly involved within the business. But when listed you create another set of owners though investors. The partners of acquired firms became directors on salaries and bonuses and disenfranchised from control and governance.”

Building on this point, Mark Lee suggests that “Any consolidator worth its salt has to bring together disparate groups, and doing it from the centre is hard. Tenon started on this late and struggled. Integrating many different practices and their systems is very hard.”

The rewards are there

There is some logic behind why this model can work. There are advantages for the acquirer and acquiree, not least given the more systemic issue of an aging partnership and succession issues.

“An exit opportunity for retiring partners and sole practitioners, and to build a national brand that might compete positively with franchises. That should work” said Lee.

For Reed the balance comes from a slower process that retains talent while underpinning centralised resource. “From a small practice perspective, you can see how it could remove some of the stresses and strains through centralisation, with the aim to leave in five years as a managed process.

“The power for consolidators would be in finding a way of running an effective shared service centre to build efficiencies, and given where we are with cloud, this has only just started to become possible.”

Consolidators and aggregators

Working to a different model and leveraging technology should provide an advantage to those that wish to have a go.

For the first part, Hewitt makes a distinction between the debt-funded consolidators of the past and an aggregator approach which may take a majority share of the equity.

“Going forward, new aggregators have more chance of success. They are being properly funded and you can’t be overleveraged, which puts a lot less pressure on the financing structure.”

He also sees advantages in speaking to the next generation coming through the enlarged practice. “There is a greater shift to younger partners, who don't want to be paying under the old equity-based models. This gives room for those wishing to retire or exit, and some equity left in the business for the remaining directors and the next generation.”

Technology and software providers

In the second part of that equation, technology is also coming into its own. More clients and more systems, in general, are coming online or into the cloud. So the ability to create scalable operations is at least more possible than it was in the early days of the consolidators, with overwhelming on-premise systems and desktop clients.

“Things have moved on 10-to-15 years in terms of the tech and the barriers are coming right down. Having businesses being able to work on a common platform without the huge infrastructure is attractive, and the more in the cloud things become the greater the gains will assist and strengthen the opportunity,” said Hewitt.

Mark Lee agrees, but he understands that this is not an easy thing to achieve. “It could be even easier in the future when everyone is cloud-based, and everyone is using a small number of key common systems.

“But I suspect that this will be at the functional level rather than the practical. There will also be a need to ensure that the guys back at the ranch are in place to make it work; the boffins if you will, that will be essential as your back office team.”

But is the door still open to the software providers? Providing the common technology base and a strong SME brand would suggest so; however, this is by no means a given.

The Nordic region has seen this tried out before. Tech giant Visma has had significant success in developing a substantial outsourcing operation called Azets. However, even this was sold creating a clear line between the two.

Interestingly though, it was sold to HG Capital and became part of the Cogital group - perhaps showing the intent if not yet the reality of how this could play forward.

Value for whom?

Ultimately though, there is an end game, but where exactly does this lead? Who benefits from a consolidator or an aggregator approach?

The obvious option is to float, and yet outside of the private equity market, Lee suggests, that “The aspiration would be clear, but I don’t see how it is any easier now than it has been in the past.”

If the market does become much tougher generally (and we can think about Brexit and economic uncertainty here as context), then will this create more opportunities for aggregators providing they are willing to hold in for the longer term? This might actually help to create a more stable overall business.

Or will it create more short-termism that could undermine the approach?

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