Since the initial announcement about MTD there have been voices in the profession proclaiming the final straw, and that time was probably up on their life in practice.
AccountingWEB has seen regular comments along those lines, often citing great frustration with the change management required for clients, additional workload, cost, perceived self interest by the software suppliers, and of course various inadequacies of HMRC.
But what is the picture actually like? Has there been a flood, a steady flow, or just a trickle finally calling it a day?
Content seriesView full content series
MTD has had an impact
Jeremy Clarke from ICAS, who helps members at times of buying or selling their business, is clear that MTD very much played a role. “Once things became clearer a year ago there was a significant change, and we saw a three times increase in the number of firms interested or ready to sell – most of which were sole practitioners.
Supporting time-consuming and complex implementations of new requirements has been relentless: self assessment, RTI, auto enrolment, GDPR, AML and now MTD. It hasn’t been easy.”
Nicola Draper, director of broker Drape Hinks agrees. “MTD has been the final straw for those already under pressure and who see too much emphasis on systems and not relationships. A real consequence was that in 2017 there was a buyers’ fatigue with so many practices coming on to the market which drove the prices available right down, although it has recovered somewhat.”
Delay and implementation has bought a lull
The delay in mandation and the focus on VAT has certainly helped to stem an even bigger rush to market. “If you’re a small practice with not many VAT clients, especially with bridging software options rather than migrating to the cloud, things are a little more manageable than first suggested. So there are still people wanting to sell, but it’s not quite as busy at this point,” explained Clarke.
Draper develops this further by suggesting a practical timeline has also played a part. “There is much more activity to come as those that decided to sell around September/October wait until after they become compliant and mandation has come into effect. The buying and selling cycle takes six months, and little happens around December and January anyway. So the choice was to embrace what needed to be done and pick up again in March and April, which is what is happening”.
Being MTD ready goes beyond client systems
Through mandation firms have had to adapt, and although there has been an obvious focus on helping clients, the general attention to internal systems is a big factor in M&A conversations.
“We ask sellers to tell us what systems they use, and to be clear and about to what extent they are MTD compliant,” said Draper. ”Process is highly valued (even more so now) and impacts on what buyers are prepared to pay.”
Looking to the future, Clarke sees this as a trend that will continue. “There will be more consolidation in the midmarket, and smaller firms subsumed. But this depends on how well prepared people are too implement the next phases of MTD, not just VAT.”
This presents significant growth potential for others. “The flip side is that those that are geared up for it have a real opportunity to grab market share, even with lower margins by leveraging the tech," continued Clarke.
“With the benefits of great process and structure of the practice – you can do compliance work very efficiently. And there’s no sign that the volume of work will disappear.”
Draper recognises that for the proportion that is already struggling to make the changes, widening the scope of MTD is also widening the gap between them and potential purchasers. “Buyers who are very digital and process driven get frustrated with sellers who are in this position – it’s almost a different world, different attitudes, and even different language.”
Multiples and pricing in the future
So what about the value of practices moving forward?
For Clarke, the equation is quite simple: the more you can demonstrably be seen as on top of however MTD progresses the greater the opportunity to maximise the sale price.
“A buyer who has to do the heavy lifting just so that they can get the margin from compliance moving forward will have the whip hand. So, being MTD ready (period) is the way to drive value and as a consequence, I do think multiples will increase. If you’re not then your multiples will go down. But even now we’re starting from a relatively low base.”
Interestingly, one of the lures of a more digital tax regime and digitalisation, in general, is the potential for greater insight-driven work, regular client contact, and higher margin services.
However, these ‘basic advisory’ type services may not actually increase what you can get in terms of the sale price.
“We can only sell the recurring fees, and we may still be selling the recurring compliance in the future,” said Draper.
“Some buyers may buy on profit or EBITDA, but this is still unusual for the majority of the market. If you can incorporate your services into a monthly fee then this may be fine, but not advisory based on one-off projects or ad hoc billing.”
Too early to evaluate just yet
We are of course only in May 2019, with the first cohort of mandatory filing filtering through now. So it may be too early to see if there has been any ramping up of those deciding that the digital tax world is really not for them. However, Clarke has a feeling time will quickly tell.
“The real crunch point will be in August. There will be a period where people will see how things have gone and relax a bit, and maybe decide it wasn’t so bad. However, the fear will be that it may also encourage the government to go further quicker.
“It will happen in due course anyway, but if the timing is not realistic then it will cause problems for the profession and business - and then we could some really interesting activity.”