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High tech accountancy firms attract private equity investors
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Private equity cash moves into accountancy

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While some corners of the UK economy are still struggling to recover from the after-effects of the Covid pandemic, the market for accountancy practices is enjoying a private-equity investment surge.

2nd Sep 2021
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Setting the tone for accountancy’s new finance trend, Norwich-based practice Farnell Clarke last week anncounced the appointment of Louise Kingston as its new non-executive director. Kingston joined the firm after a career that started in EY’s audit department, then its technology and media M&A team, followed by 12 years in the private equity industry. Her new role is to help Farnell Clarke through its next phase of growth, said founder Will Farnell.

Farnell expanded on the increasing attraction of accountancy for private investors during a webinar at the end of the week on technology and innovation within the profession. “The innovations that leading firms have made have suddenly made it compelling for private equity. If we look at then challenges of consolidators of years gone by, they were buying a traditional partnership model. It was relationships wholly owned by principals and a lack of any ability to scale because of the way the model worked,” he said.

“We’ve been on subscription-based pricing from day one. We’re growing at 30% organically a year, we’ve got recurring revenue and an average lifetime value of at least seven years. Why are people not bashing my door down saying we want a piece of that?”

Technology crossover

Ad Valorem’s Nigel Adams also sat in on the webinar and entertained a few overtures from private investors. He agreed with Farnell’s analysis that investors were beginning to move from owning a chunk of the accounting technology industry to controlling service delivery too.

“We’re starting to see private equity – the money people – look at smaller firms they otherwise wouldn’t have countenanced,” said Adams.

“The firms working in this space have more of a technology feel than a traditional accountant feel. [They’ve got] access to lots of data, are scalable and subscription-led – not a million miles away from a technology company. There certainly seems to be a lot of appetite at the moment for practices that are adopting this approach.”

Tip of the iceberg

The examples cited are the tip of an investment iceberg, according to Norman Younger, founder and director of the accountancy practice brokerage Maximiti.

In February, he blogged that private equity has been circling the profession in recent years. “These new kids on the block are smaller and more loosely structured and their investors are unwilling to invest further in frothy and uncertain equity markets. They will pay more for access to a cash cow in the form of a staid and stable business model that is easy to understand and underpinned by compliance requirements.”

Since then, Younger has seen the trickle of pre-pandemic enquiries get a lot busier: “We’re now being approached by so-called private equity investors who want to look at what we’ve got.”

The latest wave of accountancy investors appear to have been inspired by financiers such as Hg Capital, which over the past five years has broadened its portfolio from accountancy software houses such as IRIS, Dext and Access Group to include Azets, a conglomerate of more than 60 UK accountancy firms.

Accounting cash cows

It may have taken the money people a while to realise the potential opportunity, but when you look at the returns, “an accountancy firm is like a cash machine – you can make money so quickly,” Younger said.

“A lot of them want to put together a mini-conglomerate of, say, eight firms, slap a fancy logo on it and come up with a few new terms for accountancy.”

The phrase “private equity” has brought a dash of dazzle to the market and has boosted multiples to more than 1x gross recurring fees, though insiders suggest that multiples are now more likely to be calculated based on earnings before tax, interest and amortisation (EBITDA) in the region of 8-12x. However, this activity is nearing the point of “overexuberance” that could lead to bum deals for some sellers, Younger warned.

“Some of these people have a background in accountancy and know what they’re looking for, but others may have got wind of the trend and put together a syndicate to try their hands in the accounting market,” he said. “You need to separate the wheat from the chaff.”

Have you had any experiences with private equity investors - and did the encounter end happily or not? Feel free to share your story by commenting below.

Replies (8)

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By fishfishyfishfish
03rd Sep 2021 11:30

Is anyone of sound mind really going to pay 8-12 times EBITDA? I would chew their entire arm off for that kind of deal - on typical numbers that would equate to a GRF multiple of what, 3X??

[edited for typo]

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Replying to fishfishyfishfish:
By James Green
06th Sep 2021 15:44

So would I.

In fact I’d give them a discount - let’s say x2 fees for payment in full at completion with no earn out…

…but that’s not how these deals will be being done. They all be on deferred consideration with “jam tomorrow”

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By North East Accountant
03rd Sep 2021 13:43

Let's hope they don't do a Tenon....

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By Brend201
05th Sep 2021 18:19

"However, this activity is nearing the point of “overexuberance” that could lead to [***] deals for some sellers"

"for some buyers"?

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Replying to Brend201:
By James Green
06th Sep 2021 15:43

These will be deferred consideration deals meaning the sellers will never be paid when the buyer collapses.

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Replying to James Green:
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By Brend201
06th Sep 2021 16:56

Yes. Thanks for clarifying.

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Replying to James Green:
By ireallyshouldknowthisbut
07th Sep 2021 12:02

The sellers also don't get paid if the buyer haemorrhaging clients when the fees are whacked up 50% or more and its all subbed out to numpties, so your actual GRF might well be small.

Local firm to me is always buying blocks of fees and the clients then jump ship in their droves back to the smaller firms who look after 'em.

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Mark Lee 2017
By Mark Lee
13th Nov 2021 19:08

Back in 2009 Jobtel announced plans to launch a new consolidator brand. I doubted it would happen and explained my reasons here: https://www.accountingweb.co.uk/practice/general-practice/will-a-new-acc...

I tend to think the same principles apply as regards private equity funded aggregators. Someone will get their fingers burned!

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