Why merging practices is easier said than doneby
Phil Shohet, a senior consultant at Foulger Underwood, looks at the increase in smaller firms looking to sell and the stumbling blocks to successful acquisition.
The merger and acquisition market for larger firms is alive and well. Indeed, you only have to look at the accountancy league tables for the last few years to see just how few firms in this sector have remained unaffected. The tables also highlight how most of the growth achieved by individual firms has been through merger rather than by organic means.
However, more than 90% of accountancy practices in the UK consist of five partners or fewer - and although they seldom feature in the news, the scale of merger activity in the independent sector may have a greater impact on the future of the profession than what is happening among the top firms.
History is driving the merger market
In recent years, the number of mergers taking place in the independent sector has increased dramatically. Historical factors and market forces have been the main drivers of the M&A market.
There has been a natural cycle for small firms where partners set up practices and retire over a 30 year+ period. However, in the 1970s and 1980s there was an explosion in ICAEW membership that led to an increase in the number of new firms. Now, there are too many firms for the marketplace and small general practitioners are experiencing great difficulty in providing all the services demanded by their clients.
The problem is compounded by the issue of ageing partnerships. The partners from the ‘explosion’ are now in the twilight of their careers, but there is a dearth of risk-takers to take on the responsibilities of partnership. It has led to a situation where firms are not only struggling to replace retiring partners but also finding it very difficult to fund exit routes.
No ‘equal’ merger partners?
It is therefore unsurprising that there is such a high level of merger activity in the independent sector. Key issues are continuity and the opportunity to provide new services to the existing client base, while at the same time developing referrals out of it. However the quantity of referrals may not be as high as anticipated if the client regards the resulting merged firm as no more valuable than the one before.
A more pressing problem might be funding partner exit routes or achieving greater volume. There is a very real risk that both parties to the merger will simply end up compounding their problems. As many firms have learned to their cost: not all mergers are beneficial, but for those to take the time and trouble to find the right partner, the results have been extremely successful.
Of course, there are few true mergers. The reality is usually a takeover of one firm by another, with the stronger gaining the most advantage. The weaker party to the deal has to be satisfied with simply staving off the problems that prompted them to seek a merger in the first place. This often means that the partners in the weaker firm must accept terms that they do not find ideal, or a lesser value on the business than they think it is worth.
There are plenty of smaller firms looking to sell and no shortage of potential buyers. Fee acquisitions fall broadly into two categories:
- At one end there is a heavy demand for firms with up to £500k fees, a portable portfolio, no encumbrances or property issues and a retiring partner or partners; and
- Firms of between £750k and £1.5m where a similar sized or larger practice is seeking to consolidate.
In both these situations potential purchasers must be very sure of what they want. The smaller acquisition may not provide the quality of client base the acquirer needs, nor an actual or potential added value income stream.
One of the biggest stumbling blocks to a successful acquisition or merger is lack of experience. Larger firms may merge several times over a period of years, but most small practices only have one chance to get it right. As firms become more aware of the pitfalls, the percentage of successful mergers is increasing and will continue to do so as the independent sector becomes leaner and stronger.
Not all mergers are beneficial, but for those who take the time and trouble to find the right partner, the results have been extremely successful.
For small firms with an ageing population of senior partners, the temptation to merge must be overwhelming. They should not make any hasty decisions.
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Phil Shohet FCA is a senior consultant at Foulger Underwood. He has authored many books and articles, spoken at national and international conferences and seminars and is frequently asked to comment by the media on issues that affect the accountancy profession