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Will a new accountancy consolidator be any more successful?

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10th Mar 2009
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As Jobtel announces plans to launch another consolidator in the UK in 2010, guest practice editor Mark Lee looks back at the successes and failures of previous consolidations in the accountancy marketplace.

Next year will see the launch of a new consolidator in the UK brought forward by Jobtel. The broker is currently inviting firms that might be interested in future floatation to take part, but what has consolidation taught us in the past?

To consolidate a business sector by mergers and take overs is nothing new – it occurs in response to market forces, changes in government regulations, or perhaps a new invention or craze that sweeps a sector resulting in a spate of mergers and takeovers.

The trend to attempt consolidation in the UK accountancy profession started almost at the turn of the century, but none of the listed practices involved have managed to achieve their initial ambitious plans.

In the meantime, many conventional firms have continued buying blocks of fees and taking over or merging with smaller firms ('mergovers' as I like to call them). It’s often said that the only people who benefit from consolidators are the retiring senior partners, who are commonly paid in cash to relinquish control of their firms. The consolidation enables them to 'withdraw' their capital without this being funded by the remaining partners.

On the other hand, they often had to accept lower profit shares and payment for their goodwill in the consolidator's shares. If, as so often happened, such shares did not perform well, the ex-partners lost out.

With the latest consolidation scheme only a year away, perhaps it’s time to look back at past examples to see what their progress has been.

Tenon
Tenon was established in February 2000 as an AIM listed company and it aspired to build a strong profitable consolidated accountancy practice that would become the largest firm outside the Big 5.

I recall writing a piece for AccountingWEB.co.uk in 2001 in which I set out my views as to how Tenon would need to manage the integration of the disparate tax practices it had by then acquired.

Those who ran Tenon at the ouset did not have a strong background in the profession and the firm struggled to succeed. Things changed when the senior management team moved on in 2004 and Andy Raynor was appointed Chief Executive. His background included a period as managing partner of BDO Stoy Hayward (East Midlands), one of the independent practices which had been acquired by Tenon.

The practice is now firmly established as one of the UK's top ten firms, with reported turnover of £160m in the year to 30 June 2008. It has acquired 20 different businesses over the last eight years.

Whether Tenon will ever achieve the original ambition, which would involve almost tripling in size to leapfrog BDO and GT seems unlikely. In the meantime, I think their strap line says it all: "Founded by entrepreneurs, run by entrepreneurs, for entrepreneurs."

Tenon is not the largest incorporated practice of course. This position is held by Smith & Williamson whose plans to float on AIM seem to be on hold.

Numerica
Numerica was floated in October 2001 and started life as a new vehicle for long established West End firm Levy Gee. Other smaller practices were also acquired and it reached a turnover of £45m. Although its acquisitions continued, the costs rose and the hoped for profit levels were not achieved.

Unlike Tenon, it seemed unable to grasp the nettle and sort matters out. The share price collapsed and refused to budge as rumours abounded about a possible trade sale. In an effort to regain the partnership ethos and to reduce costs, a new LLP structure was adopted but it was too late and Numerica was largely acquired by Vantis in 2005.

Vantis
The third consolidator in the UK was Vantis, initially a much smaller set up based initially around four accountancy, business advisory and professional service firms. It was admitted to AIM on 1 May 2002.

I recall hearing about the plans in 2001 when I had discussions with Paul Jackson of Morgan Brown Spofforth, the lead firm at the outset. Indeed, Paul has been the Chief Executive of Vantis since it was launched. The ambition was, and seems to remain, to reduce costs and engender integration. Its deals seem to have been concluded on an earn out basis and it has paid dividends from the start.

Although costs have risen, the profits and cash flow are still being delivered and Jobtel expect the share price to recover to floatation within the next 18 months or so. According to press reports Vantis turnover to 30 April 2008 was £97.3m and it was at 13 in the 2008 lists of top 50 UK accounting firms.

Begbies
Begbies Traynor was originally a Manchester based insolvency practice. In recent years it has grown to include a number of related services, having floated on AIM in 2004. Begbies conspicuously does not include any audit or accountancy practices as such, so it is a very different animal to the others referenced above.

Key concerns
There are two further observations that may add to the story, which I will outline below.

Partner earnings: The one key issue that all consolidators have had to face and will continue to face is that payroll costs for the ex-partners will increase by around 13% to cover employers' NICs that were not payable on their previous profit shares. Partners' profit shares (in both conventional partnerships and in LLPs) constitute self employed earnings.

Once the practice is incorporated, the ex-partners receive remuneration in the same way as all other staff and directors, and this means that employers NICs are payable. The current rate is 12.8% but we know this is planned to rise in the future.

The only way around this would be for the consolidated practice to retain some form of LLP structure (as Numerica attempted latterly to introduce). Whether external investors would still be interested in such practice remains to be seen.

International association: Could a new consolidated practice achieve traction without being part of a decent sized international association? Are there any left that do not currently have adequate UK representation? Would a new consolidated practice have sufficient ability to service work referred from overseas or would such expertise need to be recruited? These and more questions will no doubt exercise Jobtel's minds as their plans develop.

I wish them well but question whether any new consolidated practice will be able to secure the necessary cost savings simply to achieve the same profit levels as before. Time will tell if Jobtel's new venture is able to reverse the trend of previous consolidators and achieve results that both adequately reward the ex-partners and the investors.

Mark Lee is Chairman of the Tax Advice Network and guest practice editor of AccountingWEB.co.uk.

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By Jobtel
01st Apr 2009 16:00

Consolidator in 2010 why not now?
Well there are 4 reasons why Jobtel believe that it will take till then for them to pull together the next consolidator

1) The stock market prices are down right now of the exiting consolidators, Tenon 41 with a P/E of 8.3 and Vantis at 68.50 and with P/E of only 5.9 are both affected by this current recession. In Jobtel's view both businesses are now doing fine and Jobtel expect these shares to rise. Although Begbies P/E seems high at 24.1 the extra profits from the recession work are not yet factored in. So in all three cases the results and share prices will be more appropriate in Jobtel's view in 2010 when the market should have returned to normal and these businesses can be seen in a more representitive light. This fillip in prices is necessary to put the doubters minds to rest.

2) Larger firms financial results are expected to be hurt in early 2008/09 but hopefully will return to a more "normal" level in late 2009/2010 so that they would be going into a Consolidator on the way up rather than down - this would affect their firms valuations and hence what the partners would gain on sale.

3) It will take that time to pull together firms who may be scarcely known to one another, it takes time for the parties to see if they like one another, see if their cultures fit and see if there is the right geographical spread. Also the Lead firm selection is a key factor. The Lead firm has to be certain that it wants to move ahead and is prepared to bear the costs which accounts for a senior partner for about a year..

then finally
4) The process of going to AIM is not an easy route and it takes time- each of the core firms have to provide what seems like endless information. A prospectus has to be prepared, investors have to be lined up, advisers, auditors and brokers selected. This is a process that takes months so it needs carefull planning from the start.

So 2010 is the most likely date to do it

Julian Hamilton - Director Jobtel

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By AnonymousUser
01st Apr 2009 11:05

Consolidator 2010 - why?
As one practice Broker (APMA) to another, why are you planning to raise a Consolidator in 2010?

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By Jobtel
24th Mar 2009 10:42

Consolidators - correcting Mark Lee's tax comments
Mark Lee implies that the additional National Insurance payable by former partners when becomming employees after acquisition by a consolidator might be off-putting to the whole concept becomming part of a consolidator.

In practice when continuing with a consolidator after acquisition the now employee should get as follows:-
a) His earninhgs as employee of the consolidator
b) Cash from the sale of part of his equity - this he might invest and might earn him an income
c) Dividends from his shares in the consolidator given as part of the consideration

Whether this comes to more or less than his previous earnings depends largely on how hard he (and other similar previous partners) works after sale to yield the profits that the consolidator needs.

If it works he gets out his Capital as well which, as a partner in a firm, he might not be able to do at all!

Julian Hamilton - Director Jobtel

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By Jobtel
14th Dec 2009 16:59

Consolidators
A dramatic change in Consolidators I suggested some months ago that there would be further Accounting Practice Consolidators. The recent announcement in the FT that Tenon is to take over  RSM Bentley Jennison with some £80M of fees is a massive and ringing endorsement of the Consolidator Floatation model.. Its by far the biggest deal done to date by Tenon and indicates the confidence that RSM Bentley Jennison has both in the model and in Tenon's ability to leverage further profits from the fees. It illustrates the ability of an AIM listed company like Tenon to raise substantial funds for M & A work far larger than would be possible under traditional Bank Funding. The Deal is being financed partly in Cash and partly in shares locked in for 4 years. The FT comment suggested that a move to a full listing was on the Cards Jobtel is itself considering bring parties together to found a new consolidator in 2010 or 2011 and from Soundings taken Jobtel believes that there will be at least two more Consolidators by 2011.  The picture of the "standard format for listed companies will then be established for good!. Maybe your readers might be interested in logging their comments? Regards Julian Hamilton

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By Mark Lee
21st May 2011 23:00

2010 has been and gone

Any news for 2011?

Mark

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By Mark Lee
24th Jan 2012 17:14

It's now nearly 3 years since the above article appeared

I appreciate the economy may be partly to blame but it seems my cynicism was justified.

There was no new consolidator in 2010, none in 2011 and given the recent news re RSM Tenon, I doubt there will be one in 2012 either.

Mark

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By Mark Lee
25th Jul 2013 17:57

Another year on

Still no new consolidators and now talk of RSM Tenon being acquired by Baker Tilly.

Is this the end for the consolidators?

Mark

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