Ireland’s accountancy firms can be split into two readily distinguishable types: on the one hand, the Big Four and their closest competitors, noted for expansive consultancy offerings and blue-chip clients; on the other, a mass of small and medium practices (SMPs), largely sustained by a local, if highly varied, client base.
In recent years, a wave of consolidation, increasingly backed by private equity, has brought a disruptive new middle tier into play. Emblematic of this is the rise of firms such as Xeinadin, the UK and Irish accounting group formed in 2018 and which already counted more than 30 Irish firms among its members by 2020. Its more recent acquisitions include Cork-based Quintas and Limerick/Tipperary-based McKeogh Gallagher Ryan.
‘Consolidating SMPs are better positioned to advise on complex issues such as equity financing’
UK firms are behind much current Irish M&A activity. The past year has seen the purchase of Baker Tilly Ireland by UK firm Azets and its subsequent merger with PKF O’Connor and Leddy & Holmes, the acquisition of RSM Ireland by RSM UK, and McInerney Saunders joining the UK-based Dains Group.
Expectations escalator
Brexit is behind at least some of this. A statement from Xeinadin in 2019 identified a ‘vast growth opportunity in Dublin’ while in contrast, as a recent Goldman Sachs report noted, the UK economy has ‘significantly underperformed’ since leaving the EU.
There is also a desire to keep pace with changing client expectations. Neil Hughes, CEO of Azets Ireland, recently told The Irish Times there is currently ‘no national firm of scale focused on SMEs’. He argues that consolidating SMPs are better positioned to advise on complex issues such as equity financing and debt restructuring – the kind of advice that is much more readily available ‘if you are a large corporate in Ireland’.
Noteworthy in all this is the €2bn in warehoused tax debt accrued by over 60,000 Irish businesses during the pandemic and, in principle, due to Revenue on 1 May 2024. Many newly consolidated firms will be competing for the restructuring and possible write-off of some of this debt, as well as a flurry of insolvencies. PwC Ireland predicts ‘close to 1,000’ corporate insolvencies in 2024, up from 717 in 2023, while the number of businesses yet to engage with Revenue on warehoused tax is ‘surprisingly low’, according to Deloitte Ireland.
The traditional practice ownership structure is limiting access to capital
New appeal
Developments in Ireland mirror international trends, notably the current appeal of accountancy firms as investment propositions. Particularly interested are private equity firms, which at the end of last year were sitting on a record US$2.59 trillion in cash reserves, according to S&P Global Market Intelligence.
US accounting journalist Kris Cooper identifies two complementary forces at play here. For private equity, ‘the recession-proof nature of the industry alongside high rates of client retention’ is a strong lure, while within accounting firms there is recognition that the traditional ownership structure is limiting access to capital.
On the question of why now, business consultant Allan Koltin says: ‘The great recession of 2008 killed the first opportunity. There was another attempt in 2012, but the accounting profession then really didn’t need the capital like it needs it today.’
Adding to the appeal for private equity is the highly fragmented nature of SMPs, which suggests to investors ‘an opportunity to build “platform” firms that can then acquire their smaller competitors’, according to Andrew Kenney in Journal of Accountancy.
‘Will practices be able to hold on to key talent?’
Flipping
Private equity involvement in any business undoubtedly bring some challenges (see ‘Private equity challenges’ boxout) and it has yet to be seen how this plays out among accountancy firms. The expectation is that many private equity investors will be looking to sell on their stakes within five to 10 years of acquiring them.
Managing partner of BDO and former ACCA president Brian McEnery has voiced his concern about what will happen ‘over the long term, when these practices have been flipped a few times. Will they be able to hold on to key talent in the meantime? Will they also be able to keep clients through ownership changes?’
There are also regulatory and compliance issues, in particular the need to keep the audit function independent. However, there is no evidence to date that this has presented any impediments to acquisitions, and the general consensus is that consolidation – and the role of private equity – is the ‘topic of the moment’ for accounting firms in Ireland right now.
A good cultural fit between the two parties is important
Shared culture
Mark Butler, managing partner of HLB Ireland, which has itself taken the lead in a number of recent mergers, including with John McCarrick & Associates in June last year, says the consolidation process brings many benefits for individual firms (see ‘Bigger – and better’ boxout).
However, he also stresses the important of a good cultural fit between the two parties and of practice owners taking independent advice before committing. ‘As you are emotionally involved in the transaction, you will want it to happen, and this can lead you to take decisions that you would not ordinarily take,’ he warns.
However, whether backed by private equity or taking more traditional forms, consolidation is undoubtedly setting the agenda for accountancy practice in Ireland for the foreseeable future.
Private equity challenges
- Dilution of ownership
Private equity investment means less equity ownership for existing shareholders. - Loss of control over management
Investment comes with strings attached in terms of corporate governance, information rights and liquidation preferences. - Exit timing
Private equity funds realise returns once the acquired company has reached a certain level of maturity, cashflow sustainability and profitability. However, management and private equity investors may not align on this timing.
Source: Big Pi Ventures
Bigger – and better
Merging or acquiring firms can confer the following advantages:
- a larger pool of partners that facilitates specialism in services and sectors
- a business model that does not rely on a few key people or clients
- more capital for investment in people, technology and digital marketing
- greater potential for career development, specialisms and flexible working arrangements among staff
- greater ability to give clients the services they require
- more opportunities for mid-tier firms as a result of changes in regulation
- easier-to-manage succession planning
- greater scale, enabling the development of deep knowledge
- international connectivity, as clients grow beyond Ireland.
Source: HLB Ireland
