In the US, accounting firm Baker Tilly has agreed a majority stake sale to private equity groups Hellman & Friedman and Valeas. The sale provides Baker Tilly – outside the top 10 largest accounting firms in the US – with US$2bn of funds to pursue what Jeff Ferro, its chief executive, described as an ‘extremely aggressive’ approach to acquisitions. The cash injection, it hopes, will help it compete more strongly among the other mid-tier accounting firms. Indeed, the deal is the biggest of its kind yet.
But private equity plays in the accounting sector isn’t a strategy confined to the US. In fact, recent deals suggest that private equity has its sights well and truly trained on the UK accounting sector too, as it hunts for guaranteed growth in a slow market.
The conditions that previously prevented such deals have changed, explains Stephen Heathcote, CEO. ‘The dynamics of the market have changed quite a bit lately,’ says Stephen Heathcote, CEO of PrimeGlobal, a network association of advisory and accounting firms. There’s a greater appetite for investment – from both sides.’
‘The sector is ripe for the implementation of technology, particularly automation’
He puts the hunger down to a range of factors: the greying of the industry, issues with recruitment and long-term loyalty, and the growing number of complex businesses needing more capable, sizeable accountants.
Changing dynamics
‘Partners are getting older,’ he says, ‘and there isn’t a particularly large pool of people with the funds or the will to buy them out so they can retire.’ In addition, ‘there is a real lack of accountants coming through ready for recruitment, and people aren’t staying at firms as long as they used to. This means the sector is ripe for the implementation of technology, particularly automation, in some of the lower value work. That takes the pressure off headcount.’
The benchmark
Following a private equity injection, practices can expect a multiple of 1.1-1.3 times their previous revenue. To give an idea of scale and activity, here are some recent deals:
- Tenzing invests in firms valued at between £10m and £200m, and recently acquired London-based practice Jeffreys Henry.
- Cooper Parry received a reported £100m from Netherlands PE firm Waterland – the biggest deal in that cycle.
- Aberdeen-based Anderson, Anderson & Brown and Leeds-based Sagars received £46.5m from August Equity.
- SKS business services received £48m from Kartesia, a European debt provider.
Source: Mark to Market
But, Heathcote points out, many of these smaller accounting firms don’t always have the money to invest in new technology, nor the knowledge to transform successfully. ‘Private equity has both in abundance,’ says Heathcote.
So, if accounting firms need private equity, why might private equity want to reciprocate any overtures? It turns out that accounting businesses are very appealing investments.
‘Some private equity firms are looking to buy into firms and roll them up with others’
‘Private equity has a lot of dry powder from the lower investment pandemic years and they are looking for businesses with consistent revenue streams, ‘sticky’ clients and repeat business,’ says Liza Robbins, CEO at Kreston Global, an international accounting network. ‘Accountancy delivers all that.’
Room to grow
It’s a sector with a lot of headroom to expand, too, with smaller accountancy firms taking on more internal audit, advisory and cybersecurity work. And it’s a sector where a fairly minimal application of technology can make a big difference. All of this has piqued private equity’s interest.
There’s also the opportunity for them to drive consolidation for even better returns. ‘Some private equity firms are looking to buy into these firms and then roll them up with other firms quite quickly,’ says Heathcote. ‘A few even have a mind to sell to some of the giant firms eventually.’
‘Some private equity firms are getting into the sector to do things differently’
The market is consolidating and the pressure on smaller firms to merge, acquire or join forces with private equity is pretty powerful. That said, it remains a fragmented market at one end (small firms) and a very competitive market at the other. Private equity firms are now increasingly looking to Europe as well.
Keep the good bits
But what about trying to hold onto the things that make smaller accountancy firms successful, such as excellent client care, local knowledge, long time horizons for relationships and good work-life balance for staff? Won’t the traditional ‘slash-and-burn’ tactics of private equity put paid to all of that?
Not necessarily, thinks Heathcote. ‘First of all, some private equity firms are getting into the sector to do things differently.’ He names a B-Corp accountancy firm that private equity thought it could scale successfully – hardly a modus operandi it’s been known for before.
‘There’s also evidence that maybe they’re learning some lessons; perhaps they moved too quickly to begin with and damaged a few of the things that make these firms successful. Then they slowed down because damaging those things would damage revenue.’
He also points out that some private equity firms are looking to preserve the benefits and capabilities of local firms by using hub-and-spoke models, where smaller offices stay in the regions and are partly run from a central location.
‘Due diligence should cover values, what’s expected of partners and whether the cultures are a good fit’
‘It’s a watching brief,’ says Heathcote, ‘and I remain optimistic. If these private equity firms are making the necessary investment in technology, then they won’t end up flogging staff and chasing targets; they won’t need to.’
When asked about the mismatch between the timescales of the respective businesses – where private equity typically looks to get out within three to five years and accountancy firms operate with a much longer horizon – Heathcote says that ‘the horizons are now maybe a little bit closer than they used to be’.
He thinks that this alignment is being driven on the one hand by accountancy firms delivering strong year-on-year returns (thus reducing the need to exit the investment); and, on the other, the shorter recruitment and work dynamics at the firms themselves.
Be clever about selling
Both Heathcote and Robbins suggest that the idea of private equity being a rapacious vulture is one that can be controlled or even banished during the sale process. Robbins says that ‘thorough due diligence’ is key, and that joining forces should depend on the firm’s goals, such as ‘expanding into new markets, weathering economic storms or riding out particular business challenges’.
‘Due diligence should cover values, what’s expected of partners and whether the cultures are a good fit,’ she explains.
Heathcote says that partners looking to sell should ‘ask themselves what they want their legacy to be, what their ethical red lines are, and what makes them different’. That way, he says, they can make plans to preserve those elements as part of any deal. ‘Ultimately, private equity isn’t forcing anyone to sell; it’s up to individuals,’ he says. ‘But if you do sell, be clever about it.’
