Keeping the Smith & Williamson house in order, without overreaching, will pay dividends, says chairman Gareth Pearce
SMITH & WILLIAMSON CHAIRMAN Gareth Pearce is “happy”. How much of that is down to good vibes from Team GB’s performance during the Olympics is hard to tell.
He puts it down to a solid-performing firm, a position not necessarily shared by all heads of big accountancy practices at the moment.
The firm, which has crept up to eight in the latest Accountancy Age Top 50 +50 survey, has certainly had a good 2011/12 after two years of tough, costly decision-making.
However, the firm isn’t without its share of hardship stories. In 2010, it took a £3.7m impairment charge against its Freaney office, while streamlining the restructuring division and office closures saw another £1.8m in costs added to its expenditure. Revenues in restructuring fell another 40% in 2011 as it continued to be reorganised – resulting in £2.1m in one-off costs.
But 2012 has seen revenues up 4% to £178.6m, while operating profit has climbed £27.86m, from £21.6m a year earlier.
“We focus on adjusted operating profits, up 19% and we were pleased with that – and that’s getting back pretty much to the levels before 2008,” says Pearce.
“Being blunt, a fair proportion of improvement in profit simply came from avoiding the pitfalls of the year before – one-off costs on various issues that we didn’t repeat. 19% is flattering – underlying profit is probably half of that, but we’re moving in the right direction.”
Alongside office rationalisation, those remaining on the books have been upgraded – a process which has taken the firm several years.
The firm’s Belfast office, for example, was so “scruffy” that staff would meet clients in hotel spaces rather than the office. A move into a “smart space” has dealt with that issue.
Business development has also been a key focus for the firm in recent times, now employing full-time staff dedicated to winning new clients and nurturing existing ones. “We are beginning to see the fruits of that,” says Pearce.
The acquisition of Begbies Traynor’s tax division at the end of last year should boost the firm, especially given Begbies had a large Manchester office, which will supply Smith & Williamson with an inroad to that region.
With Smith & Williamson’s tax arm important in complementing the firm’s investment management division, where does Pearce see the current debate about the ethics and morality issues of tax avoidance?
For former ICAEW council member Pearce, the institute’s fact sheet outlining where it perceives potential disciplinary problems in tax – which has proved a big talking point in the profession – is “fair and balanced”.
In July, the ICAEW announced it would discipline any member that rolled out “aggressive tax avoidance” schemes to its customers.
“We are active in the debate, and have never been involved in promoting artificial tax schemes,” says Pearce.
Another long running debate is the ‘will they; won’t they?’ over the firm’s potential for listing on the stock exchange. In the context of uncompromising markets, and perhaps with an eye on the travails of other listed firms, Vantis (deceased) and now RSM Tenon (severely under the weather), it’s unsurprising the limited company is no closer to listing than they were a few years back.
As Pearce explains, the firm’s policy on listing is “neutral”: “We consider it each year but there are no immediate intentions to list.”
The small matter of £70m net cash on the balance sheet certainly makes capital raising less of a priority. But the firm must hold capital as part of its regulatory requirements. “We’re taking a cautious attitude at the moment anyway,” says Pearce.
Where, in many cases, firms are battling hard to stay still, there must be opportunities to grow by acquisition.
Apart from niche opportunities, Smith & Williamson is unlikely to look to splash out on a bigger deal.
The pitfalls to a successful merger don’t outweigh the benefits. The firm is of a “sufficient” scale and will grow through “good people and teams”, says Pearce.
“[Deals] are hugely difficult to execute. One firm lost out on a deal due to due diligence recently, we have heard on the grapevine,” Pearce adds enigmatically.
“They are hugely difficult to execute properly; it takes an immense amount of time – several years for a genuine merger – and I feel there are plenty of [other] opportunities for us. I know some other firms feel differently.”
Instead, the firm has to continue to grow the top line, manage costs, and deal with regulation and compliance.
Growing the top line includes initiatives such as the ‘family office’, bringing together its investment and accounting division to provide high net-worth families with services.
It is also providing fund accounting administration services, a real high-growth area for the firm, which involves valuations, administration, accounting, and on occasion taking regulatory responsibility for the funds.
“We’re fundamentally interested in investing in business lines with the best growth prospects,” says Pearce.
Smith & Williamson
Partners: 254 directors
Fee income: £178.6m (Y/E 30/04/12)
Specialism: Investment management; accountancy and financial advisory services
Top 50 + 50 position: 8
Sources: Accountancy Age Top 50 +50 and Smith & Williamson