At last partners are being offered large sums of money by consolidators who are offering part cash/loan stock and shares to acquire suitable firms across the UK for their non-audit business.
If one analyses the practices recently taken over (and a lot of information is available in the offer documents) a pattern emerges as to the type of firms that are being acquired.
This provides a great opportunity for other practices to benchmark their own business against the profile of these firms in preparation for being acquired either by Tenon or one of the several consolidator outfits coming on stream.
If, on the other hand, a firm is convinced that staying independent is right, they should at least be organising and reshaping themselves to defend the marketing effort that business service companies are going to make, with the funds now available, to attract the larger clients away from smaller firms.
Tenon’s equity partners
In the latest round of acquisitions, Tenon acquired five firms with a combined fee income including audit of just over Pounds 31m.The offer documents provide a wealth of information on salaries, benefits and profit share. For instance, the average basic salary now offered to equity partners is Pounds 107,000. Equity partners received on average Pounds 590,000 in cash/loan stock (48%) and Pounds 644,000 in shares (52%). Partners received on average 5.7 times their earnings/11 times super profit over basic salary and the firms received in effect 2.1 times their fee income (including audit).
So what do firms need to have to interest a consolidator? Firms must, firstly, aim to have profits per partner of at least Pounds 200,000. This benchmark figure is either going to be attractive to any potential acquirer or, if remaining independent, it is going to allow sufficient scope to invest in the future.
Secondly, as with most businesses, net profits are driven by the gross margin. Firms must therefore become ultra-efficient in both the compliance and routine accounting work and be in a position to analyse what each department is contributing. Practices must concentrate on those areas that give the best returns; high write-off of time is well and truly a thing of the past. A net return for equity partners of less than 30% should not be acceptable.
Finally firms must get their partner leverage and staff ratios right. Fees per partner of at least Pounds 500,000 and all staff to partner ratio of nearly 10 are other benchmarks firms should aim for.
Specialists in niche areas
The balance of services also needs careful consideration. Although accountancy/business advisory remained core to the firms acquired, they all had at least one specialist or niche area. These range from business planning, forensic and insolvency services to entertainment, media and sports sectors, corporate finance, financial services and outsourcing. In addition they already have in existence a specialist IT consultancy division.
In one swoop, therefore they have managed to provide a diversified range of services to their client base. Once they get their act together, this nearly complete range will become one of their major selling points to the SME market across the country ? so do everything you can to provide a proactive, speedy service to your larger clients.
In order to compete for new, quality clients firms will either have to diversify into all round business advisers or become highly specialised niche practices (including just doing accounting work). Merging with other complementary practices is an alternative to consider.
The latest round of acquisitions by Tenon was clearly aimed at firms with corporate recovery departments ? a strategy to counteract any pending recession? Another area for the independent firm to think about.
Getting skilled staff
Shortages of skilled staff are going to be a major factor in a firm?s ability to meet the future demands of clients. It seems apparent that in order to achieve this diversification of service a huge investment must be made in recruiting, training, retaining and rewarding professional staff.
The consolidators will be offering bonuses and share options to attract and retain their quality and specialist staff and firms must counter this threat by looking now at a whole range of performance rewards and benefits for their key personnel. In addition, the mix of staff will have to change, with lower overall staffing costs being essential in the accounting area, where efficiency will have to improve to meet the inevitable menu pricing.
Careful resource planning and re-training is therefore going to be vital as the range of services provided evolves. As a result most firms will need to strengthen their HR skills, and experience shows partners are not always the best people to lead this vital support function.
Financing expansion plans
How practices manage to finance their expansion and succession is going to be one of the key issues over the next decade. Under the present system practices have traditionally been ?non-profit? organisations, with most of the cash generated being extracted by the partners. Firms must seriously look at their drawings, profit retention and investment policies to ensure funds are available to improve their infrastructure.
The consolidated firms will, for the first time, have access to investment capital to finance their development, marketing effort and further acquisitions, and because of their incorporation will also be able to secure additional bank finance under floating charges.
Business plans must consider the firm?s short, medium and longer term financing requirements as part of an overall strategy. Forming LLPs or incorporating all the non-audit services will be a way of assisting with the raising of extra finances.It is still early days for the ?consolidators? in the UK. They will all have real management issues trying to merge the acquired firms into a cohesive force in the SME market.
There may, therefore, be a window of opportunity if you act now ? by becoming ultra-efficient, deciding on the range of services clients will require, improving your staff training, recruitment and retention policies, and deciding how best all this will be financed. Whether at the end of the day you are acquired or stay independent ? join them or beat them ? your immediate aims must be the same.
- Stephen Raznick FCA is a professional practice consultant with RSJ Solutions. He can be contacted via www.rsjsolutions.co.uk
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