American Express made headlines in 1998 as it attempted to consolidate UK accountancy firms. It appeared to make little progress, but now the idea is back in vogue again with a new wave of at least two UK-based consolidators actively looking to acquire mid-tier firms.
Tenon and Jobtel have both publicly announced plans to consolidate the mid-tier and although both parties have played down any hint of competition, the race to secure practices has begun.
What is consolidation?
Consolidation is when two or more practices come together to create a larger firm based on the workings of the companies involved.
Tenon, however, does not like being described as a consolidator because it’s aim is to acquire accountancy practices with a view to establishing a broadly based business services group. Part of its acquisition strategy is to buy firms which all have different strengths and throw their combined skills together.
Advantages of consolidation
Access to capital – Many mid-tier firms are unable to lay their hands on large sums of money for future practice development. A consolidation may be able to offer larger sums of capital and the potential to borrow on the strength of its balance sheets. An increase in investment for technology may become possible.
Recruitment and retention – It may be possible to offer a broader range of skills and a greater scope for career development to members of staff, which, in turn may have a positive affect on recruitment.
Specialisation – Potential wider streams of skill bases brought about by consolidation may enable the formation of specialist teams and potentially a higher level of expertise on offer for its clients.
Capital growth – Consolidation may provide an element of cash to partners and the prospect of capital growth through ownership of shares.
Strength – A consolidator may be able to provide a strong management and administrative function, leaving them free to do the client work.
These potentially include the failure of the consolidation. Once a firm has signed on the dotted line there may be no way out if the consolidator runs into difficulties and losses, potential job losses and cost cutting exercises may be likely.
Loss of independence – once a firm has joined a consolidator it may be fair to assume it will lose its independence and it may lose some control over the way the practice is run.
Terms – Firms may find that the terms of the consolidation may mean large amounts of capital need to be paid to the consolidator. If that happened partners would have to dramatically lift the profitability of the business to maintain the same level of profit share or take a drop in income.
Skills – The level of skills within a consolidator may not improve. Although the variety of services may expand the skills will come from the firms that have been acquired. Therefore the consolidator may become a one-stop shop rather than a higher level of expertise.
What do the experts think?
Leading adviser in practice merger and acquisitions, Douglas Llambias, said: ‘The businesses that have grown over the last 25 years are those that have grown through merger or acquisition.
‘To ignore the potential of growth through acquisition or merger is not sensible, but if a company is going to explore they should do so in such a way that they are sure a really viable firm is going to be created and that depends on the financial terms attached to the deal.’
Who are the consolidators?
UK – Tenon, Jobtel
US – American Express, H&R Block, Century Business Services.
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