Practice Focus – This little firm went to market …

Tenon’s entry into the AIM market as the first consolidator in the UK marks a defining moment in the progress of the profession.

The changes that made all this possible were not just the incredible growth in consolidators in the years to 1999 in the US: there are several other pressures for change.

So Tenon’s entry is a landmark and it is right to be proud of its launch.

For the first time a sizeable chunk of goodwill residing in a client list owned by larger practices is being bought on a regular basis. The total consideration being for values in excess of #1 per #1 of fees.

It has already acquired four firms and looks set to buy several more – there are funds available to do it. But much depends on the success of its share price. CBIZ (Century Business Services) in the USA gives a dramatic warning of what can happen, as shares in that consolidator slumped following class actions by former partners of firms acquired.

If the share price drops and paper is used as part payment, the system rapidly collapses as does the price offered for that goodwill.

Assuming the same can be avoided in Tenon – everything hinges on the firm’s rates of growth or, if you like, the extent of the ‘haircut’ partners have to take. That is the amount of loss a partner suffers in his earnings due to the sale of the equity. After all there is now another party at the table – the investor – and he must be paid.

The lesson from the US seems to be that the post-acquisition loss of earnings lasts about three years until higher levels of growth absorb and exceed this additional cost of outside capital.

It may be several years before we can see this emerge at Tenon – but soon there will be pointers. If it is successful, other firms will seek to emulate it. The client will begin asking his accountant why if it’s so easy to launch clients on AIM he hasn’t done it himself. Better staff (and maybe whole chunks of firms) will be attracted by higher salaries and share options they can afford.

Taking soundings across many different levels within the accountancy profession is part of our normal day-to-day M&A work. Using this feedback, we at Jobtel come to the conclusion that there are five levels of change that will come in 2001 and beyond.

Emergence of a large group

National, potentially international, with fees of perhaps #100m plus.

We foresee a large voluntarily associated group will transforming itself into a listed company. There are several candidates and their advantage is that they could avoid the disruption caused by consolidators buying practices with no cultural connection.

National practices’ entry on AIM

Several #20m to #80m practices will probably emerge, although the number that can be successfully described as having national coverage will depend upon the availability of the right-sized practices in the regions.

Regional practices, #6m – #20m

Regional practices of around #6m to #20m with one large core operation and several smaller feeder offices. This structure allows for strength in depth at the centre and easy access to client via the units. Its lower overhead structure allows it to compete on equal terms with salaries paid to larger firms. It will tend to be limited to the one to two hour travel distance from the main hub. These will float if successful.

Practices bought as investments

There are signs that individual investors will simply buy the non-regulated side of practices as a good investment (probably firms involved will do no audit work at all). This is an industry where gross margins can be as high as 66% (or in some cases known to us much more) and still the customers come back for more every year. Certain practices will develop niches which will contain industry sector knowledge that can be sold at higher value. There are many examples of this: health service work, district council advice – in these cases the accountant adds knowledge which an outsider will take years to acquire.

Small firm – group practices

Already some such practitioners are under severe stress. The January deadline for some is a period of pure purgatory. Many cannot make the changes that will bring them greater profits and are stuck in a cycle of work they feel they cannot change. As a result they often lose larger clients. We think group practices will emerge which do more than just create a ‘network’ of alliances but which will actually encourage the fusion of smaller practices.

Imagine a situation where say eight practitioners widely dispersed across a region begin to cross refer clients to each other – perhaps one of these is an audit firm, another is an insolvency practitioner, a third specialises in IFA work and another in IT work – and the whole could begin to sell a range of extensive services whilst still allowing the practitioners to work their own profit centres. A transfer of staff between units would allow some relief for illness and vacations – it might also encourage a few young qualifieds to stay.

Greater buying power will enable this sort of practice to develop links with other professional firms such as solicitors for commercial work.

Perhaps in the longer term the practices would merge. Maybe in time they would seek investors too and release their own goodwill.

So we envisage years of change ahead. Many traditional firms will react positively by selling off other ‘secret’ assets such as management consultancy subsidiaries and these capital profits will be distributed to the partners.

Other firms will nurture fast track companies and, taking equity in exchange for services rendered, will sell those shareholdings on flotation. Lower forties firms will merge, hoping that size alone will enable them to survive – for those that dominate a segment or geographical area they will succeed. Others will find themselves bypassed and overtaken within a few years as the more marketing-conscious firms overtake them.

And of course we should not ignore the Americans. So far, they have made no material inroads into the UK market – cultural differences may have concerned them – but if that is shown to be irrelevant, why would they hold back?

Strictly speaking the word ‘consolidator’ just means a company that pulls firms together – but it has somehow acquired the perjorative sense of cross-selling something. It is possible other wealthy UK consolidators might be waiting in the wings – there are one or two less than attractive ‘pension advisers’ who might well brighten up their tarnished image by buying a well respected practice. So there are pitfalls too.

Not all investors will be angels. Target firms will have to wake up to the dangers as well as the benefits of selling out.

The profession will go through a cauldron of fire – firms will begin to dump partners, managers and other staff who don’t earn their keep.

Stars will emerge, particularly in M&A dealmaking, where superlative skills will earn large salaries and profit shares. Performance, performance, performance will drive out old habits and reward better brighter staff.

Hundreds of firms will be affected and many names will disappear from the list of the top 20 to the smallest practitioner.

In five years time even the global firms with their exorbitant charge rates will begin to feel the heat of real competition. Hardly any UK firm will remain unaffected by these changes.

For details of Tenon’s latest trading statement go to

To see how Jobtel intends to iron out ‘differences’ among its member firms see

News of Jobtel’s new practices is at


Secret assets

Businesses now realise their goodwill and reputation can be unlocked: note building societies, the RAC, life assurance groups, brokers, surveyors.

Audit separation

Another major effect has been the stringent US requirements to separate audit work from other services on the basis that you cannot give an independent assessment of systems or advice that you have installed. Even global firms have had to reconsider their formerly comfortable client relationships and many have formed separate operations: witness KPMG’s flotation of its audit arm.

Audit threshold

At the lower level, raising the audit level to #1m, has had a destabilising influence particularly on practices with two to five partners (and many sole practitioners). Their daily bread was the returning client. It was a routine the profession was happy with. These firms are now waking up to the fact they must actively market their services in direct competition with other similar practices. Many are frightened by the prospect. Some will find the necessity of selling their skills easier than others.

Outdated structure

There is broad acceptance that within partnerships of more than half a dozen or so the partnership structure not only does not work, and is actually a hindrance. It may be fine for a firm with five partners handling general practice work (with, say, one specialist taxation department), but it is hopeless in the modern era of greater specialisation. Shuffling partners from insolvency work to consultancy does not make sense when you’re up against organisations that can offer specialists in each sector.

In short a partnership is no way to run a business. Many firms now delegate the key decisions to a management board of some kind.

Brand extension

Due to the ability of generations of accountants, the profession has a reputation for honesty few professions can rival. This has allowed firms to extend their level of interest beyond the traditional zone. Trustee accounts, company registrar work, payroll bureau, IFA work, IT consultancy, corporate finance, forensic tax advice, general business advice, business incubators (for fast- track clients) and outsourcing are common features of most larger London and provincial firms. Hence the advice offered goes, in many cases, far beyond the ICAEW remit of monitoring and control. The brand extension that has been possible is quite remarkable.

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