But they aren’t, though these remain interesting times for consolidators (or integrators). And if the consolidators are intriguing at all, it is because of the differences in approach they have taken, and the different outcomes in terms of results. Tenon’s recent past has not been littered with glory. From promising beginnings the company reported at the beginning of April a loss of £114m for 2002, most of which came from a massive writedown of goodwill amounting to £106m. The company’s share price also went through radical adjustment. From its high of 183.5p to a low of around 6.25p in February. (It’s now up to around 15p). The poor performance has seen Tenon’s new chief executive call a halt to acquisitions. Numerica, on the other hand, and Vantis, have so far enjoyed relatively stable times. Share prices have fallen but not nearly so shockingly as Tenon’s. And both remain open to further acquisitions. But it has to be said that the industry buzz that surrounded consolidators has faded away. Many practices have decided it is not a good time to join a consolidator and it may be some time before we see more growth through acquisition. But Numerica says its full-year results in June should be good. If you can get it right, it still seems there’s a sound business proposition there. Tony Sarin, chief executive of Numerica, describes below why he’s still committed to an incorporated accountancy business.
Eighteen months since the Numerica Group floated on the London Stock Exchange Alternative Investment Market, the group has completed eight acquisitions and I stand firm in my belief that incorporation is the way forward for the accountancy industry.
The industry has undergone major change in the last 25 years. Much of it has been good in terms of technical development, improving standards, and quality control, but it has come at a cost that many firms have found hard to sustain in an increasingly competitive business climate. The business environment has changed dramatically and partners within a general partnership are exposed to unlimited personal liability. In today’s business climate where clients are increasingly litigious, the exposure to litigation can be of great concern to individual partners.
In my opinion, people in our industry are often reluctant to embrace change and unless they look at improved working practices, they are likely to regress. It is essential to have access to the finances necessary to fund growth in what is today a very competitive environment. Any sector that can take a critical, objective look at its business, address issues and reinvent itself will show the outside world that it is dynamic and adaptable in the changing economic/business environment.
In traditional accountancy partnerships, unlimited liability applies to all partners and although the risks in such a partnership can be mitigated by the use of professional indemnity insurance and LLPs, they can never be removed.
In the modern business environment, once firms grow above a certain size, the partnership consensus approach to management can become difficult to apply with compromise decisions having to be made to accommodate the views of all partners. I do not believe this to be the best method of managing a growing, dynamic business in the new millennium.
I believe that integration of firms and services through a corporate vehicle such as Numerica, offers a solution to these problems. We have the ability to raise money in the public markets, supported by a properly capitalised balance sheet without personal guarantees which enables the group to reinvest retained profits more tax efficiently. As a result, we are able to develop the best model to capitalise on the opportunities that exist for mid-size firms today.
Incorporation and listing can lead to a properly resourced environment that can facilitate the necessary investment required to grow a dynamic business and develop new client services. Moreover, it can equate opportunity with risk for partners and staff through wider share ownership coupled with the sort of capital incentives that are the performance drivers for many in the corporate sector today. This has to be good for our clients, staff and investors.
Numerica’s model also removes the problem of succession, providing long-serving partners with a short to medium term exit opportunity and enabling younger members of the industry to progress and be incentivised without the requirement for large capital contributions.
Numerica is an integrator of like-minded practices. I don’t believe in consolidation in a people business. If you buy disparate businesses and put them together, then there will be a whole raft of cultural issues to resolve. Instead, during the last 18 months, Numerica has integrated accountancy practices and other service providers with similar cultures and ethos with one sizeable firm as the lynchpin.
True integration can only be achieved by having a solid platform on which the business can be grown organically and by acquisition. Our strategy is to create a fully integrated, singly branded business services group by identifying and integrating leading regional independent firms and integrating them with our core. Our acquisition strategy must be implemented in a measured way so as the focus is on ensuring effective integration of the firms once acquired.
One of the biggest issues in growing a people business is how to address ego problems and turf wars. When I established Numerica, we sought out a strong cornerstone practice to act as a stabilising influence on the rest of the group. Levy Gee struck me as the right firm on which to build Numerica because it had already succeeded in developing itself as a business services group, providing accountancy and business solutions to clients.
I was also impressed by the entrepreneurial spirit of the firm, and the fact that in terms of organic growth, the practice was outshining some of its bigger rivals.
The firm, which won the 2001 Accountancy Age Award for the best medium-sized firm, also had the right platform from which to build the group including an excellent integrated financial reporting system as well as a very robust and scaleable IT platform. Numerica’s strategy of building a strong brand and integration have so far been key to developing a successful business. Listing on AIM has helped publicise the brand to a wider audience.
I believe becoming a public company has opened up opportunities for acquiring new businesses by providing greater access to capital and enabling the Numerica brand to be used as currency.
This has also helped to attract high performing, ambitious recruits within Numerica – people who want to be part of a successful team.
Organic growth is equal to if not more important than acquisitive growth and the building of a powerful brand together with the critical mass we have gained through our acquisition programme has enabled the individual components of our group to generate more assignments and expand the range of services we can offer our clients.
Listing on AIM and meeting strict disclosure requirements for public companies has prompted the development of more efficient systems. By centralising our head office in London, staff whose jobs previously involved administration have become free to concentrate on revenue-earning activities. In addition, the group runs a small number of large regional offices instead of operating a web of bases, enabling it to simplify lines of communication.
Numerica’s structure now has a clearly defined team responsible for the management and strategy of the group, enabling former partners to concentrate on servicing the group’s client base as well as the generation of new business.
I am confident that through successful integration we can achieve our medium-term goal to be a refreshing alternative to the Big Four for the mid-corporate market.
- Tony Sarin, chief executive of the Numerica Group plc.
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