Propping up the Economy

In each deal, there are often at least three different accounting firms involved – one advising the management team, the second working for the investing institutions and a third advising the vendor.

Within the deal process, these various firms are responsible for helping the management team to negotiate with the vendor, and the investors, assisting in the preparation of the business plan, financial modelling, tax planning, financial due diligence and running the auction.

Not to mention emotional support when the deal looks like failing and ordering the pizza to fuel the all-night completion meeting. All this work does not come cheap.

The combined accounting fees in an MBO typically represent between 3% and 5% of the transaction value.

With the UK buyout market worth about £16bn in 2003, this is clearly a nice earner for the accounting profession, especially over the last three years when M&A activity in general has been through a 10-year low.

In fact buyouts have, if anything, been propping up the M&A market. In 2003, they accounted for 57% by number and 48% by value of UK M&A activity.

Given these trends, it is clear to see why many accounting firms now have dedicated private equity specialists.

The UK buyout market is now showing a sustained recovery after three years of decline. In the first quarter of 2004, there were 155 buyouts worth £5bn. This performance has been boosted by the re-emergence of megadeals (buyouts over £100m).

The leisure, retail and business services sectors dominated the MBO landscape in 2003, accounting for over 60% of the market. With the advisory market becoming increasingly competitive, many accountancy firms are seeking to differentiate themselves by forming specialist teams who focus on a specific sector. Stay tuned for what 2005 holds.

• Tom Lamb is managing director UK of Barclays Private Equity.