M&A update: A Focus on Private Equity and Investment Funds

Mergers & Acquisitions activity within the Accountancy and Legal Practice remains high, with such levels forecasted to remain for at least the next two years.

This increase in activity has been accelerated due to a combination of factors arising from the pandemic, where owners considering retirement now expediting these plans for many reasons, including general life reflection and lack of energy to rebuild, in what has been one of the most intense times for professional services up and down the UK. Let’s focus on Private Equity Funds.

Alongside the pandemic, there has been an underlying issue that has been bubbling away for the last few years, and this is the struggle to put in place a workable and suitable succession plan. There are of course many variables and factors which play into succession planning, sometimes this is down to the ability to attract the right talent to smaller firms, or a conscious decision by the owners to drive up profits by not building a senior team around them.

Reasons

However, there are two overriding reasons which are at the forefront of many conversations held with Partners. Firstly, they find that many of the younger generation coming through the ranks do not have the desire to run a business or practice. They are extremely good accountants or lawyers, but do not wish to have the additional responsibility of ‘taking over the reins’. Secondly, in the event that there are ambitious individuals who have the drive and aptitude to run a practice, they may not have the financial punch to buy out the outgoing Partners or buy into the Partnership. This scenario has been building for many years and is now manifesting itself among many accountancy and legal practices within the UK.

An interesting development during 2021 is the entry of numerous PE/VC and other investment funds involvement within both sectors, which has created more ‘players’ than has been seen previously from such organisations; with attractive multiples involved. The sector may not produce the high yields and ROI seen from other sectors such as technology or others that are traditionally targeted by large funds, but the sector does represent a steady ship with consistent EBITDA and/or ROI.

Approach

As well as entry into the market, there has been a stark difference in the approach by such funds to their investments in the sector.

However, the approach is much more from a partnership angle in recent times. Where the current leadership teams remain in place and continue to run the business on a day to day basis. With the funds sitting in the background to assist with talent or ‘people’ structures. To adopt a more corporate leadership structure. Or to work with the business to make technology advancements and efficiencies via investment of knowledge. In addition of course to provide funds for acquisition and growth.

This is the investment firms involvement and role, to enhance and add value to what a practice owner are already doing, not to interrupt or interfere with the DNA of the accountants and lawyers work. By this very nature, most investments firms are now entering the sectors as ‘growth funds’.

The benefit to existing Equity Partners with succession plan issues. Or those close to retirement via this model is essentially de-risking their position. By realising some of the value built to date, whilst helping to secure the long term future of the firm. Obtaining capital to invest for the next generation, whilst creating a clear path for that same generation to equity and/or leadership roles.

In terms of structures there are a few variables dependent on the approach by PE or VC Houses, and of course the equity holders of the practice outlook. Typically, there are two main models being complete acquisition, or part acquisition (majority or minority). Please see below further brief on both;

Complete Acquisition

100% purchase of assets or shares of the practice
Partners would remain on a salaried basis, with performance bonus included as part of the package
This model would allow any retiring Partners to achieve exit. Whilst allowing younger Partners to realise the value they have already built
Often the Partners would continue to run the practice. Ensuring that an ‘accountants or lawyers’ mindset is maintained and instilled within the practice. To protect the DNA that has been successful to this point. Alongside the incumbent Partners, the PE/VC will parachute in Senior Management. To assist on running the practice and set out objectives for future growth and acquisitions.

Part Acquisition

This is a model we are seeing more frequently in recent months. Where a VC/PE would purchase a majority or minority position in a practice
The current Partners would be able to de-risk. By realising some of the value built to date, whilst having the backing of PE/VC ‘war chest’. To execute growth plans via acquisition or internal infrastructure improvements, that may otherwise not have been achievable
This model essentially means that the VC/PE sit in the background behind the scenes. And are simply using the practice as a vehicle in which to invest into the sector. The positive to this model is that the incumbent Partners will still be responsible for running the practice. In order to maintain the culture that has been so successful to date. VC/PE involvement is relatively light touch, in that they would solely concentrate on growth strategy.

In terms of ultimate exit, by the very nature of such funds, they are usually looking at 3-5 year exits. However, within the accountancy or legal market we are seeing these exit plans extended to more like 5-7. At this time ultimately the exit options will be to sell onto another fund, or a larger firm. For Partners, this will offer the knowledge of a higher value business by the time comes for sale. As well as the fact that a valuation at the higher end of the market will be achieved.

Of course the above is very broad strokes. And more of an overview, which hopefully will provide an insight on the way PE/VC’s are engaging and investing. We can delve into more detail or provide further context if required. Or if interest to yourself or fellow Equity Partners to explore further.

AJ Chambers are working closely with numerous funds who are actively looking for opportunities in the market.