M&A | Q1 2023 update

Our update for M&A Q1 2023. What a year 2022 proved to be in terms of M&A activity within the Accountancy and Legal Practice space, but no time to come up for air as such high levels are forecasted to remain for at least the next two years.

M&A Q1 2023 update

This sustained level of activity carried through from 2021 due to factors arising from the pandemic, where owners considering retirement were expediting these plans for many reasons, including general life reflection and lack of energy to rebuild, in what was one of the most intense times for professional services up and down the UK.

2022 saw the underlying issues within both Accountancy and Legal sectors that had been building for many years rise to the surface, the main issue being the struggle to put in place a workable and suitable succession plan internally by promoting from within. M&A for Q1 2023 could be different. 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 is certainly extremely true and very much a live scenario for many small to medium sized firms- which has only been exacerbated in the last 12 months through the ‘fight for talent’ which both industries have experienced; these sized firms simply cannot compete in the inflated salary ‘auction’ that has been winning the best talent in the market- and indeed offer a wider offering of opportunity to up and coming stars of the future like large multi faceted firms can by the very virtue of their critical mass.

Motivations

Another motivation for acquiring which was new in 2022 was the acquisition of talent, which of course the shortage of talent really fed. Many clients were seeking our help in identifying firms with great staff members to acquire, and in some cases would make exceptions if the practice which was acquired was not in the best shape financially (Profit Margins etc)- the obtaining of good staff was the overriding motivation. Of course, this is, in my opinion potentially quite a high risk strategy for securing talent- as you will need to be sure that the new staff will enjoy working for you, working within your culture and work environment. The integration process will have to be handled with care.

There are of course specific key drivers in both sectors separately, for example within Accountancy it is MTD (even with the recent delay announcement) and lack of embracing technology; and within the legal sector PII premiums monstrous increases are hitting small to mid sized firms badly which simply are not viable or sustainable.

In 2021 most pre-mentioned organisations were looking to invest or attach themselves to already established ‘consolidators’, or focus on the higher echelons of the legal and accountancy firm ecosystem , circa £15m+. 2022 saw a buck in that trend, with investments being obtained by mid sized firms of £5m+ with strong cultures and leadership teams who wish to acquire many smaller firms to achieve size. This is certainly a trend I feel will continue into 2023, indeed we are involved in such conversations currently and are contacted by PE houses frequently who are wishing to increase their knowledge and hold on the sectors.

M&A Q1 2023 update for firms

As I have mentioned previously in other articles and during panel discussions, there has been a stark difference in the approach by such funds to their investments in the sector. Speaking frankly, service based businesses have always felt there was a stigma attached to Private Equity or Venture Capitalist investment, therefore often the DNA of successful firms could be destroyed or lost; ultimately undoing the legacy of the previous owners.

However, the approach is much more from a partnership angle in recent times, whereby 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’.

Models

Of course away from PE or VC led ‘platforms’ or acquirers in terms of the consolidators in the market, you have some large ‘network’ orientated models whom allow autonomy to remain with the current leadership team, the branding remains and you essentially remain the ‘master of your own universe’- which some owners prefer as they still wish to be in the driving seat and continue to run the business as they have been. In addition funds will be made available for acquisition, as well as removing the barrier for next generation to buy into equity.

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

Summary

We are yet to see the full cycle of a PE/VC backed investment yet, as there has been no ‘flip’ within both sectors- will we see one in 2023? Azets maybe with rumours swirling around? This would certainly be the final evidence that such a model fully works in this sector.

2023 I foresee to be an interesting, exciting and fast paced year for mergers and acquisitions within the Accountancy and Legal Practice sectors, all of the key drivers and motivators for sellers remain and will surely intensify during the course of this year.

AJ Chambers work closely with numerous funds, large networks and other independent acquirers whom are actively looking for great opportunities in the market at the moment. If you are an Accountancy Practice or Legal Practice owner and would like to discuss any of the above further, including your exit plans, merging or indeed growth plans via acquisition, please do get in touch for a confidential, no obligation conversation. We are well equipped to advise you of the options open to you, and ensure that you achieve the objectives you would wish to reach for any next chapter of your business.

Happy New Year All! Wishing you all the best in health, wealth and happiness for 2023. We hope you enjoyed our M&A update for Q1 2023.

If you are an Accountancy or Law Practice owner, or Equity Partner and would like to discuss your business plans for growth, merging or exit, please contact our M&A specialists:

James Gosling: james.gosling@aj-chambers.com

Elliot Tayler: elliot.tayler@aj-chambers.com