The current spate of mergers and acquisitions across the accounting industry is a result of several dynamics, including succession plans and a Covid hangover, according to AJ Chambers’ Director James Gosling.
The accounting industry has been the subject of several acquisitions so far this year, with the likes of Sumer and Baker Tilly both snapping up firms and a spate of smaller deals also completing.
James Gosling, Director at AJ Chambers, spoke to AccountingWEB about the market and why there’s so much activity.
Dynamics at play
“There’s several dynamics at play at the moment – a little bit of a hangover from Covid-19 certainly had a lot of individuals look closer and review their life choices,” he said. “A number of people expedited their retirement during that time.
“For the past few years, there’s been a number of other factors at play that are now driving what we’re seeing in the market.
“Succession is quite a major issue for a number of firms at the moment. They might have very, very good accountants working for them and are great at looking after their clients but then not necessarily wanting to step up and run a business.
“Then you’ve got those who are ambitious enough and want equity, want to run a business, but unfortunately they’ve found it tough to get their hands on capital.”
Gosling also touched on the technologies that are “coming down the line”.
“There are probably a lot of baby boomers who are not wanting to go through that whole transition period of onboarding tech, running with the AI that’s coming in and getting MTD-ready.
“So they look to make it someone else’s headache and sell.”
“Succession is quite a major issue for a number of firms at the moment.”
Careful consolidation
Gosling spoke of the attraction of groups looking to consolidate and “take a lot of the heavy lifting of running a practice away”.
“We’re seeing there’s a hell of a lot of partners or firms who say: ‘I really don’t want to deal with this anymore, I’d rather just go back to the customer, look after my team and all the stuff I like doing’.”
So far as acquisitive consolidation as a means of expansion goes, Gosling believes there are a “couple of consolidators that have learned their lesson”.
“In the early days certainly, they probably did go out and try to acquire too many at one time. Integration in that post-acquisition process is so important.
“Likewise, they might be acquiring a small firm that deals with all sorts up in the North East and employing a niche music specialist in London – two completely different practices, two completely different cultures – and what some of the consolidators previously tried to do is mesh them under one roof and under one brand.
“It’s just not going to happen – the culture of people and alignment is super important.”
“At the moment, a lot of the consolidators and private equity firms are focusing on the £1m to £5m range in terms of revenue.”
Two trains of thought
As such, Gosling noted that there are now “two trains of thought” where you can “still go out and have all those different businesses underneath the same brand or same network, but they operate separately and you respect that they might have different charge-out rates – they might operate their office separately.
“Or you’ve got those that are growing and acquiring, but there’s a lot more focus about getting that cultural alignment correct from the start.”
On succession being an issue, Gosling said that most business owners “would ultimately love to have the people underneath them, that have been working for them and been part of their success, stepping up into equity at some point rather than externally”.
Future stars
So how do you nurture and retain “future stars”?
“Unfortunately, a lot of the time that’s being taken away from people because if someone’s having a lot of cash thrown at them, they might well skip out.
“However, we are now seeing a lot of the smaller mid-tier firms concentrating and investing time in nurturing and bringing through those future stars.
“So they’re creating these programmes where, perhaps every six months, you bring a team together and they might get some airtime with the partners. Or maybe people looking at the next stage of their career might get some airtime with them. We’re certainly seeing mentorship come into play a lot more now.”
Will it continue?
Does Gosling expect the level of mergers and acquisitions (M&A) activity to continue? In short, yes, for “the next 18 months to two years”.
“At the moment, a lot of the consolidators and private equity firms are coming to the market. They’re really focusing on the £1m to £5m range in terms of revenue. So they’re going quite hard after those types of businesses.
“Likewise, as that pool of £1m to £5m revenue businesses or practices starts to dwindle, that’s when it’ll be quite interesting to see whether these consolidators start to set their sights on each other.”
At the smaller end of the market, Gosling noted: “There are loads of independent firms out there that would love to bolt-on a sub-£1m or sub-£500,000 practice where there might be a retirement and they’re not ready to give up the ghost just yet.
“They can stay around for two to three years to transfer those client relationships over.
“So for the next 18 months to two years, we’re expecting continuation of the high activity we’re seeing.”
AJ Chambers Recruitment Ltd,