Staying independent in a changing accountancy world

One of my clients recently mentioned that he had found himself playing golf with the CEO of one of the top 10 accountancy practices in the country. He told me the name and I confessed that I’d never heard of them. But I had a sneaky suspicion that I knew the story already. When I checked out the name my suspicions were confirmed.

First of all, a bit of background. Once upon a time the accountancy industry was bit of a cottage industry. When I joined in the 1980s it had only recently relaxed rules that allowed qualified accountants to advertise or market for their services. Most had to build their client base simply from a plaque on the wall or word-of-mouth.

Although things became more sophisticated, most of the firms that grew did so in a similar way. Each partner had a maximum number of clients that he or she could handle and if they wanted to grow then they had to try and take on a bigger client to replace a smaller client.

In the medium-sized firms, you would work your way up and eventually a partner would retire and the next in line would take their place. Everyone jumped up a rung. “Dead man’s shoes”.

As a result, there was no real drive to try and be better than your competitors. At A4G we’ve created a structure where there is an opportunity for anyone to join the firm as a new trainee and work their way through the different levels. Then after qualifying, we give them the opportunity to start signing up clients of their own. Fortunately, our marketing has always been pretty good as well, so we get lots of leads and referrals enabling those individuals to grow as well.

That’s the path that my two new managing partners, Emma White and Josh Curties have followed.

Meanwhile many of my peers who also started their training in the 80s and followed the dead man’s shoes path or maybe built their own practice, are all coming up for retirement now. The problem for them is that along the way technology reduced the number of staff that they needed to support them so now there is nobody waiting in the wings to step into their shoes. Even if there is, they’re unlikely to have the finances to buy the owner out. So, all those owners with one eye on retirement are starting to think about who they might sell to.

The choices previously might have been selling to or merging themselves into a larger local competitor. In the past few years that has all changed thought because private equity has entered our industry.

I understand there are currently about 20 private equity firms out there buying up accountancy practices. I think they’ve run out of financial advisers, dentists and vets to buy and merge so accountancy has become the fashionable “go to” place for them.

If you’re not aware how the private equity model works, it’s something like this:

1. They work out what your EBITDA is. EBITDA is short for Earnings Before Interest Tax Depreciation and Amortisation. Basically take your profit, add back depreciation and interest, add back whatever salaries, pension contributions and costs there are for the owners and then deduct a market value salary for the work that the owners do.
2. Their aim is to pay 4 times the EBITDA of that accountancy practice. Multiples might vary and it all depends on what you bring to the party. Deals are funded by a mix of investor income and bank borrowings.
3. Having bought one firm, they then aim to buy more and merge them all together. For the first couple of years they will do very little and just leave each branch to carry on as they were. The last thing they want to do is upset any of the clients at that stage.
4. After a couple of years of acquisitions, they will start to try and increase profits. The most obvious ways are to increase prices and reduce head count. The aim will be to achieve some economies of scale but that’s easier said than done.
5. At the end of year four, the process starts to try and find a buyer for the now merged business. Now the business is bigger, larger investors will be prepared to be involved and the perceived risk is less. As a result, the aim will be to sell at 8 times EBITDA.

The same process is occurring in many other industries. Maybe in yours. For some business owners, merging with a larger group is the right path. If that’s something you’re considering, we can help you find the right buyer and make sure it’s done on your terms.

But at A4G we’ve chosen a different path. We are staying independent. Fiercely independent.

This year we will be taking on five new trainees. A new record. I remember when we took on our first trainee, the year we decided to take on two, the year we took on three for the first time and just before the Pandemic, when we upped it to four. But this year it’s five. Fresh faced, full of enthusiasm and the future of A4G. Who knows how far they will go?

If you’d like to make your business less dependent on you, don’t forget to download my latest book and if you’d like to hear a bit more in person about how you can do it, email amanda.stoneham@a4g-llp.co.uk for details of our series of events over the course of the year.