(c) Institute of Chartered Accountants of Scotland. Contact ICAS for permission to reproduce this article., Practice Management

Practice mergers and acquisitions likely to increase

Jeremy Clarke CA gives his advice on M&A and the dangers of thinking like Peter Pan.

A friend of mine who recently collected his free bus pass commented that, even though his body gives him grief on an almost daily basis, in his head he thinks he’s still in his mid-thirties.

This illusion of enduring youth is apparently commonplace, and keeps us more alert, active and healthy, so long may it continue!

However, there is a definite downside on our businesses to this Peter Pan attitude.

There is a real temptation, maybe even a tendency, to stay in Neverland and avoid addressing the question of ‘what happens when I’m not here?’.

Passing on the torch

For better or for worse, the accountancy profession, and in particular public practice, has always been a ‘people business’.

The nature of what we do means that, over time, very often accountants and their clients form close links, if not friendships.

Nothing brought this home to me more than my father’s funeral when, nearly 20 years after he had retired, more than a dozen of his former clients came to pay their respects.

‘People deal with people’ as the saying goes, and when considering what to do when you want to retire, finding a suitable successor is top of the list.

Not only is this a matter of professional honour and integrity, and critical to the success of the transaction from a financial perspective (most purchasers will insist on a clawback provision if clients leave within a specified time period, and often not liking the new accountant is a factor in this), it is probably also a matter of personal pride.

After many years, if not decades, of looking after our clients’ affairs, we want to see them well served and properly advised in the future.

So, once you do start thinking about putting down your pencil, where do you look for someone to take over.

If you’re in a small practice with staff or sub-contractors, the obvious place to start is with them.

The relationship problem has already been overcome – they will most likely know your clients fairly well, and your clients know them. It should be an ‘easy sell’ – but it rarely is. Why not?

The hard sell

First of all, there is a major disconnect between owners and their staff.

Most practitioners think that none of their employees want to become owners, while the majority of employees think ‘a deal has been done’ and that it doesn’t include them.

Interestingly, 56% of employees would stay in their current practice if they knew they would be offered ownership in the future; 49% are interested in becoming owners in their current firm; but only 6% have had any sort of ‘ownership’ discussion with the current owners.

How to identify the right successor

That said, even if one or more employees are ‘willing’ to take over the reins, are they ‘able’? There are two factors to consider here.

The first is ‘ability’ – do they have the necessary technical knowledge and soft skills to fulfil the role.

Often this isn’t the case, but that can usually be overcome with a proper CPD plan and enough time.

If it’s a definite blocker, then maybe it’s time to consider employing different people.

The second issue is probably the more problematic – finance.

Very few employees have the capital or assets to back a one-off purchase, however favourably it may be structured, and working out a deal that suits both buyer and seller can be a major challenge. However, where there’s a will, there’s usually a way.

The most common reason an internal solution doesn’t work is that a relatively high proportion of sole practitioners said that they would probably not seek to fully retire and would like to continue in a consultant-type role.

This could be viewed as a benefit, giving the exiting partner a chance to gradually hand over the reins to a successor and act as a sort of sounding board for the new owner.

However, it is not something that is without its problems if, for example, the retiring sole practitioner finds it hard to let go or doesn’t like the new direction in which the practice is being taken.

It is something that needs to be handled carefully, and it rarely is.

A ‘walk away’ deal, or a very short hand over period, has a much better chance of success.

Internal succession solutions aren’t just problematic for sole practitioners, many of whom don’t have any employees – often larger practices have the same difficulties.

What does the practice of the future look like?

Finding staff with the talent and the money to become principals is becoming increasingly difficult.

I believe there will be a significant change in the practice M&A market in the next couple of years.

For the reasons above, together with additional outside pressures such as RTI, auto-enrolment, FRS102, MTD and now AML and GDPR which make taking ownership even less attractive than it may have been a generation ago, another round of ‘consolidation’ is on the cards.

However, unlike in the past, I believe this will take the shape of smaller two to five partner firms coming together to create one or more mid-tier firms, in order to gain economies of scale and be better placed to recruit higher-quality staff and potential partners.

These will, in turn, hoover up smaller practitioners who cannot find other exit routes. It will certainly not be a sellers’ market, but many will have little option than to take what’s on offer.

This article was originally published by ICAS.