How more firms could merge because of Making Tax Digital

The Making Tax Digital (MTD) revolution has emphasised the need for accountants to invest in technology, but worries about the costs involved and ongoing uncertainty is driving merger and acquisition (M&A) activity.

Digital transformation cannot be ignored, but the challenge for established and traditional firms is how to fund it and how to ensure they have the right digital skills internally.

What MTD has done is start the difficult ‘digital’ conversation in many firms, especially among partners close to retirement, that now might be a good time to sell.  For those looking to buy and scale across the UK, it means many practices are ripe for acquisition and keen to talk.

Buying or checking out?

“People have to decide what is the right solution for their practices,” says Azets’ head of M&A Neil McManus. “Maybe the ongoing investment required becomes a pinch point, or they haven’t started the technology journey yet. For many, the change is so significant that they think about selling.”

Azets has been one of the most acquisition-hungry businesses in recent years. It is continuing to target SME private client-focused local businesses as it grows its brand across the UK and Europe.

“Well-run firms have to decide whether to invest their profits in technology now and then continue to spend to keep up with the technological advances that might be required in three or five years’ time,” says McManus.

One of its most recent buys was the purchase of Roffe Swayne, an accountancy and tax advisory firm based in Godalming, Surrey. An investment in digital technology at the firm is one of the priorities.

Azets also sees M&A as a chance for local practices to expand their service offering.

“The accountancy market is changing and evolving. Digital investment is needed to deliver, for example, compliance services more cost-effectively. Practices must be able to offer local clients more advisory-based services.”

Acquisition targets

So where has Azets set its acquisition sights for the remainder of 2021?  The company admits it is underrepresented in Yorkshire, the South West, the East of England and along the South Coast.

Keith Underwood, managing director at M&A advisors Foulger Underwood, says a lack of succession planning as well as concern over the need to invest in technology is fuelling M&A activity.

“Of course MTD requires investment, but we are also seeing senior partners close to retirement and considering whether to extend leases. Do they have the right people with the right skills to succeed them?” he says. “Today firms need what I call technical accountants, rather than accountants who are enthusiastic about using tech.”

Underwood has identified the growing trend of entrepreneurial accountants who are building businesses from scratch and using software platforms such as QuickBooks, Xero and Iris.

Power of the brand

The companies that are acquiring have to tread carefully when it comes to introducing their branding at a local level.

They are often entering communities where people have become used to working with a favoured accountant over the years and they value the personal service and reputation. When a takeover happens, there is always the risk some clients will decide to move on.

“After a while you need to assess whether clients are walking and if so why, and where are they going?” says Underwood. “You should be able to manage these situations by putting enough investment behind the new brand to demonstrate to people that they are still getting a good and personal service.”

More to come

Acquisitions do enable accountancy brands to scale, increase their margins and boost their competitive advantage by making the most of operational synergies. With this in mind, Underwood expects to see additional consolidation in the industry and more non-accountancy acquirers that are backed by private equity.

One company certainly noticing an increase in private equity interest is consultancy Deloitte UK.

Director Robert Murray advises corporate and private equity clients and says there has not been much of a slowdown during the COVID-19 pandemic. Many deals have continued, with negotiations conducted via virtual platforms such as Zoom.

“There was a real push from autumn 2020 with many companies that felt isolated during the pandemic opening up conversations about joining a larger group,” he says.

Murray adds that technology and innovation are going to be critical to win in this market and retain clients, which is why so many firms are considering selling up. “The typical partnership model that a lot of firms have does not allow for much free cash to reinvest in the business.”

Challenge

Murray agrees that another reason smaller firms may choose to sell is the challenge they are facing to attract and retain talent.

“Today’s generation no longer look at that traditional partnership model where you stay with one firm for 30 years. They want to move around and have more experience.”

But could we see mergers and acquisitions getting bigger?

“We could see more mergers of mid-tier players,” says Murray. “The top tier accountants have their global footprint and the smaller players have their niches and local relationships. This can squeeze the medium players who need a differentiator.”

In many ways the accountancy sector is mirroring the legal industry. It has the same issues around having to invest in technology, a traditional partnership model and challenges around succession planning.

“Law is probably three to five years ahead of accountancy, but there are very similar dynamics,” says Murray. “M&A drives innovation and investment and, when private equity is involved, it is all about making better businesses. This means investing in technology to offer clients the smarter, more efficient and faster solutions they are demanding.”

Case study – feeling confident

One practice not too concerned about the impact of MTD is online accountancy service for small and micro businesses Mazuma Accountants.

Co-founder Lucy Cohen says that while many customers are happy using apps and cloud storage to manage their accounts, there are many small business owners who are nervous about moving to digital and still require support.

“We need to be innovating and providing services to these customers,” she says. “We also need to be aware of the challenges the no-tech customers may run into and be as knowledgeable and prepared as possible to help them through it.”

She says this attitude is scarce within the industry and that many accountants will look for a way out of this niche market and choose the M&A route. 

“Many people forget that when entering a merger, the partnership must be a good fit, compromises must be made and boundaries must be clearly set, otherwise it’s doomed to fail from the start.”

Some M&A deals that took place during the pandemic

Source: MarktoMarket Valuations Limited.

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Steve Hemsley Is a journalist, media trainer, and podcast presenter. .