The trust dividend – why private equity firms are buying accountants

The pandemic caused the public’s trust in accountants to soar, now that’s helping to fuel acquisitions.

A flurry of private equity (PE) funding into UK accountancy firms over the past few years points to a real trend. This might be music to the ears for some practice owners, especially with a recession looming, inflation rising and a generally uncertain outlook for businesses and their accountants.

Notable recent examples of activity include:

London-based Jeffreys Henry, which in late 2021 secured “growth investment” from Tenzing. Tenzing typically invests in “niche market leaders and challenger businesses, valued between £10m and £200m”. The plan, according to Jeffreys Henry, is to “significantly grow the firm through new services, technology innovation and strategic M&A opportunities”.

Another example in late 2021 is August Equity, which bought into Scottish firm Anderson Anderson and Brown (AAB), which then promptly bought Leeds-based independent Sagars in a move that will see it strengthen its geographical reach beyond its core region in Scotland.

Farnell Clarke in Norwich last year appointed Baird Capital director Louise Kingston as a non-executive director to help drive its “next phase of growth”.

Why does PE find the UK accountancy sector attractive?

Above all else, private equity wants to buy something, grow it and add value, then sell it later at a profit.

Within this remit UK accountancy is attractive as firstly, there simply aren’t enough accountants to meet demand; secondly, the sector is fragmented, so there is the opportunity to grow businesses quickly by scaling up through M&A; thirdly, the sector is ripe for service diversification, adding value with technological innovation, and attracting a strong talent pipeline.

And then there’s the trust dividend.

“After the initial shock of the pandemic, businesses quickly turned to their accountants for everything — furlough, Business Bounce-Back loans, grants, business interruption loans — you name it. It had ‘my accountant’ written all over it, as they’re the only ones with the skill base,” said Gordon Gilchrist, a consultant at 2020 Innovation and a keynote speaker at May’s Accountex conference during which he focused on the private equity trend.

“This was coupled with the delightful notion that, culturally, accountants do not kick people when they’re down, it’s just not in our blood. We don’t charge more money or take advantage of people because they’re desperate.

“The accountant’s attitude towards their clients during the pandemic of ‘let’s get through this together’ has paid dividends hand over fist,” he said.

What kind of practices are PE firms buying?

PE firms like buying a larger regional practice, perhaps in the top 50, then bolting on smaller regional outfits to quickly reach scale.

“They have several million pounds to splash around and they’re looking for regional practices with gross recurring fees in the multimillions, then they just bolt on one at a time, half a million here, a million there,” said Norman Younger of Maximiti.

Gilchrist agrees: “They have learned the way forward is to buy a strong firm in Yorkshire and then build around Yorkshire, or buy a strong firm in London and build around London. A good example is Cow Corner, which has bought into Brighton-based Galloways and is building up quite quickly in the area. It has also bought Mitchell Charlesworth in the Northwest and is looking to tuck in firms there.”

The profile of the smaller satellite practices being scooped up are those with £500,000 to £3 million turnover, according to Norman Younger of Maximiti. “£1 million turnover is a good size, especially if there’s only one or two partners.”

What are PE firms willing to pay?

Younger says that the multiples for firms have been sticky for a long time, around 1.1 and 1.2 x current revenue. “There’s always been an imbalance of supply and demand, there’s too many buyers chasing too few firms. I pushed up multiples during and post Covid to 1.3 or 1.4, and I’m getting it for good firms that tick all the boxes.

“What I do find is that the smaller fry are desperate to find somebody who will pay that higher multiple, but the corporate PEs tend to fish at the higher end of the market, where there are fewer buyers, and they won’t pay the higher multiples. I always tell people, leave the money to the end. Let’s find the best fit.”

What does the money do?

While PE might be considered an expensive route to growth compared to borrowing money and trusting in your own management, it does bring unique expertise.

“PE firms give you management and all sorts of knowledge, which as an accountant, you wouldn’t necessarily apply to yourself. You apply the principles when you’re advising clients, but there’s a classic cobbler’s shoe scenario in which accountants know how to advise their clients and their businesses, but for some extraordinary reason, they can’t see the wood for the trees for their own businesses,” said Gilchrist.

They also bring deep pockets. “As a supply led industry, if I buy a tax person, my tax fees will go up. A less confident accountant wouldn’t get a chequebook out for £80,000-100,000 to buy a tax guru for fear they won’t get their money back. Whereas a PE firm, who’ve got balls of steel, just say ‘you want £80,000, here’s a £100,000, go and get five of them if you want’, because it is all about earning fees and growing,” said Gilchrist.

This can free up accountants to do what they do best — earn fees, nurture client relationships and diversify services — while PE takes care of the rest.

PE will likely wield more back office or operational influence, building out the cloud accounting capabilities and implement new workflows in order to drive scale.

PE investment means equity share structures are in play, which can help with talent acquisition and retention, while also potentially shaking up the partnership model. “Share options attract capital gains tax at 20%, whereas your salary could be into 45-50% tax and national insurance. So net take home pay can be much, much higher with a lower share option for salary swap,” said Gilchrist.

What’s in it for PE?

Most are working to a medium-to-long time horizon and want a good income stream to get a solid return on equity (ROE). Younger says a well run practice will make returns in three to three and half years. “Practices throw off cash, and the more specialist you are, the more you throw off. The ultimate game for all PE is to sell — build up a regional brand and sell on to one of the bigger players or join a group like Azets, and hopefully they’ll be taken over and then you’ll get a part when they’re taken over.”

Know your PE from a pretender

Norman Younger says there are two types of private equity. “There’s the genuine private equity who know what they’re doing, they they’ve done it before, whether with accountants or in other fields. They’ve got proper advisory boards and they have the money lined up.

“Then you have the other ones, the ‘wannabes’ who I’ve learned to flush out pretty quickly. They put a snazzy looking information pack together and paint themselves as a PE firm, but in reality they’re men of straw. It’s usually a few accountants who’ve come together and think they’re going be the next Deloitte or Azets. They’ve got no money behind them, it’s all hot air. They think the talk a good talk, but they can’t deliver the goods, and most of them have jobs still.”

The genuine players are well funded, continued Younger, but there’s a bit of a scattergun approach to their investing. “I’ve seen one or two trying to create something and they’re just buying anything they can get their hands on, there’s nothing in common between what they’re buying. They’ll buy four or five practises, a £50,000 payroll bureau and then at the other end of the country a firm of accountants turning over £150,000 specialising in farmers.

“So the trend is there and everyone’s trying to jump on it, but I think that the serious players who’ve got the cash to burn, they’re the ones who will perform.”

Neil Johnson is a freelance business journalist who contributes regularly to trade publications and member organisations, covering employability, recruitment, business trends and industrial analysis.