It’s PE Time! Or Is It?
The Growing Surge in Accounting M&A

For those of a certain age, the title of this article might conjure up nostalgic (nightmare) memories of black plimsolls, bibs and the dreaded gymnastic horse! Fear not though, I’m talking about Private Equity, so read on, unless that too fills you with an equal amount of dread.

In recent years, the UK accounting and audit sector has experienced significant transformation through two primary growth strategies: private equity (PE) investments and mergers and acquisitions (M&A). These approaches have started to reshape the industry. They offer firms avenues for expansion (or exit), technological advancement, and enhanced service offerings.

Robot playing basketball. Image to go with blog 'It's PE time! Or is it?'

Private Equity Investments in UK Accounting Firms

PE firms have increasingly targeted UK accounting firms, providing capital to drive growth and innovation. Looking back over the past decade, there are some notable instances:

  • September 2014: SJD Accountancy was acquired by Sovereign Capital in a deal valued at approximately £100 million, marking an early significant PE investment in the sector.
  • Early 2021: The Xeinadin Group, comprising around 120 smaller firms, attracted a significant minority investment from Exponent. A PE firm with experience in professional services.
  • 2022: Cooper Parry, a mid-market accountancy firm, sold over 50% of its stake to Waterland Private Equity. They’re aiming to accelerate growth through acquisitions of smaller regional accountancies.
  • June 2023: Inflexion, a mid-market private equity firm, invested in TC Group, a provider of accountancy and taxation services to UK SMEs. TC Group operates through over 35 local offices in the UK, with more than 1,000 employees serving over 30,000 clients. The firm has a strong track record of growth, both organic and through acquisitions, with 29 acquisitions completed to date.
  • April 2023: SJD Accountancy rebranded under Caroola Accountancy, reflecting ongoing transformations within PE-backed firms.
  • November 2024: Grant Thornton UK agreed to sell a majority stake to PE firm Cinven, valuing the firm at approximately £1.3 billion. This deal represents one of the largest PE investments in the UK accounting sector to date.
  • November 2024: Evelyn Partners sold (subject to regulatory approval) its professional services division. This included accounting, tax, and restructuring services, to private equity firm Apax Partners for £700 million.

Key Perspectives on PE Investments:

Reactions and commentary about the PE trend have obviously been mixed, with advocates and detractors on all sides:

  • Samy Jazaerli, Principal in Cinven’s financial services sector, remarked on the attractiveness of the accounting services market. They highlighted Grant Thornton’s “strong brand, broad product offering, blue-chip customer base and successful track record” in the UK market.
  • Malcolm Coffin, Partner at Inflexion, commented on the investment in TC Group: “TC Group have a fantastic business model and brilliant management team, which combined with Inflexion’s sector and M&A experience, puts us in a great position to help accelerate its already impressive growth.”
  • Richard Moriarty, CEO of the Financial Reporting Council (FRC), expressed concerns regarding PE investments in audit firms, emphasising the necessity to manage significant risks to preserve audit quality and firm independence.

Mergers and Acquisitions in the UK Accounting Sector

Parallel to PE investments, several UK accounting firms have pursued growth through strategic M&A activities. Prior to its sale, Evelyn Partners exemplified this approach, ascending to 6th place in the Top 50+50 Accountancy Firms through a series of mergers and acquisitions:

  • 2020: Tilney merged with Smith & Williamson to form Tilney Smith & Williamson, creating one of the UK’s leading integrated wealth management and professional services groups.
  • June 2022: The firm rebranded as Evelyn Partners, marking a new chapter in its evolution.
  • February 2023: Evelyn Partners acquired Leathers, an accountancy firm with offices in Newcastle and Harrogate. It gained the chance to strengthen its presence in Northern England.
  • April 2023: The firm expanded its footprint in Cambridge by acquiring Ashcroft Partnership, enhancing its service capabilities in the region.
  • November 2023: Evelyn Partners further bolstered its tax and accountancy services by acquiring Creaseys Group, based in Tunbridge Wells.
  • December 2023: The firm continued its expansion by acquiring Harwood Hutton, a Buckinghamshire-based accountancy and tax advisory firm.
  • July 2024: Evelyn Partners strengthened its Northern presence by acquiring the Leeds, Manchester, and Newcastle offices of Haines Watts.

Implications of PE Investments and M&A Strategies

Both PE investments and M&A activities have enabled UK accounting firms to scale operations, diversify services, and enhance technological capabilities. However, these strategies also present challenges:

  • For PE Investments: Concerns include potential conflicts of interest, pressures on auditor independence, and the need to maintain audit quality amidst profit-driven motives. The FRC has mandated that major audit firms disclose any plans to sell stakes to PE investors. This safeguards the integrity of audits and maintains public confidence.
  • For M&A Activities: The challenges are more operational. They involve the intricacies of integrating different cultures, aligning processes, technologies and processes, and retaining top talent. Effective integration is crucial to realise the anticipated synergies and ensure sustainable growth.

In summary, the UK accounting and audit sector is undergoing significant transformation through PE investments and M&A strategies. While these approaches offer opportunities for growth and innovation, they also necessitate careful management to uphold professional standards and maintain public trust.

Defend or Attack?

Accounting firms may start to contemplate their strategic direction in the face of this level of industry consolidation through mergers and acquisitions (M&A). Therefore, they might want to consciously evaluate their objectives and market positioning. Whether your firm is aiming to remain independent or will be seeking to position yourselves as attractive candidates for acquisition, I’m wondering what critical factors firms will need to consider that could affect either future desired outcome. Here are some suggestions, but there are no doubt others.

Defensive Strategies to Maintain Independence

  1. Assess Strategic Objectives: Does remaining independent align with the firm’s long-term goals and remaining competitive without merging?
  2. Enhance Operational Efficiency: Would investing in the right smart, future-proof technology and streamlining processes to improve service delivery, client satisfaction, and profitability strengthen the firm’s market position and value?
  3. Develop Niche Specialisations: Would focusing on specialised services or industries differentiate the firm and reduce vulnerability to acquisition pressures?
  4. Strengthen Client Relationships: Building strong, personalised client relationships to foster loyalty and create a competitive advantage that larger firms may find impossible to match?
  5. Invest in Talent Development: Attract and retain skilled professionals to ensure high-quality service delivery and maintain the firm’s reputation?

Positioning for Potential Merger or Acquisition

  1. Evaluate Strategic Fit: Identify potential partners whose services, culture, and strategic goals align with those of the firm. This ensures a harmonious integration.
  2. Conduct Thorough Due Diligence: Assess the financial health, client base, and operational practices of potential partners to identify synergies and address potential challenges.
  3. Prepare for Integration: Develop a comprehensive integration plan that addresses cultural alignment, technology compatibility, and communication strategies. This facilitates a smooth transition.
  4. Seek Professional Guidance: Engage legal and financial advisors experienced in M&A to navigate the complexities of the process and ensure compliance with regulatory requirements.

Key Considerations for Both Strategies

Regardless of your desired future outcome, there’s always steps any successful, strong business can do to be ready for whatever comes next, including:

  • Financial Health: Maintain accurate and transparent financial records to support valuation assessments and create trust with stakeholders.
  • Regulatory Compliance: Ensure adherence to industry regulations to avoid legal complications. Not doing so could deter potential partners or investors.
  • Market Trends: Stay informed about industry developments to anticipate challenges and capitalise on emerging opportunities.

By carefully considering these factors, smaller accounting firms can make more informed decisions that align with their strategic objectives, whether aiming to preserve independence or pursue growth through M&A.

Have your say and add your comment to this post: if you’re a firm owner, would you be open or closed to an exit through PE or M&A? Or might you be in the market and looking to expand and grow through M&A yourself? Share your views.

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