A wave of M&A sweeping through the accountancy, consultancy, audit and legal services sectors shows no sign of abating across the UK. The first half of 2023 saw more than 700 such deals, collectively worth £11.3bn, according to data from Experian; in industry hotspots, such as the advisory sub-sector, dealmaking has hit a 10-year high in 2023, despite a sharp slowdown in the overall M&A market. Last year Cenkos and finnCap, and DB and Numis completed their mergers.

Two types of dealmaker are driving this trend. First, says Oliver Hoffman, head of the M&A team at Mazars: “Private equity [PE] firms have targeted this as a market where they really want to increase exposure.” That has seen about a dozen PE firms make significant investments in professional services firms, establishing platforms from which they can pursue a buy-and-build approach through further acquisitions.

The second set of consolidators are professional services firms themselves, including a number of publicly listed firms. They are also on the acquisition trail, often with stiff competition from PE-backed platforms.

Either way, the value proposition is broadly the same. Professional services businesses are attractive and relatively secure assets in and of themselves, offering recurring revenues from clients that must meet compliance and regulatory demands each year. Scale and standardisation offer the opportunity to boost margins on such work, but consolidators are also eyeing growth from value-added services that deliver additional fee income. 

Key for firms with many audit clients is that there is no change to the rules on the provision of non-audit services. PE and consolidators are particularly likely to focus on firms serving small and medium-sized enterprises, where there is scope to boost fee income as the client grows and needs more support.

Such strategies can be applied across a range of professional services disciplines. Deals are ongoing in legal services – Inflexion recently acquired DWF, the UK’s largest listed law firm, for £342m. There has also been activity in areas such as public relations, marketing, communications and advertising.

However, it is in the accountancy sector that the consolidation trend is moving with particular pace. Recent deals have included Tenzing Private Equity’s acquisitions of Gravita and DJH Mitten Clarke, August Equity’s purchase of Anderson Anderson & Brown, Horizon Capital’s investment in Dains and Exponent Private Equity’s deal for the Xeinadin group. Among publicly-listed consolidators, K3 Capital and FRP have made a series of acquisitions.

Overseas interest

International private equity investors add to the interest in UK accountants. The Dutch firm Waterland, for example, has invested in Cooper Parry, and more recently in Moore Kingston Smith. The MKS deal caught the eye as the first time an accountant has taken private equity investment but continued to operate with a partnership structure, rather than incorporating, as has been the norm. And in November Mazars in the US announced it was merging with Forvis.

So far this year, Evelyn Partners has pursued geographic consolidation across the UK, with its most recent acquisition of Buckinghamshire-based Harwood Hutton in December last year, as well as Kent-based Creaseys and North East-based Leathers earlier last year.

Many of these transactions have followed the path first forged by Azets, which was launched in 2016 following the amalgamation of three firms – the UK’s Blick Rothenberg and Baldwins, as well as Visma BPO of the Nordics. The business grew rapidly with private equity backing from HgCapital, and in recent months has secured additional investment from PAI Partners.

The model can work well for both sides. For a small or mid-sized accountancy firm, growth is difficult to pursue without fresh capital; many also struggle with exit and succession problems, with partners looking to cash out or step up. Taking investment and incorporating can help with both challenges. For the acquirer, meanwhile, each new deal adds scale and possibly additional competencies, exposure to a different part of the market, or presence in a new region.

None of which is to suggest that doing these deals is straightforward. “These can be complicated and difficult transactions,” warns Paul Medlicott, a partner in the private equity team at law firm Addleshaw Goddard, which has advised on a significant number of professional services private equity and M&A deals. “In many cases, these are regulated businesses so any change of control process will face significant scrutiny; also, in most cases, these deals involve a corporatisation process, either ahead of the sale or as part of the transaction.”

The impacts of these nuances can be wide ranging. Often, suggests Medlicott, dealmakers need to split the exchange and completion structure, adding complexity to deal terms and risk allocation. There may be significant tax implications in corporatisation. And issues such as shareholder structure and independence will need careful attention to satisfy regulators.

People power

Another challenge to confront is that almost all the value of a professional services firm is tied up in its people and their client relationships. Pricing the business on the basis of its revenues and profitability may be simple enough, but if key people leave the firm following the transaction, those inputs may soon look irrelevant. That’s a particular issue at smaller firms, where people risk may be concentrated in a handful of key partners and clients.

Addressing this risk as part of the deal is crucial, says Medlicott. “Lock-ins and restrictive covenants are common in acquisition agreements, and we are also seeing more earn-out structures,” he says. “The transaction is likely to allow people to take some value out, but there will certainly be leaver provisions that bite, governing what happens if people leave the business of their own choice or not thereafter.”

Thereafter, integration becomes a crucial focus. “The success of the deal will depend on your ability to integrate well,” adds Medlicott. Both sides must be prepared to work together, treating each other with sensitivity while recognising that the premise of the deal is that the sum of the parts is greater than the whole.

“The piece that is very important is culture,” emphasises Mazars’ Oliver Hoffman. “That’s something you can only build over time and, where you’re integrating a number of businesses as you do more deals, it requires real focus.”

Consolidators understand this imperative, but decision-makers at professional services businesses need to be sure they will feel comfortable about how they will work in a larger group with new colleagues or with a major investor. Matthew Meadows, a partner at MKS and member of the firm’s senior leadership team, says this was a key consideration in discussions with Waterland ahead of its investment in the company.

While the transaction has provided capital for expansion, MKS has retained its operational independence. “Waterland recognises that at an operational level, the firm is best run by its partners and that they should retain their day-to-day responsibilities for the business,” says Meadows. “We broke new ground in keeping the partnership model, and it did take a great deal of intellectual input to develop a structure that works, but it was a powerful expression of our intent to keep our ethos and culture.”

Efficiency of service

At the same time, some deals are predicated on change, particularly when it comes to introducing new technology, which may be fundamental to the business case. At Azets, for example, group head of M&A Jeremy Fearnley says making use of cloud-based software tools across a fully integrated platform is a critical element of the opportunity.

“As clients input their data in real time, not only is there a benefit from increased automation, but you’re also getting a far more granular and contemporary view of their business,” Fearnley says. “This is how we can get closer to clients, so we can offer specialist services and advice that really create additional value.”

In which case, technology offers a double benefit. The firm can provide basic compliance services – tax returns and or the filing of accounts, say – much more efficiently. But it can also move into the role of trusted adviser, offering consultancy and advisory services that often command premium prices.

In the end, there is no one model for consolidation success in professional services. Indeed, the jury remains out on whether theory can translate into tangible benefits; to date, there have been almost no exits by private equity investors, so there is no data on the value they have been able to create.

Still, expect to see more deals in the months and years ahead – professional services remains a highly fragmented market, with tens of thousands of firms, many of them very small scale, targeting different types of clients.

Indeed, despite an increasing number of deals in the accountancy market, there are now more firms out there rather than fewer, with many small operators entering the market in recent years. Data from Iris Software suggests the number of accountants in the UK rose from 71,000 in 2018 to around 78,000 today. For consolidators, then, there are plenty more fish in the sea.