Significant other options

The roots of the UK’s oldest accountancy firms can be traced back to the 19th century. Partnership worked well enough for Dickens’s Scrooge and Marley, in financial terms at least, and has been the default structure for bean-counters ever since the Partnership Act was passed in 1890.

The path-to-partnership trope will be familiar to all trainees of a bright and ambitious disposition. You work hard and wait for the tap on the shoulder – although, in reality, it tends to be the best candidates tapping the incumbent partners on the shoulder if promotions aren’t forthcoming. For anyone becoming a partner in a firm, it is a pretty simple process: find the funds, put the capital in, share the profits of the firm until retirement, then take capital out to make way for the next-generation partner.

But the profession is moving on – possibly only significantly in the last decade or so, but now at pace. New practices are being created under a limited company structure. Big established firms are no longer merging – they’re being acquired – and private equity sees the accountancy sector as the next great buy-and-build story.

M&A activity in the industry has accelerated rapidly. This increase was preceded by private equity’s acquisition of 26 ‘platforms’ – typically top-100 accounting firms, acquired by financial sponsors to act as the base to acquire additional practices.

The strategy has become so ubiquitous that it seems there are few lower mid-market private equity firms yet to enter the sector. Just when we thought there was no room for another platform, however, three more appeared at the start of the summer – Bishop Fleming (Synova), AMS (Macquarie) and Burgess Hodgson (Abry Partners). The latter deal demonstrates that US capital is now eyeing-up the UK accountancy sector.

All of which raises the question of whether there are enough acquisition targets to go around. MarktoMarket data suggests there are more than 40,000 registered, owner-managed accountancy practices in the UK, of which around 26,000 employ at least one member of staff. But most acquirers will have minimum-size criteria, meaning they’ll be fighting over the 3,000-plus firms with more than 10 members of staff.

More than 3,000 firms may sound like a lot, but with 26 well-capitalised private equity-backed platforms, plus a further 50 sponsor-less vehicles active in acquisitions over the past 12 months, there is a lot of money chasing a finite supply of targets.

Unsurprisingly, in an environment of increasing demand, our deal data suggests that prices are starting to inflate. But as one insider told me: “If my platform is currently valued at 15x EBITDA, I can tolerate a fair degree of price inflation when acquiring smaller assets.”

A proven path

Although this theme is attracting a lot of attention, it is not entirely new. Cogital, a vehicle backed by Hg Capital that rebranded to Azets in 2020, pioneered it with the acquisition of Baldwins, a large UK-only independent firm of accountants. The group has since acquired more than 100 additional firms, and Hg made a partial exit in 2023, when PAI Partners came on board in a deal valuing the business at £1.5bn. It’s a deal that shows others just how well this model can work in the sector.

Any fears about the ‘end game’ for the accountancy buy-and-build strategy have been allayed by other recent exits too. These include Horizon Capital’s sale of Dains, the Midlands group it acquired in a £14m transaction in 2021, to IK Partners, and the sale of AAB – for a reported £250m – to Goldman Sachs Alternatives. Aberdeen-based AAB was originally backed by August Equity in a £46m deal in 2021. These exits provide the reassurance that the secondary financial sponsor market is open for well-run firms that have already been sprinkled with the private equity magic dust.

As the strategy develops and matures, private equity money will be returned and will move elsewhere. Next in the crosshairs looks to be the legal sector. Early movers in that sector include Livingbridge, Sun European Partners and Blixt, all of which have established their platforms in the sector and begun the bolt-on process.

Scrooge was haunted by the ghost of his former partner Marley. Here’s hoping these new bean-counting firms are not spooked by their former partners.