A NEW APPROACH
Dr Mike Sweeting explores how you can increase your revenues, while assisting your client’s journey.
The average life of a client for an accountancy practice has been steadily declining. However, many practices have not built that reality into either their strategic planning or even their day to day assumptions.
Understanding the past
It made a great deal of sense to set up numerous ancillary services to clients when it was expected that they could stay for 10 or 20 years. Even then, corporate finance was often set up on the grounds that everyone else was doing it, so it was seen to be necessary. For many, a client selling up could be a disaster; and therefore the flow of internal recommendations into one’s own team was usually a tiny trickle. Corporate finance secured those shareholders who absolutely insisted on going, and who would go to the Big Four (or Big Five) of the day if not assisted. It was far preferable to try and fill capacity with fundraising, management buy-outs and other activities that would keep the company – if not the individual client.
The outcome was thousands of accountancy practices, with underresourced and underutilised corporate finance departments, that were notionally competing with the largest of their brethren. This was certainly visible in most ‘Anglo Saxon’ style markets across the world.
These same thousands of practices then discovered the bind that they were in. If they failed to sell their client, it was now likely that they would leave in disgust anyway. If they referred the client ‘upstream’, the larger player would at the very least bring their pals to the table instead of the referrers; but they could often walk off with all the business of a non-seller anyway. In either scenario, if the company sold, it was still usually ‘goodbye’, due to the feeding frenzy generated by a ‘liquidity event’.
The needs of the present
Today, an accountancy practice keeps its client for an average of six and a half years. It is just not feasible to attempt to be a ‘cradle to grave’ solution anymore; nor is it worthwhile. The result has been the stunning growth in the mid and lower market of referral based relationships with third-party suppliers. Some of these offer tax treatments; some do coaching and mentoring; some are management consultants; some do mergers and acquisitions; others do wealth management. All are specialists in their single discipline. It has become far more advantageous for the accountancy practice to concentrate on certain core skills.
Maybe some Top 50 firms in each country will continue to develop their wealth management side, or whatever. Below that, such ‘bolt ons’ have become increasingly unlikely. Consultancy has been tried and discarded (although in a number of high profile cases, this is due to perceived conflicts of interest, as well). Accountants know deep down that they are neither management consultants, nor business coaches. The last bastion is the corporate finance side, typically because one partner in the practice really loves it! It may be neither profitable, nor time effective.
The position today is that those corporate finance departments still exist in some form, even if merely on paper or the website. About 10% of the team’s activity is actually to do with the sale of shares in a business. The remainder is a patchwork quilt of valuations, management buy-out advice (although rarely actual transactions), some property stuff, shareholder disputes, divorce related work, and other things. The better departments fulfil some acquisition mandates too.
My simple question is this – surely there must be a better way?
The way ahead
In this stripped down, more focused business environment, it makes sense to ally with best of specialists. The various ‘networks’ have been early adopters here, attempting (quite successfully) to compete with the first tier by combining training, buying power and so on.
So what should you look for to maintain your reputation, get the best for your client and make decent profits from M&A activity?
- Work with no more than one or two M&A firms, firms that match your own client profile in their pricing and performance.
- Work with firms that you can measure and monitor. Many will spend months making ‘polite noises’. Who is prepared to share their internal KPIs and their stats on your client’s progress with you?
- Work with M&A firms that are themselves true specialists.
- Work with those that share with you revenue from both their activity fees and success fees. If it is only one, some serious insecurity must lie beneath.
- Work with the ones that will refer relevant work back to you.
- Work with an M&A specialist which has clients that go on to do other things in the business world.
Selling a company is not about retirement any more. The average age of the seller has gone down steadily over the last decade. In the UK, it was 63; today it is 53 (source: ONS). Here at BCMS, the average age in a done deal is 46 for UK clients, and it is even lower in many other countries (eg Poland, Israel).
However, 68% of BCMS clients stay in business after the deal. Most of the remainder do NOT suddenly go off to their little place in Marbella. Some do, but they often become bored. One client sold his main business through us several years ago and became a tax exile. He bought a company off us as an acquirer a couple of years later – and sold it through us subsequently! Why this behaviour?
In our case, it is self-certifying. Our clients take very seriously our statement that we will sell their company for its maximum value. These are serious business people who do not suddenly stop being serious. The 32% of our clients that do not end up at the helm of a purchased or pioneered company again just a few years later have plenty of choices. Money does that for you.
Company vendors of the better sort become private equity investors, or angel investors, or open a family office, or… All of these are future long term clients for your own practice. By working with the right M&A specialist, you can maintain revenue from your ex-clients for far longer than you ever did, from the six and a half year average of them and their ilk as audit clients.