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For what reasons should firms consider undertaking mergers and acquisitions?

This article was first published in the February 2011 Malaysia edition of Accounting and Business magazine

A major trend in the growth of the accounting profession and other professional service providers is significant sector consolidation; we are witnessing a global phenomenon covering Europe, the US and Asia. Although there may be different factors and emphases in each of these marketplaces, the overriding drivers are common for all geographic areas.

The trend in global regulation of international and national accounting practices has been a spur to consolidation. This increased level of regulation, driven by Enron, Lehman Brothers and other multinational failures, and coupled with global concerns for the banking system (particularly in the US and Europe), has resulted in a tightening of the global auditing and accounting regulatory framework. Further regulation is inevitable in the Asian markets as a result.

Certified public accounting (CPA) firms in Singapore and Hong Kong are currently experiencing an increase in levels of new business as the world economy reconfigures.

The ability of these practices to service the global interests of clients is a key issue that requires more fundamental changes in competency and professionalism than were needed 10, or even five, years ago. CPA firms will therefore have to respond by ensuring that their international associates can provide consistent, high-quality service that will stand the rigour of review across multi-jurisdictions.

Changing focus

As a consequence of the above pressures, many firms have sought to build critical mass, widen their client base and focus on a particular client grouping which will buy the specialist services offered.

Although organic growth rates in Asia have outstripped the US and European experience in recent years, in many markets the ability to grow service firms in this way is limited. If you are taking on a specialised compliance partner in audit or risk management, the target clients requiring this enhanced service may well be small in number. In addition, they are usually well serviced and difficult to move from one practice to another. In addition, the appointment of auditors, tax and accounting services is decided at a regional or global HQ level and usually to a firm with international connections.

This all leads to the interest in building critical mass through mergers and acquisitions (M&A) with similar-sized firms. The combined practices can thus extensively broaden the offering of added-value services for their clients from within the larger firm environment.  

We foresee that the drive to consolidation will continue throughout Asia. Governments wishing to develop regional hubs of accounting services to support their financial and investment sectors will only increase the demand for M&A.

Retirement plans

For those accountants in industry, commerce or the public sector, retirement is normally fairly straightforward, with the terms and timing forming part of the employment contract.

This is often, however, not the case for the accountant in practice, either as a sole practitioner or in a partnership, although the larger practices tend to ensure that their partnership agreement covers this issue. In our view if there is any lack of clarity then problems will arise.

Although some practising accountants choose to retire ‘early’ (ie before the statutory retirement age), they tend to plan well in advance for this and the changes within the firm run smoothly.

However, in our experience this is not the case when dealing with an ageing senior partner or, worse still, an ageing founding partner or partners. Indeed, for many firms this situation almost guarantees difficulty in finding appropriate succession solutions or maximising capital value.

For some reason, these often highly successful but potentially autocratic business leaders do not seem to realise that they are mortal and that eventually they will cease to attract new clients. There will be no guarantee that they will be able to survive their client’s five-year business plan.

In addition, prospective retirees are often ill versed in any form of management training and have little or no idea about what motivates the generation whom they are seeking to motivate. Time and again we see practices that are strong and well developed losing their value because older partners are not prepared to step aside and let the practice be developed along modern business lines.

So what is the answer? In simple terms, planning, planning and still more planning. Older partners must decide whether they seek ongoing but potentially diminishing income streams or some form of capital payout. They need also to decide whether they have the heart and energy to continue to remain up to date in an increasingly regulated environment, where the pace of change may mean that their traditional work is no longer either necessary or available.

Practices should be determining whether or not the succession can come from within or be achieved through external sale, either full or partial. If internal, the partners must decide whether or not those involved have the necessary experience and skills. If not, what steps can be taken through, for example, training, to overcome these shortcomings? If external sale is thought to be the answer, the practice must ensure that it is in the best possible shape for sale. This is unlikely to be the case if it is managed and led by individuals who, were they employed by others, would have had to retire long ago.

Considering an acquisition?

Growth through acquisition is typically viewed as an alternative to organic growth. As the acquirer, your business will need to have the right profile and structures in place if the deal is to create any value and to enable you and your partners to achieve your objectives.

Some of the strategies we encounter in our assignments include:

  1. Practices seeking growth in a new discipline or complementary service offering.
  2. Defensive, taking out competition.
  3. Need to acquire new skill sets and/or teams.
  4. Acquisition of a complementary client portfolio.

Whatever the strategy, the acquiring practice needs a strong profile and financial position. It should have good documentation on partner or member shareholder relationships, and a clear management accountability and practical decision-making structure. The practice should pay second-tier management-level salaries and emoluments that are competitive in the marketplace and potentially attractive to specialists within larger firms who they may seek to employ in the future.

Differentiation between emoluments of equity partners and second-tier management should be clear and the rewards for moving internally from second-tier management to ownership should be rewarding and attractive. Partner assessment and development should ensure that there is not only technical but also management and personal skills training available to develop partner and senior management’s abilities.

Professional firms need to know their own business profit drivers. They also need to understand how these work and at what stage of the cycle these drivers are at. Are they new with longevity or are they short-term initiatives that will gradually erode as competitors move into that particular service or marketplace? The analysis of your dogs, hares and tortoises in terms of contribution is just as relevant for accounting and professional firms as it is for your commercial clients.

Foundation for growth

The answers to the above questions provide a basic foundation to establish which direction a practice needs to move in to achieve its anticipated growth. We often assist in strategy development and find that, although firms have come to us because they wish to acquire a specific practice, the reality is that:

  1. They need a year or possibly 18 months to tackle some of their internal practice issues.
  2. Their own marketing and organic growth needs to be enhanced within a similar time frame.
  3. The target practice does not meet the key criteria as determined by the client.

The final questions at the initial evaluation stage are:

  • Have you the time to achieve the integration?
  • Do you have a strong enough ethos into which the new clients, staff and partners of the targeted firm can be introduced and motivated for the future?
  • Often the managing partner or managing director will need to give up some of their chargeable time in order to handle the integration. Are they prepared for this change?

The strategies should reflect and embody the above analysis. The evaluation is critical, and will determine whether a practice should be acquiring to build a portfolio of specialist clients, acquiring specialist accounting boutiques or facilitating a change in its external profile in order to reposition the practice geographically or through marketplace branding.

Do not leave the strategy exercise to chance. There are many pitfalls in trying to research the marketplace and internally manage the deal, so seek guidance from specialist consultancies.

Tim Underwood is a director in the Singapore office of Foulger Underwood and Derek G Smith is senior consultant in the London office.

Key market drivers for consolidation of practices

  • Compliance and regulation
  • The view that size matters
  • The need to service global multinational businesses with consistent service
  • Staff shortages
  • Technology developments, particularly with regard to communication and data transfer

Specialism in Singapore

As the audit exemption level increases – and audit-based fees diminish – in coming years, Singapore-based practices must look at investing in and setting up specialist services. This has already taken place in the UK and there is evidence that it is starting to happen in Singapore. In order to differentiate themselves, practices will have to consider specialising in provision of the following services:

  • International/regional tax
  • Audit and compliance
  • Valuation
  • Financial services
  • Insolvency

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Last updated: 7 Apr 2014