A letter to the partners or owners of Regional Champion accounting firms

If you’ve found yourself here, you’re either already thinking about what the future of your firm will look like, or we’ve encouraged you to do so!

This letter sets out our thoughts on the industry, the options that you may have and the things you might well be (rightly) worried about. Full disclosure, it is a long letter, so brace yourself…

The industry

The accounting industry is rapidly changing. There is a massive surge of investment from private equity firms, both in the UK and overseas. There is a rapid consolidation of firms, and a shift from an ‘LLP’ to an ‘LTD’ mindset. The Accountancy Age 50+50 table has never had so much movement…..

All of this provides more choices for you than ever before. It also provides uncertainty, a fear of being left behind, or of just ‘getting it wrong’.

As well as the shifts in the industry caused by external investment, you are probably also navigating some, or all, of the following operational issues:

A shortage of good people not a shortage of good work - Attracting and retaining the right people is the number one issue we find when speaking to partners. Getting the right CV’s and convincing candidates to join can be difficult. Convincing the rest of your partners to sign off on a hire and pay a big recruitment fee can be challenging as it might impact this year’s drawings.
Partners working in the business not on the business - In our experience most partners are spending too much of their time ‘on the tools’, and dealing with the never emptying inbox of client queries, rather than proactively spending time with clients or finding new ones. Or recruiting and managing talent.
Succession - A combination of affordability and risk appetite means there are fewer partners who are able to ‘buy in’ and allow the existing partners to realise their capital value. But if they’re not rewarded then those young and hungry partners of the future will leave, accentuating the two challenges set out above.
Technology - It is all around us, but it is not necessarily easy to adopt. What should the tech stack look like? Should we be investing in AI? Can we afford to invest in new technologies? Can we afford not to?

But while aspects of your market are changing, there are some fundamentals that make your market highly attractive. You tend to have loyal, longstanding client relationships. Nearly every partner we meet puts their clients’ needs above anything else, including their own. And because of that, the clients stay for a long time, in many cases over multiple generations. A renewal rate and a ‘lifetime value’ that most software companies would be jealous of.

Your industry is stable, non-cyclical, and it grows and grows. The compliance and regulatory burden is only heading one way, despite what our politicians keep promising us. Clients don’t just want your help, they need it.

However the most attractive thing about your industry is that your clients trust you. We talk to hundreds of clients of accounting firms every year, and overwhelmingly the feedback is positive. The staff and partners in the firms we meet are highly trusted by their clients. The clients want your advice, ideas and friendship. So if you can invest into some additional expertise such as specialist tax resource, or ESG and non-financial reporting, or financial outsourcing then your clients will be excited to hear what you can do for them.

Your industry is special. Which explains why so many of those private equity firms are piling in…..

The options

The good news is you now have far more options open to you. No more muddling through, or selling to the junior partners at a discount. There are too many options to list, but the main ones are set out below. They all have their pros and cons. It simply depends on what you want.

Raise external debt to help the junior partners to buy you out - This is an option many look to as it increases the money you receive today vs what the partners could afford on their own. Arguably however it is borrowing money from yourself to pay yourself, and the cashflow burden can make it hard to make investment decisions until the debt has been serviced.
Partial sales - There are several models in the UK where a business will buy 49% or 51% of the business, but then charge an ongoing fee (normally taken ‘off the top’) for back-office services. The implied valuation on the business today is high but it is tricky to say how the remaining shareholders will be able to sell the other half and for how much. It’s a middle ground that solves the problem today, but we think stores up problems in the future.
Sell to a consolidator - There are now 20+ SME focused consolidators looking for firms like yours to build up their scale. They pay good prices and will offer back-office support to your business. You will become an office within a national brand, have access to new lines of service that you may not have today, and you get the kudos of working for a ‘top XX’ accounting firm. But you will report into a regional manager, you will no longer be able to take recruitment decisions locally, you will be told to adopt standard practises and technologies, and you will need to look out for the synergies (which can only mean people). You will also need to trade a portion of your firm for shares in the wider group (a smaller % of a bigger pie).
Sell to a new private equity investor - Remarkably, even with all the existing consolidators out there already backed by private equity, there are still many new investors who are keen to invest into accounting. If you find a new PE investor you get the benefit of being the ‘platform’ and therefore can likely retain more of your identity. You will also probably retain more equity than when selling to a consolidator. You will however need to ensure that your new owner understands your business. There is a risk they may not add much value as you would like, or worse impose a strategy that may destroy value. They will almost certainly load your business with debt to partly pay for the deal. The main downside however on this route is likely linked to ‘hold period’. Your new owner will most likely want to ‘exit’ in 3-4 years. You get sold again, with limited control over where you end up. You kept your identity for a while, but PE will always sell to the highest bidder. If you go down this route you will likely end up with one of the national consolidators. Or, best case, you become one yourself.
Take investment from One Point - Become, or join, a Regional Champion. A firm looking to be the destination of choice in the local market for the best people and the best clients. A firm that will always retain a sense of independence. You keep your equity at the local level, investing alongside the partners you already know. With this approach you still get support with recruitment, technology and ultimately, growth. We encourage you to think about what you want the firm to look like in ten years’ time and we then invest in that. Put the right incentives in place to motivate and reward the new(er) partners. Don’t work towards one ‘exit’ – allow partners to sell their stake when they want to, not when the investor decides.

We single out One Point as an option because we genuinely believe our model to be different. Not necessarily better, or right for everyone, but different. We want to have a lasting, positive impact on the firms and partners we work with. We want to maximise growth over a longer period of time not over a short three-year investment horizon. Other investors will want more M&A, faster ‘synergy’ realisation, and offer contingent consideration based on hitting these targets. As such they can sometimes pay more. So for anyone who is motivated to sell for the highest price today, they are probably a great option. Incidentally, we respect that motivation very much. It is a very valid objective and something you are well within your rights to prioritise. We are lucky to get to meet lots of you and we really respect those being honest with us (and themselves) about that. You have a great business. Why not get the very highest price possible today?

The worries

All of these options require making a decision that you know will lead to change. Even if you think that change is going to be positive it is still very understandable to worry about what the new world will look like. These are the main worries we hear about:

Giving up control - You go from controlling your firm to someone else owning 40%, 60% or even 100% of it. That is a huge change. But you need to try and decouple control over your shareholding, and control over your day-to-day life. Are you still in control of your clients, your staff and your diary, or have you given that up when you sold your equity? It’s a spectrum and it is different for all of the options above. One Point only works with firms who want to maintain that sense of control and local influence. Each Regional Champion has its own CEO leading their firm and making decisions relevant to their local market, staff and clients.
Losing the firm’s identity - For many of you the firm has been operating under the same brand for 50+ years. There is a heritage and a history associated with your name. Whether that brand has real value over and above the people who work there is a fascinating topic to debate, but one thing that is certain is that brand is not the same as identity. The identity and the culture in your firm is built and instilled by the people in the present, not the past. It is how your clients and the local market sees you operate today. It is how the staff and recruiters see you act. Most of the options above will require you to change the brand in time, most of them will also require you to change your identity. Charging minimum fees or increasing charge out rates, or setting out what a ’good client’ looks like. Changing job titles and pay bands into a standardised matrix. We think that all of our Regional Champions have their own identity. It’s what makes them great.
Letting clients down - Client service is typically your number one priority and you’re worried this will be impacted when new investors come in. This is a valid concern. Some options will make offers conditional on improving EBITDA margin which likely means cutting costs. We’ve already said we think there is a shortage of good people not good work, and the longstanding client relationships are what makes accounting so attractive. So our model is to invest in capabilities to do more for clients not less. To improve client service, not reduce it.
Being lost within a national firm - A national firm can give status in certain settings, and undeniably gives access to many different service lines to support clients. But the worry can be that you’ll get lost within them. Your 0.1% share of voice on how things are done can mean you lose motivation as it’s hard to see the impact your contribution is making. It is also very difficult asking, or worse telling, your fellow partners to refer their client to the specialist VAT partner 200 miles away. You don’t know them and they don’t know you, so trusting them not to let your client down or damage your relationship is hard. Our view is that most SME clients are not that bothered about global or national resource. They want One Point of contact locally who can support most of their business advisory needs.
Selling out the next generation - The partners we talk to were nurtured, developed and mentored by the generation that came before them. You owe a debt of gratitude to them. Some of you (not all) feel guilty about selling the goodwill of the firm for a level far above what you paid the previous generation. Many of you want to feel confident that the generation that follows you has the same opportunity to have as wonderful career as you have had, and to build equity value in the same way that you have.

There will always be a worry that will justify the decision to defer making a change. That will never change. But you should also be worried about deferring the decision for too long. The industry is evolving at pace and burying your head in the sand is never a good approach. Instead, we encourage partners to think about it actively, talk to each of the options out there, and make an informed, positive decision to stay as you are or explore something different.

Overall

We said the letter was long. But there is a lot going on, and we’re passionate about being a force for good in all this change. You don’t regret making an informed decision, you generally regret an uninformed one, or not making one at all and letting an opportunity pass you by. One Point’s mission is to support local firms who want to stay local and build a Regional Champion. We offer investment and support to grow, we help with succession, and we encourage long-term value creation. We also offer friendship and a sounding board as you navigate through this changing environment.

We fully respect the other investment or sale options that exist in the market today. We recommend to most people that they should speak to others before making a decision. It’s critical that you really think hard about what you want as individuals and as a firm. Referencing and doing your own diligence is key. Speak to the partners of other firms who’ve already made their choice and see if they’re happy.

If you’d like to chat to some of the partners of Galloways, Mitchell Charlesworth and Pierce then please just call them. We hope it will be positive but it will certainly be honest!