Consolidation: a critical crossroads for Ireland’s accounting firms

Consolidation is reshaping Ireland’s accounting sector. Ken McAndrew explores the critical choice facing many firms: invest to stay independent or partner for growth

The global accountancy sector is experiencing a wave of consolidation driven by advances in technology, regulatory developments, succession challenges and the need for firms to enhance their service offering.

Over the past two years, this trend has gained significant momentum in the Irish market.

For small- and medium-sized firms, there a big decision is on the horizon: invest in your own growth strategy to remain independent or seek investment and partnership to secure the future of your firm and your people.

There is no right or wrong answer; the decision you make will depend on the starting point and ambitions of your firm.

What is clear, however, is that having no strategy in place is not an option. If firms don’t act now, not only could they miss an opportunity for growth, but it could also result in them being left behind in the market and prove fatal for their business.

Remaining independent

If a firm chooses to go it alone, the upside is that it maintains control of its destiny. However, there are substantial risks on this pathway that need to be mitigated.

The firm’s ability to respond to the rising client expectations by offering a broad service at a competitive price, while also continuing to adhere to regulatory developments, is becoming increasingly challenging.

Firms can mitigate this risk somewhat by acquiring specialised capabilities to broaden their service offering and investing in best-in-class technology to maintain efficiencies.

Navigating these operational changes can be risky and cause business disruption if not managed well.

Another challenge firms need to address is the retirement of senior partners and ensuring succession for the next generation.

When succession is planned for years in advance, the challenge can be somewhat eased. However, the idea of an incoming partner taking on long-term debt to pay out an exiting partner is no longer an attractive proposition for many.

This issue alone is one of the primary reasons firms are turning to investors to help them on their growth journey.

Engaging an investment partner

When it comes to selecting an investment partner, there is a broad range of options to choose from.

First, larger Irish firms are seeking to grow through the acquisition of smaller specialised firms to enhance their service offering and/or geographical presence in Ireland.

UK-based private equity-backed investors are also seeking to build a practice networks across the UK and Ireland with a view to selling the group to another private equity (PE) consolidator within four to five years.

In both scenarios, the outcome for the selling firm is some form of equity event for the shareholders, which can be financially attractive, especially in the case of PE investment, and resolves immediate succession issues for the firm.

However, the pathway to getting there can be complex: selecting the wrong partnership can cause significant stress for the business and shareholders post-transaction.

Outlined below are the three fundamental steps SMEs need to navigate to ensure a successful investment partnership that achieves the right value for their business and is the right strategic fit for future growth plans.

Step 1: Aligning shareholders

One of the biggest stumbling blocks in deciding on partnerships and taking on investment is shareholder alignment, especially in firms with different generations of shareholders.

It stands to reason that a senior partner nearing retirement will have a differing view on taking on investment compared to a younger partner who has another 10 to 20 years of work ahead of them.

Just some of the issues to consider here include commercial and preferred partnership types, exit timelines and onboarding new partners post-transaction.

All of these scenarios need to be discussed in detail and alignment reached before a firm even starts the process of finding an investment partner.

If neglected, while the cracks may be papered over in the short term, they will most likely emerge later in the transaction, leading to significant shareholder friction or a failed process.

Step 2: Preparing for investment

Taking time to define and implement initiatives to improve earnings before interest, taxes, depreciation and amortisation (EBITDA) pre-transaction can significantly increase the value of your business.

Examples of these initiatives include increased pricing, outsourcing of high-value and low-volume work and removal of unnecessary overheads.

Risk is another key point investors look out for, and can easily erode value if not mitigated properly. Examples to focus on include customer concentration, succession planning for the leadership team and the scalability of the operating model.

Step 3: Identify the preferred investment partner

There are a wide range of potential investment partners in the Irish market, all looking for opportunities to acquire a firm that will support their growth strategy.

Some will offer a better financial outcome but will seek to fundamentally change the business post-transaction (sometimes for the worse).

Others may offer less in terms of financial incentive but demand less change to the ways of working and culture of the firm following the transaction.

There is no right or wrong option here. The most suitable option will vary from one firm to the next, depending on how they are currently positioned and what they want for the future.

Taking time to understand the different types of investors and engaging with one that aligns with your firm’s culture and strategic objectives is a key step that is often overlooked.

Understanding the investor’s growth strategy and ensuring it is aligned with the firm’s strategic objectives should be a key input to any partnership decision.

Another factor in decision-making is being clear and comfortable with what life will be like post-transaction in terms of support from the investor, level of autonomy and reporting requirements.

PE-backed investors tend to request more granular reporting and strong governance, especially focused on profitability. If this is something your firm is not used to, it can cause friction if not adequately planned for.

These are just a flavour of all the considerations firms must consider when deciding where to remain independent and invest in your own growth strategy, or pursue an external partnership.

The accountancy sector in Ireland will continue to see significant change in the years ahead. Above all, it is vital that your firm is prepared for whatever might come next.

Ken McAndrew is Founder of Camigo Consulting