Be Audit You Can Be: Accounting Firm Consolidators Demonstrate Room For Growth

“Accountants work to shed ‘boring tag’ amid hiring crisis” was a recent headline in the FT1. However, with the accounting industry currently in the midst of a wave of consolidation, which has sparked interest from private equity firms looking to generate growth, this label may already be off the books.

As an industry, accounting has proved itself fairly recession resilient. The impact of the Global Financial Crisis in 2008 / 09 was moderate; revenues dropped 2% year-on-year whilst the UK’s GDP fell by over 4%. The pandemic caused an inevitable shock, but the market recovered quickly as businesses relied upon accountants to help with Covid-related queries, including furlough, bounce-back loans, and grants.

Figure 1: Accounting Services Market Growth2

(Indexed: 100=1997); SOURCE: ONS

Accounting For The Market 

The UK accounting market is diverse. At one end are the Big 4 (PwC, Deloitte, EY, KPMG) – multi-national firms who focus on advising and auditing the largest, often publicly listed, companies. The rest of the Top 10 firms (BDO, Evelyn Partners, Grant Thornton, RSM, Azets and Mazars) offer similar accounting services, but typically target slightly smaller clients. However, these firms are increasingly competing with the Big 4 for audit work, as audit rotation rules now require the largest businesses to rotate auditor every ten years.   

Beyond this, smaller accounting firms tend to focus their client base on SMEs (small & medium-sized enterprises) and offer both compliance related services (including bookkeeping, accounts preparation, payroll, tax returns, and audit) alongside value-add services (including corporate finance, insolvency and restructuring, and tax advice). Some players may have a national footprint, whilst others will keep their presence regional, or even local.

Figure 2: UK SME Accounting Market Map

Non-Exhaustive & Illustrative; SOURCE: Fairgrove Research

For SMEs, working with a good accountant can be a huge asset to the business. This relationship will often begin with a compliance related service (sometimes thought of as ‘an expense a business needs to have but doesn’t necessarily want’), typically accounts preparation, tax returns or even audit work for larger clients. As the client starts to appreciate the accountant’s role, and trust builds, the client may also begin to purchase strategic and advisory services (sometimes thought of as ‘an expense a business doesn’t necessarily need to have, but wants’). By this stage, the accountant is likely to be perceived as a trusted business adviser, providing the expertise and financial tools to help clients grow their businesses. The longer this relationship lasts, the harder it will be for the client to move elsewhere.

Crunching The Numbers: The Attractiveness Of The Sector

Fairgrove’s analysis suggests that ten private equity deals took place in the accounting sector in 2021, with this activity continuing throughout 2022. But what is drawing this private equity interest to the sector, and why now?

Firstly, the market size for SME accounting and related services is large (estimated by Fairgrove to be worth ~£4bn-£5bn per annum in the UK alone) and fairly stable, with ~60%-70% of this market in recurring revenue service lines (e.g. account preparation, audit, annual tax returns). Now more than ever, this recurring work helps accounting to be one of the more desirable sectors within Business Services to invest in.

However, alongside this steadier recurring income, accounting also presents exciting opportunities for high growth. The industry has not remained untouched by the technological revolution sweeping across professional services, as both firms and clients look to make their lives easier. Improvements in efficiency and productivity is cited as the most common benefit of updated technology for accounting firms. Those who choose not to invest in technology may find themselves struggling to compete.

Figure 3: Impact of Technology On Accounting Firms

“In what ways has updating technology, within the past five years, had a positive impact on your practice?”

Chart by Visualizer

These efficiencies free up more time for client interactions and value-add analysis. As the quality of data improves, clients are more likely to request further insights and reporting advice. Aspects of practical accounting will still remain however, despite the automation of basic compliance work. For example, converting client data to statutory format is difficult to automate any further than has been done currently, so is likely to remain a more manual task.

Additionally, the fragmented nature of the market presents an attractive opportunity for growth; ONS data suggests that there are ~2,000 accounting firms in the UK with £500k+ revenue, and a further 4,000 firms earning £250k-£450k per year, indicating that there is a wealth of targets for an M&A consolidation strategy, a popular avenue for growth for private equity firms.

Pursuing such a strategy would frequently involve transitioning a firm from a partnership to a limited company. Whilst this may seem daunting, data on the ownership structure of the top 50 accounting firms suggests that the direction of travel is, in fact, away from partnership models; 13 of the top 50 firms are now non-partnership, an increase from 2 in 2012.

Figure 4: Ownership Structure Of The Top 50 Firms

Chart by Visualizer

Is There a GAAP In The Market For More Consolidation?

Consolidation of accounting firms is not a new phenomenon, although it has been gathering pace over the past couple of years. One of the best known examples of M&A consolidation in the sector is Azets (formerly known as Cogital). HgCapital supported the formation of Azets, through the merger of accounting firms Blick Rothenberg and Baldwins, and Nordic outsourcing provider Visma BPO, in 2016. The group was formed with the purpose of acquiring mid-tier accountancy practices on a national scale. Fast-forward six years, and it appears to have achieved its purpose: Azets has acquired over 70 businesses, and is aiming to reach £1bn in revenue by 2027. Recent reports even suggest that Azets may currently be valued at ~£1.5bn3.

Such strategies do require careful management, with the 2009 merger between RSM and Tenon serving as a stark reminder of this. The company planned to employ 3,000 UK staff, have a combined fee income of >£250m, and have 700 offices worldwide under the RSM branding. But unserviceable levels of debt, a result of an aggressive expansion strategy including acquisitions of Bentley Jennison and Vantis, and a lack of cultural integration between the two firms, resulted in issues that could not be overcome. Baker Tilly acquired the combined entity in 2014, and adopted the RSM name in 2015

However, there has been a strong amount of M&A activity amongst accounting firms in recent years, both from private equity backed firms, and those without external investment.

Figure 5: Recent M&A Activity By Key Consolidators

ConsolidatorInvestor DateExample Acquisition
(Since Investment)
Shaw GibbsApiary CapitalNov 2022N/A
DJH Mitten ClarkeTenzingNov 2022N/A
Cooper ParryWaterlandJul 2022N/A
XeinadinExponentFeb 2022Scott & Wilkinson; Smith Craven; PWR
DainsHorizonDec 2021Barringtons; Clere’s; Isoceles
AABAugust EquityOct 2021FPM; Charlton House; Sagars
Jeffreys HenryTenzingFeb 2021ABG
AzetsHgAug 2016Garbutt + Elliott; Moore; Rees Pollock
TC GroupN/AN/AFiler Knapper; Paget Reid York;
Copson Grandfield
Begbies TraynorN/AN/AMaf; CVR; Daniells Harrison
Non-Exhaustive: SOURCE: Fairgrove Research

Acquisitions are either intended to grow geographic or service line reach. Dains’ recent acquisition of Isoceles, a provider of outsourcing and interim FD services, demonstrates that there is appetite within the sector to move beyond the more traditional service lines. Although not necessarily the result of mergers, the Big 4 firms have moved beyond finance to offer legal services, competing with traditional law firms through positioning themselves as a ‘one-stop shop’ for business and legal services.

Despite these recent flurries of activity, the accounting market continues to be an appealing space for consolidators; the recurring nature of revenue, benefits of scale from merging smaller entities and ongoing growth in technological efficiencies could all help investments to excel.


Our Experience

If you would like to discuss this article or if you are considering investing in the accounting sector, please contact Paddy Woods Ballard, or Sophie McGurk.


Footnotes and Sources

1 Financial Times, October 3rd 2022

2 Includes accounting and auditing activities, bookkeeping activities, and tax consultancy

3 Accountancy Today, August 5th 2022

Photo: Lovelyday12, Shutterstock