Sector Overview

A lawyer and an accountant walk into a bar – except this is no joke and there is no witty punchline. On the contrary, it’s a celebration as record volumes of accountants and lawyers have taken to their favourite watering hole to toast the successful exits of their firms to a new wave of industry consolidators.

New business models that deviate from traditional partnership structures, increased competition, and technology disruption are all driving change in the accountancy and legal professions. These dynamics have forced a wave of consolidation that is unprecedented in these industries as advisers turn their attentions from clients to their own M&A.

Since 2015, there have been 348 acquisitions of accountancy firms in the UK, and over the same period, 246 law firms have been acquired.

Who is buying?

CogitalGroup is the leading acquirer in the UK accountancy market, accounting for 31 of the 348 deals during the period under review. In addition to these standard transactions, Cogital has also acquired assets in the field of financial advice, business process outsourcing, and even IT and telecoms.

More recently, however, Cogital has been relatively quiet following an initial flurry of activity in 2016 and 2017 – perhaps a sign that the buy and build model is largely exhausted and that owners John Connolly, a former global chairman of Deloitte, and HgCapital, the private equity house, are gearing up for a sale.

In the legal industry, the buyer landscape is more fragmented. The most active acquirer has been the Property Information Exchange (PIE), which has completed a number of ‘under the radar’ acquisitions of property and conveyancing-focused law firms, alongside its higher profile acquisitions of technology solutions.

The next most active buyer in the legal sector was Gordon Dadds, a full service, international law firm. The stand-out deal for Dadds was the acquisition of Ince & Co (which now lends its name to the new group) but this flagship combination was augmented by five smaller transactions.

The impact on valuations

Profit multiples are difficult to extrapolate from deals where the target has a traditional partnership structure (in other words, most accountancy and legal practices). Underlying profitability is something of a misnomer as partners tend to distribute the profits of the firm in lieu of salary. This means that operating profits will appear high and profits after partners’ drawings will appear low. A better measure of pricing may be revenue (or billings) multiples.

In our sample of accountants, revenue multiples have varied with size (lower deal size = lower multiples), where the mean multiple of annual billings paid was 1.37x (excluding outliers). For our sample of legal firms, however, the mean like-for-like multiple was 1.46x. This suggests that the quality of billings (for example, the repeatability and margins on revenues, the scarcity of supply etc) is perceived to be higher by buyers of law firms than acquirers of accountancy firms, but not by much.

The pricing trend over time is also insightful – accountancy multiples have been trending north as deal activity increased, whilst legal multiples have trended down. However, look under the bonnet and you discover that there was a concentration of higher priced deals earlier in the period under review, pushing up the mean in the early years of our analysis.

The outcome of this M&A activity is a reduction in the number of independent firms and an emergence of a new breed of professional services outfit, pitting the old partnership template against a new, often private equity-backed model. How this affects client service remains to be seen. Though at the very least, more practitioners will have the first-hand experience of exiting their business to impart to their clients.

The article was created in collaboration with Accountancy Age .