An expected uptick in mergers and acquisitions among small-to-medium accounting firms is just one more reason why practice owners should be embracing automation technologies to future-proof their business.
That’s the message from Paul Goessler, Westpac’s national head of professional services, who says he expects to see a flurry of mergers among smaller practices in the coming years.
“We’re seeing many clients bulk up their existing businesses via mergers and acquisitions,” he says. “I have a client that's done seven acquisitions in a little over five years.”
Picture: Paul Goessler, Westpac’s national head of professional services.
Goessler believes this wave of industry consolidation is being driven by two key factors. One is demographic, as a glut of baby boomer practitioners approach retirement and seek to sell up. The other is technological, as automation makes it easier for accounting firms to move beyond providing mainly compliance-related services and expand into value-added services such as business advisory, consulting and financial planning.
According to Goessler, where once average smaller accounting firms earned annual revenues of around A$3 million, this amount has almost doubled over the last five years as firms combine or acquire to complement organic growth.
“Often, smaller firms that generate roughly $700,000 in annual revenue are brought into a larger firm as ‘tuck ins’ to create businesses producing $5-$6 million in annual revenue. The smaller firms often have fantastic, valuable clients,” he explains.
“Often, smaller firms that generate roughly $700,000 in annual revenue are brought into a larger firm as ‘tuck ins’ to create businesses producing $5-$6 million in annual revenue.”
This approach delivers advantages to both sides of the transaction, Goessler says. Sometimes the smaller firm is run by an older practitioner looking for an exit strategy. Under the terms of the deal, the seller may agree to work in the business for a number of years, perhaps reducing the number of days he or she works over that time, and gradually exit the business as clients are transferred to the combined entity.
For the larger entity, it allows them to add to the services they offer, potentially moving into areas such as consulting, strategic planning, data analysis, mortgage broking and financial planning. Over time, this ability to provide a wider range of services assists the business to generate higher fees from clients.
“We have found clients that once produced annual fees of $3,000 become $15,000 clients because the business is able to provide a broader range of services to them, including financial planning advice,” says Goessler.
He recommends that all small-to-medium practice owners focus on ensuring they are embracing new technologies to optimise their firm’s efficiency.
“While there are a number of attributes that potential acquirers look for when exploring relationships with firms they wish to integrate into their operations, access to state-of-the art technology, as well as sound financial management systems, are key,” Goessler says.
New tech frees up accountants to be advisers
The degree to which cognitive technologies, such as robotic process automation (RPA) and machine learning, are transforming industries such as accounting and law was a key theme of the recently released Smart Industry Report: Professional Services, a special report in Westpac’s Towards 2030 series.
Automation technology is being used to collect data and populate forms for compliance activities, freeing accountants from hours of mundane work and allowing them to instead focus on analysis and advisory work.
The Westpac report cites a study by the International Federation of Accountants (IFAC) that found advisory services were some of the top services provided by small and medium accountancy firms.
IFAC’s Global SMP Survey 2018, which explored accounting trends across 164 countries, showed 83% of respondents provide business advisory and consulting services. It also highlighted that local accounting firms actively promote the need to move to a trusted adviser model and, in some instances, have been moving into financial advice.
As Westpac’s Towards 2030 report concluded: “firms must adapt their services and pricing models to suit consumers who increasingly insist on seamless, value-added service on demand.”
- How new tech relieves practice pain points. Automation tech is changing the way accountants work, and it can also make clients pay the bill faster. Brought to you by Westpac.
- Smart Industry Report: Professional Services is a special report in Westpac’s ‘Towards 2030’ series.