Is M&A the right growth strategy for accounting businesses?
For accountants looking to grow their business through M&A over the next few years, there will be plenty of buying opportunities. But M&A is not for everyone, writes Paul Barrett.
- M&A activity is a popular and important tool for growth and can give businesses a competitive advantage
- When it comes to M&A there are three reasons to pursue a deal
- If not executed properly, M&A has the potential to transfer problems from one business to another
Merger and acquisition (M&A) activity in the accounting space is ramping up, as accountants recognise the increasing importance of scale and efficiency to drive performance – and a wave of baby boomer practitioners prepare to sell up and retire.
Acquisition is a popular and important tool for growth. Almost overnight, it can give a business a competitive advantage that would otherwise take years to build. That competitive advantage could be a large client base, specialist competency or unique technology.
For accountants looking to grow through acquisition over the next two-three years, there will be plenty of buying and partnership opportunities.
However, before heading down the M&A route, buyers should consider the reasons they want to do a deal and whether the same objectives can be achieved through organic growth.
At a high level, there are only three legitimate reasons to pursue a deal: to acquire capability, to acquire capacity and/or to achieve synergy benefits.
In accounting, capability could be a specialist tax and business advisory service such as support to apply for government grants.
It could be exposure to different market segments, for example, medical and healthcare professionals, charities and philanthropic organisations or regional SMEs.
Accountants should approach M&A with a view to increase their strategic capability, particularly in areas that are difficult to replicate. They should look for opportunities that will help them standout and win in a competitive marketplace.
“Accountants should approach M&A with a view to increase their strategic capability, particularly in areas that are difficult to replicate.”
For small businesses and start-ups, growth is relatively easy to achieve but at some point in the business cycle, growth slows down
For mature businesses, M&A can revive business growth by enabling them to expand their services, open new offices and extend their market share.
M&A can enable a business to scale up operations and service more clients.
Achieving synergies through cost savings and revenue
There are two main types of synergies that can be achieved through M&A. These are cost savings (through shared expenses, reduced salaries and economies of scale) and revenue benefits (cross-selling opportunities, geographic expansion and higher sales).
Achieving synergies is an important driver of value in M&A but it is also extremely hard to do. This is because integrating two businesses is more complex than people think. It usually takes a lot more time, money and resources than expected.
Furthermore, buyers routinely overstate and overvalue the synergies to be had, resulting in disappointing outcomes. Overstating synergies happens for a number of reasons including lack of experience, lack of information on a target and enthusiasm.
Be wary of too much enthusiasm
Enthusiasm to do a deal can make assets appear more attractive than they are. That’s not to say synergies can’t be achieved; you just require strong fiscal management and complete control over profit margins to do it.
Business integration also requires extensive operational experience plus strong project management skills. More than likely, the average accounting firm will need to look externally for these skills.
If not executed properly, M&A has the potential to transfer problems from one business to another and become a major distraction for management and staff. Instead of creating value, it can destroy value.
An organic growth strategy
Better results and outcomes can sometimes be achieved by pursuing an organic growth strategy. This is a more conservative approach (music to many accountants’ ears) but can steadily increase a business’s profitability and enterprise value by achieving net client growth year-on-year.
Either way, whether a business goes down the M&A route or takes a more organic approach, sustainable long-term success always hinges on organic growth.
Any M&A transaction, be that a book buy, tuck-in or company acquisition, must produce new clients and referral opportunities in order for the financials to stack up. There is no getting around the need to generate a lot of activity, see clients and win business.
The smart money will chase deals that expand their capacity and capability to derive organic growth.
*This is an edited extract from AZ NGA’s white paper Build or Buy: A guide to merger and acquisition fundamentals, available at www.aznga.com.au