Accountancy practices have been a poor second cousin to financial planning businesses in terms of sale price and merger and acquisition (M&A) activity. Here’s why that might change soon.
Accountants enjoy a strong position as trusted advisers, and are increasingly becoming SMSF experts. Many are also broadening their services to include financial advice, and growing holistic services. The result? Increased recognition of the potential of accounting practices, leading to increased M&A activity and greater goodwill recognition. A golden era for accounting practices (and their Gen X and baby boomer principals) may well be emerging.
In this article, I put the case for increasing accounting firms’ values, due to:
- the increasing involvement of accounting practices in financial services and advice
- the recognition of the latent value of accounting practices, with their attractive client lists and relatively low financial planning (FP) penetration
- their special positioning with clients as trusted advisers.
The following observations are based on trends and themes in recent M&A activity.
Historic multiples and valuations
In transaction terms, on a simple revenue multiple basis, accountancy practices typically trade at 70c-$1.10 per $1 of annual revenue, whereas FP practices trade at 2.5-3.5 x annual revenue. On the increasingly common EBIT basis for establishing valuation of practices, accountancy practices typically trade at 3.5-5 x EBIT (depending on a whole range of variables), whereas FP practices trade at 5-7 x EBIT.
Why the relative discount for accountancy practices? Is it because accounting firms are fundamentally less profitable than FP practices? Is it because the revenue or EBIT growth profiles of the respective businesses are fundamentally different? Or does it reflect the traditional custom that accounting firms have been the typical acquirers of other accounting firms and paid little for goodwill? The latent potential makes them attractive and potentially undervalued, and the M&A metrics for accountancy practices are now shifting.
Strong fundamentals
Accountants enjoy a special and privileged position with clients. For small to medium enterprise (SME) clients, accountants are the first port of call for financial matters including financial advice, SMSFs, and loans. Accountants are particularly well-positioned given their strong knowledge of the clients’ financial affairs, the structure they use including family trusts, their knowledge on optimal tax structures, and their access to financial statements (especially useful for lending services and intermediation).
There are a range of issues and current industry developments which reinforce the role of accountants, including:
- The strong ongoing growth in the SMSF sector, with the next waves being Gen X clients, post retiree clients and clients seeking a co-navigation and coaching advice model. Accountants are the gatekeepers to these SMSF client relationships.
- The removal of the accountants’ SMSF exemption and the introduction of an SMSF limited licensing regime (with a three year transition period from July 2013). Current estimates are that up to 8,000 accountants may become licensed, with a healthy portion likely to opt for full licensing due to residual ambiguities in the limited licensing regime. This will only strengthen and extend the intensity of involvement with SMSF clients and financial advice.
- Following an extensive and intense three year consultation process with the Accounting Professional and Ethics Standards Board (APESB), a constructive resolution has finally been reached for a sensible professional standard, APES 230, governing accountants providing financial advice and services. There was the possibility that the original draft of this standard could have constrained financial advice services by accountants, damaged their business models, and driven the provision of financial of advice away from accountants. This would have been counter to the public interest.
- Whilst the Tax Agents Services Act (TASA) looks likely to apply to non-accountant financial planners from 1 July 2013, which will be pretty challenging, accountants are already well- positioned with respect to TASA.
- Anecdotally, an increasing degree of referral arrangements between accountancy practices and financial planning firms, including the arrangements being supported by the Institute of Public Accountants. The introduction of SMSF licensing requirements will only increase the degree of referral activity as some accounting firms decide to rely on referral arrangements to cover licensed activities.
Accounting and financial planning as natural partners
Typically, acquirers of accounting practices have been other larger accounting practices, either through merger or acquisition. These are often called ‘tuck-ins’. Smart acquirers, which are already strong in FP, often look for accountancy practices with a relatively low level of involvement in FP so that the acquisition can be value-adding as FP is expanded in the acquired practice.
Four additional trends are evident:
First, accounting firms are seeking to acquire or merge with FP practices to extend their expertise in this area of service provision, and offer a more holistic client solution.
Second, FP firms want to acquire or merge with accounting firms in order to integrate services, and protect their clients from poaching.
Third, wealth management organisations want to acquire businesses which are strong in the accountant or SMSF sector. Examples include CBA’s acquisition of Count Financial, IOOF’s of DKN, Shadforth Financial Group’s of Lachlan partners and others.
Finally, accountant aggregation plays such as Countplus and the recently announced Countplus 2.
Recent corporate activity has seen consolidation in the wealth management and financial advice sectors, with many non-aligned and independently owned organisations being acquired by institutions. It is likely that the future growth of accountants and their involvement in financial services and advice will see accountants at the vanguard of a renaissance in the independent financial adviser sector, as a portion of accountants will prefer to be independently positioned.
In the past, accountants acquiring or merging have typically done transactions with little recognition of the goodwill value or potential. Financial advice revenues are often less than 15% or 20% of the revenue base of many accounting practices, and for some it is close to zero, where even the advice provision to SMSF clients is limited to compliance services. This represents upside potential for accounting practices or potential acquirers of such practices.
The bottom line of all the above is increased recognition of the potential of accounting practices, more M&A activity, and greater goodwill recognition. A golden era for accounting practices is upon us – and accounting might finally be sexy.
Andrew Gale is a former CEO and Managing Director of Count Financial, and is now a Director of SPAA and Executive Director at Chase Corporate Advisory.