Why is MarktoMarket doing this webinar?

1. Increasingly accountancy firms are using MarktoMarket as a means to provide advisory services; and
2. There is margin pressure on traditional, compliance-related accounting and tax activities.

Participants

Doug Lawson, CEO of MarktoMarket

Carl Swansbury, Partner and Head of Corporate Finance at Ryecroft Glenton (RG)

Daniel Wright, Corporate Finance Director at Barnes Roffe (BR)

The Market

Doug provided a brief overview of the UK advisory market, illustrating the number of accounting firms by employee size and the proportion of firms offering advisory services.  Unsurprisingly, as firm size reduces, so does the likelihood of offering advisory services.

MarktoMarket estimated that the market generates £2 billion in fees per annum from M&A, fundraising and valuation related work.

What does advisory mean?

Carl – to RG, it’s mostly Corporate Finance (CF) and within this, M&A (acquisitions, disposals, buy-ins and buyouts), transaction services and transactional tax.  Advisory could be far broader eg valuations, fundraising (equity and debt), management consultancy and provision of broader strategic advice.

Dan – would add debt advisory to the above.  Anything that is specialist, forward-looking and strategic in nature.

When is the right time for a firm to start offering advisory activities?

Dan – firms must ask themselves if they have the capabilities – you often need some specialist knowledge.  Secondly, it’s about your clients – not all clients will want to buy a business although most will want to sell at some point so you can choose to help them with this or recommend someone else if you do not have the in-house capabilities.

Carl – RG was a 100 year old tax and accounting compliance firm with no CF activities when he joined.  There were 5 reasons they wanted CF:

1. Wanted to become full service advisory business….so that they could standout in a competitive market but also to advise different type of clients eg private equity, plcs, management teams on MBOs
2. A recognition that those managements team could become clients post-transaction
3. Attract talent by offering more varied roles within the firm
4. Software was automating a lot of compliance services so these were becoming commoditised and lower margin so wanted (needed?) to offer services that could not be commoditised and automated
5. Client retention – long-standing audit clients went elsewhere when thinking about the sale of their business or a fund raise so there was a risk that those relationships would be lost as the “new” supplier offered compliance services post-transaction

Can CF be used for retention of clients and a cross-selling opportunity?

Dan – Barnes Roffe previously had to outsource CF services, so there was a risk that they would lose the client relationship to the firm offering CF services and, with it, the ability to offer recurring compliance services. Furthermore, offering CF services “in-house” keeps the number of service providers to one, which helps make the process more efficient.

Regarding staff retention, you need to keep people challenged and involved, and give them interesting work to keep them motivated – it helps with this if you can offer some experience in CF.

Does offering advisory services, specifically CF, take a firm into new areas of legislation with regulators?

Carl – it depends on the type of advice.  If you are helping businesses secure minority equity investment and promoting opportunities to sophisticated retail investors you need to be mindful of specific rules.  If you are only advising on the sale or purchase of controlling interests in businesses the regime is more straightforward.  You need to understand what you are going to do and then seek clarity on the regulations you need to abide by.  RG is regulated by ICAEW.

What is stopping any firm of accountants branching out into advisory services?

Dan – all accountants should, at the very least, be able also to spot which services are required (or will be required) by the client.  You need to understand from your client what their funding and/or exit plans are, or identify the signs!  In terms of instructing specific advisory services, if you don’t have the specialist knowledge in-house it is difficult to provide the advice, such as preparing a business for sale, the sale process, etc.

We are seeing the breakup of the Big 4 due to conflicts.  Will this impact small and medium-sized firms?

Carl – it is no longer possible to provide an audit client with advice where the fee is contingent in nature.  As a significant proportion of fees a CF firm will generate will be contingent on success it’s less possible for a firm to offer  CF advice / services to an existing  audit client. That is the only area of separation that is necessary.  CF does not need to be a separate legal entity to the rest of the business to prove this separation.

Dan – Barnes Roffe segregates teams and uses Chinese walls to manage this conflict.

How do RG and BR see themselves fitting into the market alongside independent boutiques and business brokers?

Carl – RG does not take a transactional approach to working with clients.  Their mission is to help the client to improve the financial performance, position and equity value of the business in a tax-efficient way over a number of years.  They focus on the “lower mid-market” which they define as businesses that have today or will in time have a £5-75 million equity value.  They also advise companies that need capital for growth in advance of an exit.

Dan – BR comes across other smaller accountancy firms and boutiques in the SME & lower mid-market space, also working on transactions with EVs up to £75m. However, given that BR has a large internal client base that it serves, it also provides advisory services to businesses with an EV below £5m.

Is there an opportunity for emerging CF businesses to take the business at the smaller end of the market that does not work for RG?

Carl – there is a huge market for advising clients in the sub-£5 million arena.  For RG, there is a market to advise on larger, more complex deals and this is where they choose to focus.  At this end of the market you do not really come across brokers, nor do you see Big 4 but you do see larger nationals and larger boutiques.  Most of the independent boutique firms coming out of accounting firms are, at least initially, addressing the sub-£5 million market.

The boutiques make a virtue out of their independence.  Is this not a good thing?

Carl – RG would contend that a full-service offering, providing M&A, transaction tax and transaction support, is better for the client.  It is the cradle to grave approach.  It means the client can appoint RG alone rather than 2-3 parties.  Furthermore, a management team doing an MBO will need in-house accounting , payroll, back office etc post-completion and RG can provide this.

When starting a CF business in an accountancy firm, can you rely on in-house clients at the firm or do you need to identify external clients from day 1?

Dan – BR has the luxury of warm leads due to its strong existing relationships with its clients, but does not rely on this.  It does provide a solid base from which to expand.

Carl – from day 1, RG Corporate Finance has been self-sufficient.  Over time they have found themselves advising existing audit and compliance clients of the firm but 95% of income still comes from external, new to firm CF only clients.

Questions from attendees:

Should you be providing DD services if advising on the transaction?

Carl – often RG will be advising and providing TS services.  This is allowed but they will deliver financial and tax DD separately to the lead advisory advice so that the advice is being delivered independently.

How are firms dealing with rising PI costs?

Carl – is not seeing material inflation for personal indemnity insurance.

Dan – not aware of significant rises in this.

How does a new CF practitioner carve out their own “space” at an existing firm?

Dan – it takes time but once you can demonstrate that you are building value and billing, you will be given more and more freedom.  Have monthly or quarterly catch-ups to update on progress.

Carl – insisted that RG CF would be a separately run business.  His advice would be to have her own “fee following” as that gives control.  Be focused around specific sectors.

MARKTOMARKET

MarktoMarket collects rich data on private businesses, particularly in the small and mid-market. Our easily searchable database allows our advisory, private equity and corporate customers to identify, analyse and price investments.

MarktoMarket’s auditable data gives users the confidence that they are dealing with intelligence that can be trusted

To continue the discussions about how data can support your business, contact Olga Melnyk at olga@marktomarket.io.