Succession merger sale what will the exit model look like in 2021
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Succession/merger/sale What will the exit model look like in 2021?. Presentation to the MGI UK and Ireland Annual Conference 2 December 2011 Derek Smith. Agenda. Introduction Context My objectives The UK market and professional service firms The past The present The future

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Succession merger sale what will the exit model look like in 2021

Succession/merger/saleWhat will the exit model look like in 2021?

Presentation to the

MGI UK and Ireland Annual Conference

2 December 2011

Derek Smith

Foulger Underwood Associates Limited


Agenda

Agenda

  • Introduction

  • Context

  • My objectives

  • The UK market and professional service firms

    • The past

    • The present

    • The future

  • Succession/merger/sale

    • The past

    • The present

    • The future

  • The future – what will the successful firm look like?

Foulger Underwood Associates Limited


Context

Context

  • Change is the only constant

  • The trouble with the future is that it is not what it used to be.

    Paul Valery

  • The trouble with the future is that is usually arrives before we're ready for it.

Foulger Underwood Associates Limited


Context1

Context

  • Change is the only constant

  • The trouble with the future is that it is not what it used to be.

    Paul Valery

  • The trouble with the future is that is usually arrives before we're ready for it.

Planning is the key

Foulger Underwood Associates Limited


Objectives

Objectives

To encourage thought and discussion among members by:

  • Giving some background on the market and to share some experiences as to where it is

  • Looking at where the market seems to be going

  • Perhaps questioning your current thinking and position

  • Giving you some issues to think about by being challenging (and perhaps provocative!)

Foulger Underwood Associates Limited


Succession merger sale what will the exit model look like in 2021

2001

April 2001

Tenon announced acquisition of 5 firms for £60 million

2 December 2001

Enron filed for bankruptcy

Foulger Underwood Associates Limited


The uk market

The UK market

Some key changes (over the last 20 years!)

Size of service providers

Nature of service providers

Expectations of clients

Nature of services provided

Legislation

Regulation

Litigation

Foulger Underwood Associates Limited


The uk market1

The UK market

Some key changes (over the last 20 years!)

Size of service providers

Until 1989 – the big 8

Arthur Andersen

Arthur Young & Co

Coopers & Lybrand

Ernst & Whinney

Deloitte Haskins & Sells

Peat Marwick

Price Waterhouse

Touche Ross

Foulger Underwood Associates Limited


The uk market2

The UK market

Some key changes (over the last 20 years!)

Size of service providers

Since 2002 – the big 4

Ernst & Young

Peat Marwick

Pricewaterhouse Coopers

Deloitte & Touche

Foulger Underwood Associates Limited


The uk market3

The UK market

Some key changes (over the last 20 years!)

Size of service providers

Since 2002 – the big 4

Number 4 (E & Y) is £1.383 billion; number 5 is £0.378 billion.

Top 100 listed audits are big 4 clients

Foulger Underwood Associates Limited


The uk market4

The UK market

Some key changes (over the last 20 years!)

Size of service providers

Foulger Underwood Associates Limited


The uk market5

The UK market

Some key changes (over the last 20 years!)

Size of service providers – WHY??

SURVIVAL IS NOT COMPULSORY

IT IS A TOUGH COMPETITIVE ENVIRONMENT

AUDIT DIMINISHES and COMPLIANCE COSTS LESS

CLIENTS EXPECT MORE

STAFF HARDER TO HIRE AND KEEP

Foulger Underwood Associates Limited


The uk market6

The UK market

Some key changes (over the last 20 years!)

Nature of service providers

Partnerships

National and international networks or entities

LLPs

Corporates

Consolidators

GRADUATE ENTRY LEVEL

Foulger Underwood Associates Limited


The consolidators

The consolidators

  • What?

    Acquirers of practices

    External shareholders/ownership

    Normally publicly listed

Foulger Underwood Associates Limited


The consolidators1

The consolidators

  • Who?

    H & R Block

    Amex

    Tenon

    Numerica

    Vantis

Foulger Underwood Associates Limited


The consolidators2

The consolidators

  • Why?

    Low value compliance and scale

    Distribution channel

    Big is better

    Greater scope for investment

Foulger Underwood Associates Limited


The consolidators3

The consolidators

  • Do they work?

    H & R Block - yes

    Amex - no

    Tenon - maybe

    Numerica - no

    Vantis - no

Foulger Underwood Associates Limited


The consolidators4

The consolidators

  • Do they work? WHY NOT?

    Pay too much

    Buy the fiercely independent

    Buy out the oldest and the best and employ the less able or the young able who gain little

    Benefit to client?

Foulger Underwood Associates Limited


The uk market7

The UK market

Some key changes (over the last 20 years!)

Expectations of clients

  • More for less

  • Certainty on price and on outcome

  • Broader range of knowledge

  • Exceptional service delivery

    BUT THEY SHOW LESS LOYALTY?

Foulger Underwood Associates Limited


The uk market8

The UK market

Some key changes (over the last 20 years!)

Nature of services provided

  • AUDIT requirement has changed – increased exemption, increased pressure on fees, audit and consultancy segregation

  • COMPLIANCE SERVICES – fee pressure, low cost unqualified providers, outsourcing

  • NEW SERVICES - multi-service norm, taxation, corporate finance, insolvency, consultancy, financial services, management information and accounts, HR services, IT services, actuarial services, specialist industry boutiques

Foulger Underwood Associates Limited


The uk market9

The UK market

Some key changes (over the last 20 years!)

Legislation

Regulation

Litigation

EVER INCREASING, INCREASINGLY INTERNATIONAL!

INCREASINGLY “RULE” BASED

STRONG AMERICAN and EUROPEAN INFLUENCES

Foulger Underwood Associates Limited


The uk market10

The UK market

Some key changes (over the last 20 years!)

Size of service providers

Nature of service providers

Expectations of clients

Nature of services provided

Legislation

Regulation

Litigation

Foulger Underwood Associates Limited


How the market has valued

How the market has valued

  • Sustainable earnings – consistency with investment

  • Lack of baggage and clarity of vision

  • The underlying value or worth


How the market now values

How the market now values

  • Sustainable earnings – consistent with investment

  • Lack of baggage and clarity of vision

  • The underlying value or worth


Methodologies

Methodologies

  • Capitalisation of income

  • Capitalisation of earnings

  • Cross-check approach


Plus a change plus c est la m me chose

Plus ça change, plus c'est la même chose

  • Capitalisation of income

  • Capitalisation of earnings

  • Cross-check approach

Multiples

and

Emphasis


Uk market trends

UK market – trends

International expansion

  • Overseas competitors crossing geographic boundaries

  • Choosing the right expansion model: organic growth, merger /acquisition, ‘best friends’

  • Managing risk across geographic boundaries

Foulger Underwood Associates Limited


Uk market trends1

UK market – trends

International expansion

  • Overseas competitors crossing geographic boundaries

  • Choosing the right expansion model: organic growth, merger /acquisition, ‘best friends’

  • Managing risk across geographic boundaries

    Increasing scale

  • Scale brings bureaucracy, an anathema to all professionals

  • Being ‘corporate’ at the top while remaining practice-based below

  • Outsourcing of standardised work / back office functions

Foulger Underwood Associates Limited


Uk market trends2

UK market – trends

People

  • Younger staff are more demanding, with different values and aspirations

  • Ensuring people appointed to formal leadership positions are effective from the start and continue to be so

  • Creating incentive models that reward collaborative and longer-term performance

  • Appraising and developing partners

Foulger Underwood Associates Limited


Uk market trends3

UK market – trends

Winning business

  • Many firms look and act the same

  • Clients increasingly better informed and more demanding

  • Creating a culture where cross-selling is the norm

    Leadership

  • Greater emphasis on training, development, coaching and mentoring

  • What the partners do sets the tone for what gets done and how it gets done

Foulger Underwood Associates Limited


Uk market trends4

UK market – trends

Technology

  • Greater emphasis in all activities

  • Timeframes and communications are changing faster than anything else

  • POTS and PANS

Foulger Underwood Associates Limited


Pots and pans

POTS and PANS

  • N

Native, immigrant or non-dom?


Uk market trends5

UK market – trends

Diversity and equality

  • The inevitable changes

  • The need for integration and community

  • Some deep-seated prejudices

    The non-white British population has grown from 6.6m in 2001 to 9.1m in 2009 - or nearly one in six

Foulger Underwood Associates Limited


Succession merger sale what will the exit model look like in 2021

Leadership


The 2011 exit model

The 2011 exit model?

Foulger Underwood Associates Limited


The 2011 exit model1

The 2011 exit model

FIRMS WITH:

  • Clarity of purpose

  • Clear vision and direction

  • Embedded values or principles

  • Great leadership

  • Good communication

  • Recognition of team dynamics

  • Sustainability

Foulger Underwood Associates Limited


How the market will value

How the market will value

  • Sustainable earnings – consistent with investment

  • Lack of baggage and clarity of vision

  • The underlying value or worth


How the market will value1

How the market will value

Capable of going

the distance in challenging and changing times

  • Sustainable earnings – consistent with investment

  • Lack of baggage and clarity of vision

  • The underlying value or worth


How the market will value2

How the market will value

Leadership

People development

Vision, mission, values

Will need planning

All about the test of time

  • Sustainable earnings – consistent with investment

  • Lack of baggage and clarity of vision

  • The underlying value or worth


Succession merger sale what will the exit model look like in 2021

THANK YOU

Foulger Underwood Associates Limited


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