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M&A in the professional services sector: six key questions answered


Michael Page Finance interviews Russell McBurnie, CFO of RSM Tenon Plc

Russell worked as CFO for RSM Tenon Plc for seven years. During this period the business completed acquisitions totalling circa £95m of turnover, raised £40m of equity on the AIM market, increased bank facilities to £88m and moved the business to main list. Known as the ‘advisors to entrepreneurs’, Tenon are the UK’s seventh largest accounting firm with a fee income of over £200m, employing over 2,500 people with offices in all major commercial centres across the UK.

1. There has been much talk of the increase in M&A activity within the sector; in the absence of organic growth, firms are looking to grow top line via acquisition. What do you think are the benefits and perhaps more importantly the associated risks of mergers/acquisitions?

At Tenon, the model was to either expand a service line or to extend geography, concentrating on firms between £2 - £10m which were of a size that could be managed without extending ourselves. A practice could take between 10 – 20 years to establish itself from scratch so there are some very obvious benefits in fast tracking this process with a merger or acquisition and subsequently using that business as leverage for your other services driving further subsequent value.
The risks focus always around the people. It is very important to understand what business you are entering, what are their aspirations and how would they work moving forward. As the acquiring business you need to tie in the key individuals to the new business. Problems arise at integration stage when it becomes obvious that certain partners do not want to change the way they operate in any way and it is hard to drive the value out of the merger when this happens.

2. How can you mitigate the risk inherent in any deal?

There are some obvious contractual safeguards you can put in place such as deferred payments, earn out clauses, payment tied to subsequent profit levels, strong non compete clauses and claw backs as well as making the purchase price partly share based. However it is important to identify any risk from the outset at due diligence stage. Why does this individual want to sell, is it purely based on realisation of capital? Are they ready for the change in culture and do they appreciate the implications of working for a much larger firm i.e. much less influence, less input into marketing, policy making, decisions on drawings etc? Often when problems occur down the line, you look back at the negotiations and the warning signs were there – detailed questions about the minutiae, a real focus on establishing who makes which decisions, autonomy etc or at the opposite end of the spectrum, partners who seem to be taking a real back seat in the process, almost disinterested in the deal.

3. Market research suggests that 70% of firms realise less than 50% of anticipated benefits following a merger. Having once established the benefits of the merger and concluded the deal, how do you integrate successfully and drive the value out of the merger?

Firstly establish the key drivers in the business and which individuals are critical, this can sometimes be very different to the individuals you had anticipated and often they can be found just beneath partnership. You need to stay close to the business, have lots of people on site and gain a sense of what is going on at ground level. It is important to understand what is meant by integration; successfully integrating does not mean integrating the systems, all the contracts, the brand etc; all of this is less important. The key thing is to ensure everyone feels part of the same business and understands the larger business; it is a cultural issue, not infrastructure.
You also need to ensure the acquisition plan is followed through on; you need to be tough enough to follow through on changes agreed. The integration team need to be involved at the pre acquisition stage so everyone goes into the deal with their eyes open, knowing what was agreed and how it will be implemented.

4. How can the CFO make a difference in the merger process?

The staring point is obviously ensuring that the due diligence basics are done and all the numbers and protections in the agreement stack up. Outside of this, as CFO you are an integral part of the management team contributing to strategy, so you need to think hard about potential stumbling blocks and any major issues. Getting to the bottom of what the firm want to get out of the merger and how is that going to be achieved, what is the make up of the team etc. Sometimes the hardest but best decision is to put the brakes on a deal not purely based on the financials but some other warning signs you have picked up.

5. Industry experts are reporting on the decline of the traditional high street model of ‘the brown paper bag’ year end work accompanied with high accountancy fees; what are your thoughts on the future of the sector?

There is a top down effect and the large firms have undergone significant change over the last few years. Their businesses focus on very large contracts alongside consultancy and management solutions. They are no longer run on a localised basis but operate on a truly global platform which in turn means partners have been cut out who no longer fit that bill. These individuals come down the food chain and either bulk out smaller practices or join forces to create new practices.
Audit regulation changes will have a big impact on the market and there is a strong suggestion that double audits might open doors on the larger clients for the mid tier which could create consolidation in the top 20. Outside of the top 20, outsourcing (payroll, tax returns etc) could rapidly expand and dovetail with accountancy practices. There will always be a place for smaller firms; there is a trade off for clients between technical expertise and a personal relationship with a partner with depth and breadth and accessibility.

6. What has been your biggest challenge in your career to date?

The biggest personal challenge I have faced in the sector has been trying to get the balance right between operating a proper corporate structure and culture against an individualised client management structure. When is it right to make an exception about how a particular department or individual runs their business and when is it not? Too many exceptions and you do not get the benefits of scale following a growth strategy but being too inflexible cold also cost you key individuals within the business. It is a fine line.
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