UK:
An Increase In Professional Services M&A
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In recent years, there has been a noticeable increase in
M&A and corporate transactions involving professional services
firms, for instance law firms, accountancy practices and
consultancy businesses.
This has been driven by a number of factors, including the
growing revenues and earnings in certain sub-sectors of
professional services; the increasing appetite of certain private
equity firms to deploy capital into the sector; and an IPO becoming
a viable route to exit (particularly in legal services).
Traditionally, many professional services businesses have been
structured as partnerships, often in the form of limited liability
partnerships or LLPs, without external capital and operating a
fully distributing profit model. Many professional services firms
have been reluctant to consider external investment because such
transactions inevitably result in the yielding of some control to
the investor. Such transactions also require careful thought as to
how to ensure the next generation is incentivised to remain in the
business.
For a long time, many investment banks operated as partnerships.
However, most such banks now operate as corporates. The conversion
of Goldman Sachs from partnership to listed corporate at the start
of the Millennium is a case study in how to structure such a
transaction successfully.
The market is now witnessing a growing number of transactions
involving accountancy firms, driven by an influx of private equity
money, and also because audit firms are having to divest parts of
their business to manage conflicts between their audit and advisory
practices. Cogital Group, backed by HG Capital, embarked on an
M&A roll up strategy targeting accountancy firms. And KPMG
recently struck a deal to sell its restructuring practice to a new
vehicle backed by HIG Capital.
In the legal sphere, deals tend to be structured as nil-premium
mergers. But, with the rise of the listed law firm, sellers of law
firms are being offered listed shares as consideration for
acquisitions. There are now seven listed law firms, and with
Mischon de Reya recently announcing its intention to IPO, it looks
as if the listed law firm market is set to grow even further.
Separately, there are an increasing number of employment
ownership trusts, or EOTs, that give sellers the opportunity to
sell their business and pay no capital gains tax on the disposal.
These structures are particularly prevalent in the architectural
industry.
Over time, our economy has become ever more service orientated,
a significant part of which is driven by professional services. As
these offerings become more sophisticated, diverse (look for
instance at the rise of ESG consulting) and technology driven,
there will be an ever greater requirement for more capital to be
injected into the sector. This should drive further corporate
activity, in the form of private equity and family office
investment, M&A and IPOs.
Originally published by CITY A.M.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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