For those in PE - whether you are already invested or not invested - what are the thoughts on the accountancy roll-ups - particularly in the UK and Europe
For context - I just struggle to see the thesis given the multiples being paid and the number of platforms in play, and wondering what the exit is.
But, maybe I am missing something?
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Accountancy roll-ups, or buy-and-build strategies in the accountancy sector, have been a hot topic in private equity, particularly in the UK and Europe. Here's what you need to know based on the most helpful WSO content:
High Multiples and Competition:
The concern you raised about high multiples is valid. With numerous platforms already in play, the market is becoming increasingly competitive. This competition often drives up acquisition prices, which can compress returns unless significant synergies or operational improvements are achieved.
Fragmented Market Opportunity:
The accountancy sector is highly fragmented, making it an attractive target for roll-ups. PE firms often see an opportunity to consolidate smaller firms, achieve economies of scale, and create a more efficient, centralized operation. However, the success of this strategy heavily depends on execution.
Exit Challenges:
The exit strategy is a critical consideration. With so many platforms in the market, the question becomes: who will buy these consolidated entities? Potential exits could include selling to larger PE firms, strategic buyers, or even IPOs, but the crowded space might limit options or depress valuations.
Operational Improvements and Synergies:
The thesis often hinges on the ability to drive operational improvements, such as centralizing back-office functions, cross-selling services, and leveraging technology to improve margins. Without these improvements, the high multiples paid may not be justified.
Sector-Specific Risks:
Accountancy firms often rely on recurring revenue streams, which can be attractive. However, they also face risks such as regulatory changes, talent retention challenges, and the commoditization of certain services due to technology.
Differentiation is Key:
For a roll-up strategy to succeed, the platform needs to differentiate itself, whether through niche expertise, technology adoption, or superior client service. Without a clear competitive edge, it may struggle to stand out in a crowded market.
In summary, while the accountancy roll-up strategy has potential, the high multiples and crowded market make it a challenging play. Success will depend on the ability to execute operational improvements, achieve synergies, and identify a viable exit strategy. If these elements are not in place, the investment thesis may indeed be difficult to justify.
Sources: fuck poorly integrated rollup sell-side mandates. all my homies HATE unintegrated rollups, BO to M&A and think I've failed; should I move back to BO?, Healthcare Rollup Strategy, Overview of Infrastructure Private Equity, Private Funds Group (CS/UBS etc)
Curious too - some of the assets going at 10x today would easily have traded at 6-7x if acquired a couple years back. More recent plays have been regional ones - without the rebranding and centralization that would be done by the likes of an Azets, instead focusing on select back office functions (over a longer timeframe). My guess would be the newer/geography-constrained consolidators would eventually look to exit to an earlier/more sophisticated one - they would've had a few years to get people comfortable with change of power, culture/brand integration, and an earnout to make retirement sweeter if they pull their weight for a few more years.
Probs right on regional to larger ones.
I see the back office point - that seems genuinely valid.
I do think public markets are an option for these sort of businesses, at least in the U.K. but it still feels like there’s too many of them. All trying to win more PE work as well…
The other thing that comes to mind, at least from a differentiation perspective, is specialisation via sector focus. The difficult part of this (and arguably why there's money to be made here) is finding 4-6 businesses that are similar enough, that service clients in the same industry (e.g. Real Estate) where you'd eventually start gaining good share in that category, and can then expand to adjacent sectors (maybe Architecture or Engineering in the Property/Real Estate case) before you're a big/attractive enough fish to be sought out by a larger player
You think the public markets would be cool with the alternative practice structures?
This rings true with any roll-up, once they're a certain size there is no exit market. The public markets would laugh at a shitty CPA firm growing 3% a year with no margins.
Not sure it's the growth or the margins that make public markets a better/worse funding source - there's an abundance of businesses growing at below 3% p/a, with shit margins
I think the bigger problem is how scrutinising/impatient public markets can be, which doesn't really make sense if you're looking to consolidate a sector over (potentially) many years (not quarters)
Most PE backed companies going public are small caps which are truly have and have nots. Most are highly levered, barely/not making money which is just code for a shitty business not worth owning. The other half run out of small caps quickly and are real businesses with growth.
What you’re missing is that you an slap some AI on your accounting rollup and then drive your valuation to infinity /s
I am a little bit too close to one of these, so I know the pros and cons in detail. My personal view is that they're fairly hard for reasons that aren't obvious from the start.
The pros are:
The cons are:
So my view is that this works only if you go in eyes wide open and with a people-first/focused strategy. These folks will react poorly to being "a number in a spreadsheet" and you can get screwed. Can work well too, and make decent money because leverage is available, the industry grows at inflation+, there's recurring revenues, etc. But you have to be on the ground to make things happen.
Awesome. Thank you.
I did work in accountancy before - albeit M&A so get the difficulties first hand. Hence my surprise at the multiples being paid!
Duplicate
Duplicate
.Duplicate.
Not to be an asshole, but this sounds like any services rollup.
Pros: (i) professionalization/centralization, (ii) diversification, and (iii) cross-sells.
Cons: (i) assets becoming more expensive, and (ii) and people/integration are challenging.
Fair enough - the part about the people surprised me though, because services is not my usual sector coverage.
i mean true but felt the explanation was well articulated and put plainly in ways people who do not live in the space could understand (i think at least) - I SB'd
Currently working in the accountancy market in the UK / Europe area - valuations have skyrocketed in the past c.6 months which I believe is partially due to exiting consolidators offering insane multiples (and even some pretty crazy EBITDA adjustments) to bolt on EBITDA, engage HoT's and add to their valuation pre-exit. This is likely to heavily affect the acquirers following exit, but hey-ho, not their problem I guess?
PE has also been targeting a fair amount of decent size lower end firms for regional plays, again offering insane multiples. The end goal however is to acquire at 10x+, then bolt on a tonne of 5-8x multiple businesses, dragging down the blended multiple and selling to a national player. The primary source of good deals are those that arise off-market, however most owners, even of sub £/€5m t/o businesses are aware of the current premiums and do end up engaging multiple consolidators for offers.
Will definitely be interesting to see where valuation goes, but I know of at least 10 PE firms looking to get into the market currently, and it doesn't show any short-term signs of slowing down.
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