UPDATE as of February 2010

There are frequently reports that many well placed and well respected potential AIM listings have been refused and AIM seems to be going into hibernation.  It looks likely then that any new AIM consolidator will float in 2010.

Added to this Vantis has received for a variety of reasons negative PR comments and its share price has tumbled.  Profits after amortisation of goodwill have been turned into losses of £10M and this is further evidence that the prognosis for an accountancy practice AIM consolidator appearing. Although some of Vantis problems were created by Stamford whose assets were found to be under USA control, which obliged Vantis into short term cost repayment problems.

Jobtel  have visited about 14 firms with fees of well over £100M talking about Consolidation since Jobtel believe that there is now a great opportunity to form a new Consolidator and that the market will be ready for this in 2010 (or maybe 2011).  Those that come in at the start can expect to lay the foundations for the style and format of the new Consolidator, of which they can be a part.

So far contact has been positive and there are several firms who wish to proceed with the next Consolidator. 

If your firm has fees of £1 million plus and is possibly interested in consolidation, why not call Julian Hamilton of Jobtel on 01636 812960 and he will be more than happy to send you further information, or make a personal presentation to you, at your premises, either on a one to one basis or a seminar format for a larger number partners or directors of the firm. 

Jobtel will also be happy to make introductions for those who do not wish the Consolidator route but who want to merge with, or acquire, other practices.

BACKGROUND what’s Consolidation?
 
To consolidate a business sector by mergers and take overs is nothing new – in the mid 19th Century just about every large town in England had its own Bank – sometimes in response to market forces, or to changed government regulations or perhaps a new invention or craze that sweeps a sector there was a spate of mergers and take-overs.  What differentiates this ‘Consolidation’ of the Accountancy Practices sector is that it was for generations a ‘profession’ or more latterly perhaps ‘a business offering accountancy services’ run in a particular way, usually within a partnership format.  In this business format the owner of the practice was generally the employer and the person who met the clients, supervised the work and took ultimate responsibility for it. Consolidation essentially separates the ownership from the operations.
 
‘AMEX’ the true pioneer
 
The change when it came was partly due to changes in attitude, changes in the ability of practices to market competitively and a recognition that regulatory work, like auditing, was not in fact a bar to the arrival of outside investors.  That this came about was largely the result of the efforts of the "Pioneer" of the industry the "Tax & Business Services" Division of American Express (AMEX TBS).  AMEX had wanted to create a Financial Services division to complete the circle of services to their ‘platinum card holders’ but their efforts soon took it beyond a personal service to a desire to provide services for the $100M assets which often involved business behind the owner.
 
It was AMEX TBS that pioneered the way of segregating out the audit work and providing a ‘parallel world’ for it so that it could not be said that the work of auditing was influenced by outside bodies who might possibly otherwise be prevailed upon to grant or withhold audit clearance for other non technical reasons. Audit work was thus ringfenced.
 
The acceptance of this move by the authorities in the USA cleared the way for take over by AMEX of quite large practices. This marked the end of the first stage of development – but almost immediately after this came the individual floatations of these Consolidator practices. AMEX TBS was always just a part of AMEX  (which is enormous) and no funds were ever raised specifically for the TBS side so much so, that, when it ended several years later, it did not even cause a ripple in AMEX’s financials.  H & R Block had always been an aggressive buyer of smaller practices but it was rather better known as the firm that completed by far the largest number of personal tax returns for its USA clients – these tended to be tax shops whose work had never been ‘regulated’. 
 
‘C-BIZ’ in the USA
 
Soon after AMEX came the floatation of Century Business Services or C-BIZ that really tested out matters  This company started off well and took over several practices but soon hit trouble and is only now beginning to turn the profits and share price around. Consistent profits and a strong cash flow have been important factors in its recovery and the share overhang has been addressed by auction share repurchasing.  The business model includes also a niche  area, in healthcare financial management.
 
Consolidators  in Australia
 
Soon after this the Australian market also underwent the same business change and suddenly there was a rash of floatations in OZ.  There the market is a little different as firms of accountants often become involved in the fund management world.  Of the half a dozen floatations often with new, ingenious and sometimes odd business models, only one now survives originally called …..
 
‘Investor’ now called WHK Group Ltd which has sales of about Australian $ 400M (around 2/3rds is traditional business services) the rest is financial services. It has offices country wide and although shares slipped at one time it appears now to have a strong business model.
 

Soon afgerwards Consolidation arrived in the UK

‘TENON’ in the UK
 
In the UK Tenon was the first to float but was soon under pressure because of its inability to deliver the expected profits and also for overpaying for the practices that it had bought. However it's management has been considerably improved. With strong profits and cash flow it can only ,in Jobtel’s view, be a matter of time before their shares regain at least the initial offer price.
 
‘NUMERICA’ in the UK
 
Numerica was floated in October 2001 and was expected to do well.  It reached a turnover of £45M as it was based on one larger firm Levy Gee. However, although their acquisitions continued, the costs rose and again they were never able to deliver the profits expected, though unlike Tenon they seemed unable to grasp the nettle and sort matters out.  The share price collapsed and refused to budge as rumours abounded about a possible trade sale. Almost in desperation a new financial structure was discussed to try to ring-fence costs but it was too late and it was sold to Vantis who sold on some parts to BDO Stoy Hayward.
 
‘VANTIS’ in the UK
 
The third Consolidator in the UK was Vantis a much smaller set up  with only around £14K sales in 2003. It was based in London and brought acquired firms into its large office site thus aiming to reduce costs and engender integration. It's deals were on an earned-out basis and it paid dividends from the start.  After a while the shares took off but then later suddenly collapsed, probably as a result of some adverse press comment in a too-clever-by-half tax scheme which was reported as under investigation by the authorities. Although costs have risen, the profits and cash flow are still being delivered and again Jobtel expect the share price to recover to floatation within the next 18 months or so. Its sales were £45M in 2008.
 
‘BEGBIES’ in the UK
 
The fourth UK Consolidator is BEGBIES (was Begbies Traynor) in 2005. It was originally a Manchester based insolvency practice (both Vantis and Tenon have their own but much smaller insolvency side). It floated in a boom time and had only a couple of years trading before, in 2008 the profit collapsed to their pre float levels at £1M down from £5M but as they thrive in  recessions along came this recession to give the shares a huge lift. They took advantage of this by having a new share issue at a premium. So far their shares are still above original float.  They are trying to acquire non recession based firms in order to balance their work load.  If this recession lasts for 2 to 3 years, in Jobtel’s opinion, that should put enough cash in their pockets to enable them to do just that.
 
OTHERS in the UK
 
There have been several also rans – floatations that tried to use the model and the then rather lax AIM rules for raising funds for in house part deals – but these do not appeared to have gathered momentum of any kind.
 
SO WHAT MAKES IT ALL WORK?
 
The motivating factor for Consolidation is partly of course that the owners can crystalise their equity, sell their firm and, it gets better, very possibly still continue to work in the firm in exactly the same way. Of course it’s not quite as easy as that; very often deals are done on an earned out basis (so that the price paid is dependent in part of the profits delivered after the sale) and often the sellers of firms are paid at least part in shares.  It’s this ability to use new shares for acquisitions that allows the Consolidator to rapidly expand operations. taking over firms and using the brokers’ multiple. If you imagine that the Stock Market prices reflect a price as near as you can get it to a trade between a willing buyer and seller = a perfect market price -  then any private sale of say one practice to another cannot hope to match this as the number of buyers in much more limited and funding is much more restricted. In practice a ‘Consolidator’ can often buy firms at half the earnings multiple that its shares justify, under normal conditions, in the Stock Market.
 
GOODWILL the intangible asset
 
The largest asset of any accountancy practice consolidator is Goodwill.  That is to say its connections and clients whose return for future work secures it a forward income.  However Goodwill is notorious for collapsing when shown to be under pressure, adverse press comment leading to persistent questions about its future profits, its business format, or suitability of services can have a catastrophic affect on the share price.  This can mean that the shares ‘overhang’ those given in part exchange for firms but which, by agreement may not be sold immediately, provide a constant  pressure to sell. This in turn means that the share paper-money is no longer attractive to sellers of practices, so shares can be used only with difficulty for deals.  Tis might be so even though the dividends are maintained and the cash flow is positive.
 
SO WHATS GOING TO HAPPEN?
 
Jobtel believe that the time is now right to launch another Consolidator in the UK.  It is our intention to collect expressions of interest and visit firms that might be interested in a future floatation.  It’s called Consolidator 2010 because it will take at least that long for

a) the stock markets to turn around

b) the existing Consolidators’ shares to get back to a premium

c) the clients to get back to normalcy, hence increasing fees,

d) the time it takes to filter out those who are heart and sole committed and

e) the time it takes for the chosen group to formulate a group philosophy.

So we invite you to think ahead for 2010 and beyond.

 
Most of the likely firms will be contacted by Jobtel in the coming months through mailshots and in some cases by personal visits by Jobtel’s director, and there will also be adverts and additional articles to spread the word.
 
WHO MIGHT BE INTERESTED?  There are likely to be three levels of interest :
 
Level 1 As a lead Group: experience suggests that one firm will have to take the lead in order to drive to floatation. We would suggest that a Lead Firm should have at least £10M fees (better £15M) and be profitable. It will cost the lead firm probably the time of a senior partner for about 12 months in addition to costs of floatation and the preparation of prospectus and completion of due diligence.
 
Level 2 As a Core Member:  these are the firms that are going to be ‘in at the start’ and provide both the geographical coverage and depth in terms of specific types of niches to add to the Lead Group’s services. They will probably have fees in excess of £2M (many nearer £5M) and most of their management will be expected to remain after merging.
 
Level 3 as a Bolt-on or Stand Alone: these are firms of at least £500K plus within a single office, with a good client list and good profits. They may either be bolted onto an existing core member or lead group, if in the same vicinity, or survive as a stand alone in which case succession management will be important.
 
SO WHO IS JOBTEL?
 
Jobtel has been in practice as a broker assisting Mergers in Accountancy Practices for 10 years under its current management and for several years before that. Jobtel were involved in the introduction of firms prior to the Vantis PLC launch and is mentioned in that firm’s prospectus. For 5 years after launch Jobtel received a retainer from Vantis which prevented them from becoming involved with any similar launch. Mr Julian Hamilton, FCA,MBA BA is the director of Jobtel.
 
Could this be of interest to you in the long term?   If so, we would like to hear from you. Why not call Julian Hamilton on 01636 812960 or contact us through our email Jobtel@btconnect.com and we will get back to you as soon as we can. If you are ‘in at the beginning’ you are much more likely to be able to influence the early decisions made by the new group and the structure and the culture.
 
Otherwise how do you aim to crystalise your goodwill in your firm? If you don’t do it those that follow may well do so?
 
The full story of all the “consolidators in the USA, Australia and the UK are related in a book called the "Consolidators" written by Tony Thomas of Australia, August Acquila in the USA edited by Julian Hamilton from the UK it was published in 2004 only a few of the books remain at £200 each. An updated 2009 version is also available at £75 summarising the UK Consolidators to date.
 
Nothing in this article is to be considered as encouragement to buy any of the shares in the companies mentioned above – the comments are Jobtel’s only. Jobtel is not a broker and carries no licence to act as an advisor for share investors.
 
Mr Julian Hamilton owns a few thousand share options in Vantis and through his SIPP several shares in Begbies.