The sale of Grant Thornton UK to private equity firm Cinven could be seen as a watershed moment for the UK accountancy market. It’s not just the size, if reports of a £1.3bn deal are accurate, but the shift from a traditional partnership model to a corporate structure that makes it particularly noteworthy.
Lesley Fordyce and Mark Bell, change directors at Equator, examine the shift from traditional partnership model to a corporate structure, and the impact on business owners
Private equity investors are attracted to accountancy firms which already perform well, and which they think can perform even better. One of the benefits of private equity investment is a chunky injection of cash to accelerate market share through acquisitions, new talent, investment in technology, operational efficiencies, and a range of other changes that can drive sales and increase profits.
But nothing comes for free. In return for new-found financial firepower, private equity asks for growth. And it’s not relaxed, easy, a few per cent per year if all goes to plan growth.
It’s intense, urgent, double-digit-whatever-it-takes-growth. That is a very different environment to the one in which most accountancy firms have hitherto operated.
Maintaining the status quo is not something many firms would be happy to accept. It certainly isn’t how private equity delivers value to investors.
Unfortunately, businesses generally tend not to be very good at change. Research published by Harvard Business Review several years ago estimated that something like 70% of deals do not deliver the intended value.
That is not because deals are ill-conceived or because the management team did not know what it was doing. Rather, in the clamour to integrate services, systems and finances, the role of people and the importance of specific change management expertise is usually overlooked.
For accountancy firms which are not quite at the scale of a billion-pound buyout, there is perhaps a temptation to believe that the complexities of change may not apply to quite the same extent. They do. If the point isn’t already clear, private equity investment, by its very nature, brings change on a scale very few accountancy firms will ever have experienced.
So, given these changes, what should leaders of accountancy firms consider before a private equity investment? We suggest the following three for starters:
- go into the deal with your eyes wide open. Have an honest conversation with yourself at the start;
- the success of the deal is driven by a balance between logic and emotional; and
- accept that change needs resource and commitment.
Honest conversations
Before any deal is done, partners must get together and have a really honest conversation about how life might look post-transaction and if they are really, truthfully ready for all that might entail.
Do not think things will roll along the way they always have; that is not what you’ve signed up for. You may have to recalibrate your thinking on what constitutes good performance.
What may have previously been considered a good year could easily look like underperformance post-deal. And ‘good’ isn’t really the right yardstick once a deal has been done.
With a three-to-five-year investment cycle in most cases, private equity partners are looking for a pretty consistent run of ‘exceptional’.
When weighing up a deal, consider what you are going to lose. Partners in professional services firms operate with a unique autonomy. Once a deal with a private equity partner is agreed, the old autonomy changes dramatically.
Once a major shareholder with significant influence over how the firm is run onboard, this changes how decisions are made and how people are remunerated. Even if this is understood philosophically, the reality of it can be a shock to the system.
Psychological impact
This may sound odd, but partners should expect to grieve for how things were. Having observed these transactions many times over – and having been directly involved in a private equity buyout of an accountancy firm – we have witnessed the very real emotional wrench of a deal.
Acknowledging this loss is an important part of being able to fully embrace the opportunity which lies ahead.
Many partners will have been in the firm for decades and see it as part of their personal life story. Why wouldn’t a wholesale change lead to emotional upheaval? Many choose to retire rather than summon the energy for a lengthy period of full-on change; for others, the change is an opportunity to play a role in something significant.
Change is a full-time gig
What tends to happen after a deal is that responsibility for change is done off the side of someone’s desk; a rising star partner (or a less-busy one) is given the dubious honour of leading change with little or no experience of doing so.
There usually follows 12-18 months of gradually dawning realisation that change is a full-time gig, before the business agrees to bring in dedicated resource.
Put significant time and effort into communicating with the rest of the business early and often. Be honest. Your teams are smart enough to realise there is no land of milk and honey, so give them the full picture of the opportunity as well as how things are going to change.
Keep this up once the deal completes and things are underway, even when times are tougher than expected. People can deal with bad news, but radio silence is usually counterproductive.
Getting people to come with on the journey is probably the key challenge, but those running the firm need to be clear on what that journey is going to look like.
The proposed changes will have a significant impact on colleagues’ ability to effect the change while delivering business-as-usual. If you want teams to follow you into this new world, they need to see that the leaders know where they are going.
Private equity investment brings with it huge opportunities, which is why it is playing a bigger role in the future of the UK accountancy market. Preparing for and managing the change is the part most organisations tend to miss, but getting it right will give the business an advantage that few firms ever manage to fully realise.
About the authors
Lesley Fordyce and Mark Bell, change directors at Equator, the digital transformation consultancy
Article appeared in Business and Accountancy Daily
