Looking local: The benefits of small-scale regional mergers

Global M&A deals reached its highest level in history last year, surging 62.1% to $5.9tn (£4.71tn) year-on-year. With Coxeys recently marking the latest merger in the industry with a local accounting firm, Accountancy Today looks at what factors make a successful merger and the added benefits of merging locally.

“Expanding further from our local region makes it harder to deliver a hands-on teaching approach that we provide. If all the offices are within the similar region, it’s very good for intercompany relationships,” says Anthony Lewis, managing director of accountancy and audit firm Coxeys.

Just last week, news broke of the firm’s merger plans with Martin Williams and Co, which is located across the corridor of the same building in Saltney. Coxeys has clients across the UK in Wrexham, Shrewsbury, Liverpool, Manchester, London, Edinburgh and Glasgow, as well as overseas including Africa, America, Canada and Japan.

As Martin Williams and Co is a team of six, why did Coxeys decide to merge with a local firm instead of a larger business that will further boost its footprint? “Martin Williams and Co have a number of clients in sectors that we do not have current experience in,” says Lewis, “which will then enhance our staff if they can train in those areas as well.” Coxeys is a training firm for both the Institute of ICAEW and the ACCA, and Lewis reveals that the merger will enable  its chartered accountant trainees to better complete their training, and in turn introduce a new generation of accountants coming through the region. “The merger will give our trainees here a broader selection of client types and sectors; they will gain knowledge in different areas.”

Coxeys has maintained a low level of turnover of staff throughout the years, and the firm declares it will not make any redundancies as part of the merger to ensure continuity and provide the same opportunities to develop and grow. Coxeys now employs more than 40 individuals, including 10 qualified accountants, but how exactly has the firm managed to maintain a low level of staff turnover?

Lewis says: “We always encourage people to train, whether they are accountants, or tax, payroll or admin staff. We appraise all the staff but also encourage multi-skilling; for example, we train our administrative staff not only to conduct company secretarial work, but we also train some of them on payroll.” He explains that this ensures staff remain happy and motivated, making them less likely to leave the business.

Benefits of merging locally

“The strength of the team can only be built when in close proximity to each other. The staff can move between offices, they work with different people, and they get to know each other’s skills and knowledge so we can all help each other. If we set up another firm 100 miles away, then there wouldn’t be the same interaction between the team members, and that sets us apart,” says Lewis.

By the same token, Daran Harding, business development director at Dains Accountants, explains that merging with a business in the same region creates merger efficiencies. “Where a similar task is undertaken by both firms, scale economies can be created by bringing those people together and simplifying the process.” Consequently, this can then create capacity for those staff to do other important and client facing tasks in the business.

Harding adds: “One of the largest challenges a lot of businesses face is recruitment. It’s still tricky to recruit the right candidates; I don’t consider there to be an absolute pool of people that we can pick from.” Therefore, if a company does merge with a local firm, its staff will immediately come in, and they will have ongoing work that they bring with them, adding to the economies of scale. According to BDO, a shortage of workers and rising employment costs risk hampering business growth as 40% of businesses worry about finding employees with the right skills, and 35% report a lack of workers able to work the hours that the business requires.

By the same token, Clive Hatchard, partner in the corporate finance team at FRP Advisory, reveals that if firms merge in the same region, the respective businesses can physically be put together into one office, which can help both on financial terms by freeing up operating costs, but also in terms of integrating people so they feel like one firm rather than two separate companies, which will more likely be the case when merging with firms in different areas. “If you’re two well-known firms in one small area, then the fact you’ve come together will make that critical message much more evident. The combined reputation will be known much quicker in a local community.”

How to make a successful merger

According to Hatchard, firms must consider the objective of the business, albeit to enhance geographical coverage, to expand or get a certain type of client base, to bring in a service line that the firm doesn’t currently offer, or to recruit people in a “very tough market”. By clarifying the focus of the merger, the company will ultimately be able to integrate this objective into the merger which will in turn make a seamless transition.

He highlights that by identifying which avenue a business wishes to grow, the financial aspects of the merger will fall into place. For example, private equity interest is currently picking up within the M&A market for accountancy firms. “There is a rise in private equity firms that are looking to invest in a reasonably-sized accountancy firm to use it as a platform for a consolidation in the sector; that seems to be coming back to the fore.” Analysis from KPMG reveals that mid-market private equity investment in the UK in 2021 soared to the highest level ever recorded, with 803 private equity deals worth £46.8bn completed last year. The UK’s private equity market overall saw a total of 1,545 deals worth £159.2bn completed in 2021, up from 1,117 in 2020 and 1,246 in 2019.

Meanwhile, Harding says one of the most important aspects of creating a successful merger is the cultural alignment, which is “always one of the most difficult things to find in accountancy” as businesses are unlikely to find a perfect fit. “Firms need to have one identity because that then leads to clarity in terms of the vision for the business. Otherwise, it almost remains as if there are two different businesses that have the same brand, working from different offices, offering different things in different ways. The look and feel of the delivery for all services on offer has to be consistent.”

This then makes it easier for a potential client to understand what they are getting into, what to expect, and what the experience should be like. “Where merging firms don’t have that consistency, it makes the message very unclear and difficult, both for existing clients to understand and for new clients to buy into.” If there is no cultural alignment, there will be a mismatch in values, which will impact everything from simple telephone calls to the way that services are delivered and the future of the businesses.

Furthermore, diversification of offerings is another important criteria to consider because it may be that a target business that a firm is looking to acquire has additional services that the firm currently doesn’t offer to its client base. “It may be something that you would like to offer, but you just don’t have the expertise or the track record of delivering that service. Immediately, there are synergy benefits as this new service can be rolled out to an existing client base in a bid to keep them on board, and to demonstrate that the firm continues to do everything it can to support them.”

What is an indicator that a merger might not work? “One of the biggest problems is the positioning of employees,” Hatchard says. When two businesses merge, there are two boards or two groups of partners coming together, meaning people are effectively vying for the same job. For example, a firm can’t have two heads of audit and two heads of corporate finance, so somebody has to take the lead. “However, people are often not happy taking a backseat for others, meaning they leave the company when they don’t get the job they want.”

To tackle this, Hatchard suggests that both businesses should assess if there is common thinking amongst the leadership group, in terms of where they want to take the business, how they want to run it, and to also pre-agree roles and responsibilities beforehand to  prevent any mishaps and to determine how the business is going to function post deal. “If you get that wrong, the financial bits will never happen, even if theoretically it should be fantastic.”

Meanwhile, the greatest challenge that Coxeys experienced with its recent merger is data integration. “Most of the issues we’ve faced with the merger is to do with integrating the IT systems holding client data,” Lewis says. Despite having a set plan before the merger process started in terms of how to export the data across to Coxeys’ systems, aligning the systems has posed an obstacle.

“Data and data security is critically important, so it’s important to have a consistent format rather than in disparate pots,” Harding adds, “because it makes analysis collection and interrogation too difficult.” Therefore, data integration is an important feature to consider before agreeing on a merger because, without having client records and performance data in one place, this can create “unnecessary” challenges around the production of information.

He explains: “The important thing is focusing on the clients and being an advisor. We can’t do that as effectively if we have data integration issues; that is the bedrock of the practice. Our purpose is to service clients, and look at opportunities and efficiencies for them. We don’t want to work with disparate parts of data.” Therefore, firms should ideally look to have similar systems so that staff can focus on moving the practice forward, rather than on administrative tasks around data interrogation and integration. 

All in all, to make a successful merger, Harding advises firms to ensure that everyone within the business is on the same page in terms of understanding the reason for the merger. Additionally, “good quality” advisors and financiers indeed are in place to take that independent view in support of a transaction.

Additionally, Lewis reveals that businesses should be more cautious about a merger if they don’t already have a steady ship. “If you have a revolving door of staff, you wouldn’t have confidence that you could do a successful merger. You’d always be worried about being able to properly service a client’s needs without having a quality staff base to support it.” Therefore, it is “essential” to get to know the new team prior to initiating a merger to maintain the steady ship; “You might be able to change the culture there and create a happy team, but that could be a lot more work than merging with a firm where you’ve already got that in place.”

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