Accountancy companies merge to benefit from economies of scale

Over the last 12 months*, the number of accountancy firms in the UK has fallen from 6,962 to 6,622, as the profession continues to consolidate says LDF, a leading independent finance provider.

LDF says that the rate of consolidation is now beginning to accelerate again following a slowdown since 2010 (see graph below). A key driver of the renewed fall is the rising number of mergers among accountancy firms, as they look to achieve the benefits that come with economies of scale.

The number of accountancy firms drops 41% since 2002 as firms merge

The number of accountancy firms drops

LDF explains that small and mid-size accountancy firms appear to be merging in order to compete with larger firms by reducing administrative costs in order to create more efficient business models and increase their profit margins. By consolidating, accountancy firms can also build the capacity and broader-based skills needed to grow the number and size of their client base.

LDF adds that some firms are also merging to diversify their portfolios away from certain kinds of audit or tax planning work. The Government is set to introduce in January 2016 higher thresholds for businesses requiring an audit, and it is putting greater pressure on what it sees as 'aggressive' tax avoidance.

Mergers of accountancy firms in the past year include:

· Top-ten firm Moore Stephens with top-25 firm Chantrey Vellacott

· Top-20 firm MacIntyre Hudson with fellow MHA group member Bloomer Heaven

· Menzies LLP with Harris Lipman, creating a £40m-turnover firm

· Yorkshire firms BHP and Clough, creating a new top-40 firm

Peter Alderson, Managing Director at LDF, comments:

"Mergers have been the catalyst for many accountancy firms to start the next stage of their growth, as it gives them the wherewithal to invest in better marketing and IT systems. As the market recovers, more firms are looking to take advantage of that.

"Merging with another firm that has a different geographical, sector or service line focus can strengthen both practices if the fit is right. Especially for smaller businesses, merging with a larger firm can expand your client base and increase revenue streams."

LDF says that there was a particular drop of 6% in the number of sole practitioner accountants in the last year, from 3,625 to 3,421.

Peter Alderson continues: "There is also a consideration for any accountants nearing retirement who may also be looking to sell their books of businesses to firms who may be looking to diversify their client base."

LDF notes that more firms are using alternative finance to fund the often significant up-front costs involved in mergers.

Peter Alderson continues: "We continue to see a rising demand to fund merger costs, and we are able to fund a wide range of expenditures that can arise in the course of bringing two firms in to line – including office refurbishment, new IT and software updates, as well as tax issues.

"Mergers are a good opportunity to review policies for investment in equipment and resources on a company-wide basis."

*Year to December 31st 2014. Source: Financial Reporting Council

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