The results of the KATO retirement and succession survey

ACCOUNTANCY AGE - By Phil Shohet and Andrew Jenner, Directors, KATO Consultancy - 04.05.04

Peat Marwick McLintock; Price Waterhouse; Coopers and Lybrand; Deloitte, Haskins + Sells; Ernst & Whinney; Touche Ross; Arthur Andersen; Arthur Young; Grant Thornton; Binder Hamlyn; these were the top 10 firms ranked by fee income in 1988. So where are they now? Only one name remains the same, the rest have merged into each other or disappeared altogether. Half the firms in the top 73 of that year have merged or changed names over the same 16 year period. Since 2000 Andersens have disappeared, Deloitte & Touch is now Deloitte and HLB Kidsons have merged with Baker Tilly.

In just a few short years the face of the accountancy profession has changed completely and that change is replicated throughout the profession, from the giants at the top end through the mid-tier firms, the independent practices and the small practitioners at the bottom of the pile.

Globalisation, competition and the demands of the marketplace have reduced the top twenty firms of the 80s to the handful of mega-firms that dominate the scene nationally and internationally. The number of mid-tier practices has also shrunk as firms have looked to merger rather than organic growth to achieve the critical mass necessary to maintain growth and development. But, although less obvious, perhaps the greatest upheaval has been in the independent sector where many firms are struggling to bolt on an additional range of services to cope with client demand, whilst at the same time trying to grow the business and retain their independence.

To add to their woes, and what will eventually prove an insurmountable problem for many, is the ticking time bomb of succession that has been rumbling under the surface for several years and is now about to explode.

An ageing partnership profile, shrinking pensions; insufficient capital in the practice to pay out retiring partners; a dearth of high calibre new partners prepared to invest in the business; problems with client retention as partners retire; no hope of early retirement; no possibility of continuing independence. These are just a few of the retirement and succession issues revealed by the firms taking part in a recent survey undertaken by practice consultancy, KATO.

But perhaps the most shocking fact to emerge from this survey is that 28% of the respondents saw a sale or merger as the only way of solving their succession problems. Bearing in mind the number of partners now in their late 40s and 50s – and assuming that they will virtually all be working until they are 65 – this means that in ten years or less the profession will have lost over a quarter of the independent firms practising today. The consequences of a loss of this magnitude will be felt not only by the profession as a whole, but also by the entire business community; particularly the OMB and SME clients that constitute the lifeblood of this sector of the profession.

For some years now multi-national corporations have had to select their accountants from a dwindling pool as megamergers reduce the number of firms available. The same is now set to happen to smaller companies, and those who prefer to use local independent practices rather than a national or international firm are going to find that their choice is similarly restricted and there may well be areas where no substantial independent firms survive at all.

Another negative outcome for clients will be the inevitable rise in fees as the number of service providers gets smaller, and they may well find that the traditional personal service that the independents provide is replaced by the rather more clinical and detached attitude of a large practice.

As for the remaining independent firms; those that recognised the problem some years ago and set about restructuring their business in order to provide for the demands that succession and retirement issues would place upon it are now extremely well placed to capitalise on their foresight. As the sector shrinks they will have the opportunity to acquire those OMB and SME clients that do not wish to follow their current advisers into a larger practice and thus both retain their independence and grow their business.

For those that are struggling to maintain their independence, and have not managed to build an attractive and successful business, their greatest problem is the dearth of younger people for whom equity partnership is a career goal. The majority of the respondents to the KATO survey expected incoming partners to provide a significant proportion of the funding for retiring partners’ exit routes. Not surprisingly, the high flying, entrepreneurial types that these practices so desperately need are not attracted to firms that are not in a financially healthy position, and where future profitability will be hampered by the need to pay out those who are no longer contributing to the business.

The increasing demand from their core client base for specialist consultancy services has also made some independent practices extremely vulnerable and they are looking to expand their range of services through merger rather than organic growth. However, some smaller firms have already become extremely successful by confining themselves to highly specialised areas in terms of industry sector or the services they offer, and the number of these niche practices will grow – either as the result of fall-out from larger firm mergers or as these small firms realise they no longer have the breadth of expertise to operate as general practitioners.

Very recently another factor has arisen that is going to affect the future of the independent sector and add to the increasing regulatory burden on firms: the raising of the audit threshold. This will have a dramatic impact on the way many firms are structured as they either choose to compete for the dwindling number of audit clients or abandon audit altogether and concentrate on developing other services.

Where does the work go and what are the opportunities for the surviving firms? These are important questions that practices need to understand and answer. Do they have any strategies for this?

All in all, the independent sector is in for a roller coaster ride over the next few years, but will hopefully emerge leaner, fitter and with its place in the accountancy market firmly secured.