In recent years, there has been a noticeable increase in M&A and corporate transactions involving professional services firms, for instance law firms, accountancy practices and consultancy businesses.
This has been driven by a number of factors, including the growing revenues and earnings in certain sub-sectors of professional services; the increasing appetite of certain private equity firms to deploy capital into the sector; and an IPO becoming a viable route to exit (particularly in legal services).
Traditionally, many professional services businesses have been structured as partnerships, often in the form of limited liability partnerships or LLPs, without external capital and operating a fully distributing profit model. Many professional services firms have been reluctant to consider external investment because such transactions inevitably result in the yielding of some control to the investor. Such transactions also require careful thought as to how to ensure the next generation is incentivised to remain in the business.
For a long time, many investment banks operated as partnerships. However, most such banks now operate as corporates. The conversion of Goldman Sachs from partnership to listed corporate at the start of the Millennium is a case study in how to structure such a transaction successfully.
The market is now witnessing a growing number of transactions involving accountancy firms, driven by an influx of private equity money, and also because audit firms are having to divest parts of their business to manage conflicts between their audit and advisory practices. Cogital Group, backed by HG Capital, embarked on an M&A roll up strategy targeting accountancy firms. And KPMG recently struck a deal to sell its restructuring practice to a new vehicle backed by HIG Capital.
In the legal sphere, deals tend to be structured as nil-premium mergers. But, with the rise of the listed law firm, sellers of law firms are being offered listed shares as consideration for acquisitions. There are now seven listed law firms, and with Mischon de Reya recently announcing its intention to IPO, it looks as if the listed law firm market is set to grow even further.
Separately, there are an increasing number of employment ownership trusts, or EOTs, that give sellers the opportunity to sell their business and pay no capital gains tax on the disposal. These structures are particularly prevalent in the architectural industry.
Over time, our economy has become ever more service orientated, a significant part of which is driven by professional services. As these offerings become more sophisticated, diverse (look for instance at the rise of ESG consulting) and technology driven, there will be an ever greater requirement for more capital to be injected into the sector. This should drive further corporate activity, in the form of private equity and family office investment, M&A and IPOs.