Foulger Underwood Associates Limited Succession/merger/sale What will the exit model look like in 2021? Presentation to the MGI UK and Ireland Annual Conference

Foulger Underwood Associates Limited

Succession/merger/saleWhat will the exit model look like in 2021?

Presentation to the

MGI UK and Ireland Annual Conference

2 December 2011

Derek Smith

Agenda

• Introduction

• Context

• My objectives

• The UK market and professional service firms

– The past

– The present

– The future

• Succession/merger/sale

– The past

– The present

– The future

• The future – what will the successful firm look like?


Context

• Change is the only constant

• The trouble with the future is that it is not what it used to be.

Paul Valery

• The trouble with the future is that is usually arrives before we're ready for it.


Context

• Change is the only constant

• The trouble with the future is that it is not what it used to be.

Paul Valery

• The trouble with the future is that is usually arrives before we're ready for it.



ObjectivesTo encourage thought and discussion among members by:

• Giving some background on the market and to share some experiences as to where it is

• Looking at where the market seems to be going

• Perhaps questioning your current thinking and position

• Giving you some issues to think about by being challenging (and perhaps provocative!)

2001

April 2001

Tenon announced acquisition of 5 firms for £60 million

2 December 2001

Enron filed for bankruptcy


The UK market

Some key changes (over the last 20 years!)

Size of service providers

Nature of service providers

Expectations of clients

Nature of services provided

Legislation

Regulation

Litigation


The UK market



Until 1989 – the big 8Arthur Andersen

Arthur Young & Co

Coopers & Lybrand

Ernst & Whinney

Deloitte Haskins & Sells

Peat Marwick

Price Waterhouse

Touche Ross


The UK market



Since 2002 – the big 4

Ernst & Young

Peat Marwick

Pricewaterhouse Coopers

Deloitte & Touche


The UK market



Since 2002 – the big 4


Year Top 60 firms Big 4 firms Firms 5 - 60 Big 4 share

£ billion £ billion £ billion % ge

2003 6.201 4.449 1.752 72

2010 9.922 7.226 2.696 73

Number 4 (E & Y) is £1.383 billion; number 5 is £0.378 billion. Top 100 listed audits are big 4 clients

The UK market




Partners 1995 2005 2010

51 plus 14 19 15

21 - 50 36 32 42

11 - 20 126 96 94

2 - 10 3,389 3,197 5,839

1 14,707 12,432 6,826

The UK market


Size of service providers – WHY??

SURVIVAL IS NOT COMPULSORY

IT IS A TOUGH COMPETITIVE ENVIRONMENT

AUDIT DIMINISHES and COMPLIANCE COSTS LESS

CLIENTS EXPECT MORE

STAFF HARDER TO HIRE AND KEEP


Partners 1995 2005 2010

1 14,707 12,432 6,826

The UK market



Partnerships

National and international networks or entities

LLPs

Corporates

Consolidators

GRADUATE ENTRY LEVEL


The consolidators

• What?

Acquirers of practices

External shareholders/ownership

Normally publicly listed


The consolidators

• Who?

H & R Block

Amex

Tenon

Numerica

Vantis


The consolidators

• Why?

Low value compliance and scale

Distribution channel

Big is better

Greater scope for investment


The consolidators

• Do they work?

H & R Block - yes

Amex - no

Tenon - maybe

Numerica - no

Vantis - no


The consolidators

• Do they work? WHY NOT?

Pay too much

Buy the fiercely independent

Buy out the oldest and the best and employ the less able or the young able who gain little

Benefit to client?


The UK market


Expectations of clients• More for less

• Certainty on price and on outcome

• Broader range of knowledge

• Exceptional service delivery

BUT THEY SHOW LESS LOYALTY?


The UK market


Nature of services provided• AUDIT requirement has changed – increased exemption, increased

pressure on fees, audit and consultancy segregation

• COMPLIANCE SERVICES – fee pressure, low cost unqualified providers, outsourcing

• NEW SERVICES - multi-service norm, taxation, corporate finance, insolvency, consultancy, financial services, management information and accounts, HR services, IT services, actuarial services, specialist industry boutiques


The UK market


Legislation

Regulation

Litigation

EVER INCREASING, INCREASINGLY INTERNATIONAL!

INCREASINGLY “RULE” BASED

STRONG AMERICAN and EUROPEAN INFLUENCES


The UK market




Expectations of clients

Nature of services provided

Legislation

Regulation

Litigation


How the market has valued

• Sustainable earnings – consistency with investment

• Lack of baggage and clarity of vision

• The underlying value or worth

How the market now values

• Sustainable earnings – consistent with investment



Methodologies

• Capitalisation of income

• Capitalisation of earnings

• Cross-check approach

Plus ça change, plus c'est la même chose

• Capitalisation of income

• Capitalisation of earnings

• Cross-check approach

UK market – trends

International expansion Overseas competitors crossing geographic boundaries Choosing the right expansion model: organic growth,

merger /acquisition, ‘best friends’ Managing risk across geographic boundaries



International expansion Overseas competitors crossing geographic boundaries Choosing the right expansion model: organic growth,

merger /acquisition, ‘best friends’ Managing risk across geographic boundaries

Increasing scale Scale brings bureaucracy, an anathema to all professionals Being ‘corporate’ at the top while remaining practice-based

below Outsourcing of standardised work / back office functions



PeopleYounger staff are more demanding, with different values and

aspirationsEnsuring people appointed to formal leadership positions are

effective from the start and continue to be soCreating incentive models that reward collaborative and longer-

term performanceAppraising and developing partners



Winning business Many firms look and act the same Clients increasingly better informed and more demanding Creating a culture where cross-selling is the norm

Leadership Greater emphasis on training, development, coaching and

mentoring What the partners do sets the tone for what gets done and how

it gets done



Technology Greater emphasis in all activities Timeframes and communications are changing faster than

anything else POTS and PANS


POTS and PANS

• N

Native, immigrant or non-dom?


Diversity and equality The inevitable changes The need for integration and community Some deep-seated prejudices

The non-white British population has grown from 6.6m in 2001 to 9.1m in 2009 - or nearly one in six


Leadership

The 2011 exit model?


The 2011 exit model

FIRMS WITH:

• Clarity of purpose

• Clear vision and direction

• Embedded values or principles

• Great leadership

• Good communication

• Recognition of team dynamics

• Sustainability


How the market will value













Documents

Foulger Underwood Associates Limited Succession/merger/sale What will the exit model look like in 2021? Presentation to the MGI UK and Ireland Annual Conference