Accountancy firm BDO USA, LLP, formerly auditor for Robert Sillerman’s troubled Function(x) web business, has resigned amid allegations of “insufficiently authorised cash disbursements” to Sillerman from company bank accounts.

In a 21 June letter to Function(x)’s CFO, Michelle Lanken, and general counsel, Tom McLean, BDO said it had, through a phone conversation on 12 May, been made “aware of information indicating that an ‘illegal act’ […] may have occurred”.

It continues: “BDO stated that information provided to it at the time of the phone conversation […] included insufficiently authorised cash disbursements from a [Function(x)] bank account, unexplained deposits into the same registrant bank account and possible repayment to the registrant’s chairman of the board, chief executive officer and controlling shareholder [Sillerman] in excess of the amount owed to him under his line of credit to the registrant.”

The letter says the “possible payments” include a US$500,000 cash withdrawal by Sillerman in March 2017, “done without proper approval from the board”, and, more seriously, a total of $6.1m “released from a [Function(x)] bank account into an account held by the CEO at the same financial institution”.

The findings mirror similar allegations levelled at Sillerman in the final months of SFX Entertainment

At BDO’s request, it and Function(x) hired a third-party law firm to investigate the missing money, as well as alleged irregularities relating to a recent series-G stock offering. It concluded that there were “likely illegal acts committed by the CEO and the registrant [Function(x)]”, including “false and misleading statements in connection with the series-G offering”.

The findings mirror similar allegations levelled at Sillerman in the final months of SFX Entertainment, when he was accused of making “misleading statements” designed to boost the ailing business’s attractiveness to investors.

He denies any “wilful” wrongdoing, saying he was “misinformed as to the amounts outstanding on loans the CEO had made to the company” and paid Function(x) back as soon as he realised the error.

Function(x), which specialises in ‘viral’ online content, was last week delisted from the Nasdaq stock exchange after failing to file an up-to-date current report.

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Last year saw more than 30 million people attend music festivals in the UK. With market value forecast to rise as high as £3.5 billion by 2020, the sector presents a phenomenal opportunity for owners, promoters and investors.

The number of events has increased from 496 in 2007 to 1,070 in 2016 – one particularly welcome result of the rise is the corresponding increase in merger and acquisition (M&A) activity. As we enter 2017 festival season, we are likely to see an increase in the number of deals being done, led by buyers with a series of objectives in mind, the first being consolidation.

Several significant deals have completed in recent months, including Live Nation’s acquisition of MAMA Group, Parklife and Isle of Wight Festival, Universal’s acquisition of an equity stake in jazz festival Love Supreme and several acquisitions by Global Entertainment, including Y Not, Rewind and, most recently, Victorious Festival and Hideout Festival. These deals are testament to festival owners who built enviable concepts that attract the crowds year in, year out.

Growth in the festival portfolios of the larger players provides them with increased opportunity to secure talent on exclusive live music deals, along with benefitting from income synergies through other related activities, such as ticketing and corporate sponsorship. Acquisitions also allow cost savings across a portfolio through both knowledge sharing and ability to drive economies of scale, reducing overall expenses.

There is also, of course, the desire to have the next must-have asset, with some events attracting a premium based on their brand alone.

Buyers are interested not only in festivals which provide consistently high-quality experiences for its attendees, but fundamentally their ability to generate profits

To date, we’ve seen the majority of M&A and consolidation activity from the larger corporate live music stalwarts. However, where there is money to be made and sizeable festival empires to grow, private equity investment can’t be far behind, joining some of the venture capitalists seeking to benefit from these positive market trends.

With M&A activity and consolidation changing the dynamics within the market, owners and promoters must ensure that their events continue to innovate and compete successfully.

The most crucial challenge is securing the all-important talent. Securing popular artists remains a fundamental principle in delivering successful live music festivals, but consolidation in the sector has resulted in larger groups requesting that artists sign up to their portfolio of festivals and tours exclusively. Conversely, the devolution of recorded music means that artists are relying to a greater extent on festivals and live music to make their money – a dynamic that has helped to encourage the proliferation of events. Promoters will need to work harder and faster to secure the desired artists and negotiate favourable terms for both parties.

This aspect of consolidation doesn’t affect the entire market. Independent festivals will continue to thrive, given that they aren’t competing head on for major festival artists but are instead booking specialist artists in a particular genre, benefitting from a different set of pull factors for consumers – namely atmosphere, experience and exclusivity. The same applies for secondary touring markets: the trend towards live music has seen artists seeking alternative ways to reach new fans, dictating the rise in live music in regional non-mainstream locations and festivals, such as, for example, the Manchester International Festival.

As the sector continues to perform well and expand further, we expect M&A activity to increase in accordance. Owners and promoters would be sensible to ensure that their brand is fit for the future, and in a strong position to capitalise on potential interest, whether from a competitor or private equity or venture capital investment, being mindful of core valuation drivers that, combined, see that festival assets are sold for a strategic premium.

With M&A activity and consolidation changing the dynamics within the market, owners and promoters must ensure that their events continue to innovate and compete successfully

The first is the delivery of profitability over a consistent period – buyers are interested not only in festivals which provide consistently high-quality experiences for its attendees, but fundamentally their ability to generate profits. From a potential buyer’s perspective, the best performing festivals will be delivering consistent year-on-year growth in both revenues and profits. Profit margin is crucial, and shouldn’t be ignored in favour of focusing on revenue and attendee growth. Even from the early days, as the festival grows, decisions should be taken to drive profitability, not just increase attendee numbers. Where possible, the security of revenue and/or profit should also be safeguarded through relevant and appropriate insurance.

This isn’t to say that demonstrating year-on-year growth in attendees isn’t important; merely not the sole requirement. Being able to demonstrate and plot historic growth and potential future growth will be of huge interest to prospective bidders. Festival owners should try to plan ahead if capacity constraints are going to restrict this growth – it may mean relocating at the appropriate time, or expanding through additional dates at existing sites.

Last but not least is the ability to provide timely production of quality management information. How did ticket sales compare to the same period the previous year? What is the average per-head spend on F&B and how does this vary for each day of the festival? What percentage of paying adults purchased merchandise and how does this compare to the previous year? Having access to this information not only protects value during a sales process, but drives it upwards by providing the buyer with confidence that targets can be achieved.

By delivering on these core points, owners and promoters can ensure that – whether looking for investment or open to a sale – they’re as well-equipped as possible to deal with the challenges and opportunities in 2017 and beyond.

James Fieldhouse is corporate finance director at accountancy and business advisory firm BDO.