The UK economy performed better than expected in 2023, but growth remained weak. Falling inflation offered some encouragement, while high borrowing costs, labour shortages and limited business and consumer confidence continued to constrain investment. Interest rates were expected to remain elevated until inflation was brought under control.
AI adoption was expected to accelerate during 2024, although concerns surrounding regulation, intellectual property and rapidly changing technology created uncertainty. Larger organisations and agile specialist firms appeared best placed to pursue early adoption.
Connected devices could support AI development by generating valuable data. For SMEs, strengthening infrastructure, IT management and cybersecurity offered a practical way to prepare for future automation.
National elections involving around four billion voters created the potential for changes in economic and foreign policy. The growth of shadow banking also presented wider financial risks because of its close relationship with regulated banks.
Lower interest rates could gradually improve consumer confidence and spending. However, businesses were expected to remain cautious until there was greater certainty around capital costs, labour availability and geopolitical conditions.
Investment in renewable energy continued to increase, while companies faced growing pressure to demonstrate measurable environmental progress. New sustainability reporting requirements were also increasing scrutiny of qualifying businesses with European operations.
Digital transformation was affecting companies throughout the Business Services sector, with the pace of change accelerating.
Marketing and communications firms increasingly needed to offer integrated solutions as clients looked for services extending beyond traditional capabilities. Areas such as social media advisory and YouTube channel management offered opportunities to broaden services and generate revenue less directly connected to consumer spending.
Investment in technology was becoming increasingly important for firms seeking to remain competitive and sustain growth.
Many Business Services companies rely heavily on people to deliver their services. Professional services, facilities management, waste management and call-routing businesses therefore needed to balance staff utilisation with the need to improve efficiency.
Technology could reduce low-value administrative work, allowing employees to focus on higher-value service delivery. This offered firms an opportunity to control operating costs while making roles more rewarding and supporting staff retention.
Working from home on any given day was five times more common than it had been in 2019. Services and technologies supporting hybrid working were consequently expected to remain important during 2024.
Office attendance nevertheless continued to play a role in employee development, collaboration and company culture. Culture could also influence whether an acquirer chose to proceed with a transaction, making the ability to maintain it across office-based and remote teams commercially important.
Automation and AI could transform HR processes including payroll, data management and reporting. These technologies offered opportunities to improve efficiency and allow HR businesses to scale without an equivalent increase in resources.
AI could also provide customised reports and data visualisations to support strategic decisions. However, rapidly evolving technology was creating concerns surrounding ethics, compliance and data usage. HR leaders needed to understand these risks and benefits before communicating their approach to employees.
Approximately 85% of financial services organisations were using AI in some form, while 77% believed it would become essential to their businesses within the following two years.
Automation could streamline accounting processes such as data entry and reconciliation. Integrated FinTech systems could also deliver real-time data synchronisation, improving the accuracy and availability of financial information.
Renewable energy, energy-efficient retrofitting, waste reduction, water conservation and green building certifications were becoming increasingly relevant to businesses operating within Business Services and real estate.
With real estate accounting for 40% of global emissions, environmental improvements were being driven by both sustainability objectives and the potential for cost savings. Landlords were also considering how the environmental performance of their properties could affect future rental demand and asset values.
Business Services valuations remained comparatively stable during 2023, although performance differed between individual subsectors.
Consulting and professional services remained at the higher end of both revenue and EBITDA valuation multiples, sustaining modest growth during 2023.
Demand for sustainability, technology and other specialist professional advice was expected to continue as companies navigated increasingly complex technical and reporting requirements.
Food services multiples experienced a modest decline. Reduced spending on luxury and mid-range products, combined with higher produce costs, placed pressure on revenue and margins.
Software and robotics offered opportunities to transform operating systems and support future growth within the subsector.
Facilities management experienced a significant contraction in valuation multiples during the latter part of 2023.
Changes in green building practices were influencing customer and investor expectations. As companies developed their environmental services and sought to future-proof their assets, multiples were expected to remain sensitive during the transition.
Marketing and communications valuations followed the subsector’s established pattern of peaks and troughs linked to consumer confidence and seasonal advertising expenditure.
Despite economic pressure, multiples remained relatively steady during 2023 as companies continued to develop their advertising practices and invest in areas such as social media. Further digital transformation was expected to support similar valuation levels during 2024.
Logistics, supply chain and distribution businesses also maintained stable multiples during 2023.
Companies were beginning to use artificial intelligence and resource-planning technology to improve operations. Valuations had the potential to strengthen as businesses demonstrated the profitability available from these developments.
Construction services remained at the lower end of Business Services valuation multiples. This reflected the subsector’s labour-led model, project-based revenue and relatively slow adoption of technology.
Continued demand for construction services nevertheless helped maintain investor interest.
Business Services transaction activity declined during 2023, reflecting the challenging economic environment experienced across the wider UK M&A market.
Excluding transactions valued above £1 billion:
Most private equity transaction values were not publicly disclosed, meaning the reported figures did not capture the full value of activity.
Consulting remained a significant focus for investment, recording 124 transactions during 2023.
The subsector attracted both venture capital and private equity. Venture investors identified opportunities to support new developments, while private equity targeted established companies with growth potential, often using them as platforms for buy-and-build strategies.
Developing sustainability requirements also created opportunities for consultants capable of helping companies navigate new regulations.
Marketing and communications recorded ten reported transactions in each of the first, second and fourth quarters, rising to 12 during the third quarter.
Approximately 60% of these transactions involved venture capital, demonstrating investor interest in developing technologies within the subsector.
Half of the construction services transactions completed during 2023 involved private equity, despite staffing challenges and relatively low overall deal volumes.
This demonstrated continued investor interest in high-quality assets within the subsector.
Private equity accounted for eight facilities management transactions, representing 60% of activity within the subsector.
Future growth was expected to be supported by demand for sustainability and ESG improvements across public infrastructure, technology-led efficiency gains and new approaches to employee training and retention.
The overall mix of Business Services transaction types remained relatively consistent throughout 2023.
Although total deal activity fell during the fourth quarter, trade buyer activity increased. This demonstrated continued strategic interest in acquiring high-quality Business Services companies despite the uncertain economic environment.
Investors targeted companies capable of using technology, specialist expertise and sustainable practices to develop traditional Business Services models.
Examples included:
Trade buyers used acquisitions to expand technical capabilities, enter new geographical markets, broaden their services and secure recurring revenue.
The transactions featured in the review demonstrate how technology, sustainability and specialist expertise were influencing investment decisions.
These transactions reflect investor and acquirer interest in businesses using technology or specialist knowledge to address operational, environmental and sector-specific challenges.
The Business Services sector entered 2024 with continuing economic uncertainty but several identifiable areas of opportunity.
Digital transformation was becoming more important across the sector, while labour shortages increased the value of automation and operational efficiency. Sustainability requirements were creating demand for consultancy, construction, facilities management and property services capable of helping customers meet environmental objectives.
Consulting remained an active area for investment, and private equity continued to target high-quality construction and facilities management businesses. Trade buyers also remained willing to acquire attractive businesses where transactions could add capabilities, services, technology or geographical reach.
Excluding deals valued above £1 billion, Business Services transaction volumes declined by 21% and the total reported value fell by 15%. The challenging economic climate and uncertainty surrounding the cost of debt affected activity.
Consulting remained a significant area for M&A, recording 124 transactions during 2023. The subsector attracted venture capital, private equity and corporate buyers.
Private equity completed 8% fewer investments during 2023, although the reported amount invested increased by 12%. Private equity represented half of construction services transactions and 60% of facilities management transactions.
Valuations remained comparatively stable overall, but performance varied between subsectors. Consulting and professional services remained at the higher end of revenue and EBITDA multiples, while facilities management experienced a significant contraction later in the year.
AI and automation could improve payroll, data management, accounting, reporting and other administrative processes. These technologies offered opportunities to increase efficiency and scale operations, although businesses also needed to consider ethics, compliance and data usage.
Sustainability requirements were influencing consulting, construction, facilities management, real estate and other services. Businesses faced growing demand for energy efficiency, waste reduction, lower-carbon infrastructure and improved environmental reporting.
The transactions featured in the review show buyers and investors pursuing businesses that offered technology, specialist expertise, sustainable solutions, recurring revenue, new services or opportunities for geographical expansion.
