The UK Business Services sector experienced a significant reduction in M&A activity during the first three quarters of 2023 as higher interest rates, more expensive debt and economic uncertainty affected investment decisions.
However, specialist Business Services companies continued to attract interest from private equity and corporate buyers. Loyal client relationships, repeat revenue, relatively low capital requirements and specialist expertise supported demand for high-quality assets.
Polestar CF’s Business Services Sector Review examines the market trends, valuations, M&A activity and selected transactions affecting the sector during the first three quarters of 2023.
UK inflation fell from 11.1% in October 2022 to 6.7% in August 2023, but remained above the Bank of England’s 2% target.
High inflation and interest rates placed pressure on economic growth, business investment and consumer spending. These conditions contributed to lower public and private valuations and reduced dealmaking across the wider economy.
Business Services companies often provide specialist services embedded within their clients’ operating models. Loyal customers, repeat revenue and relatively low capital requirements can make these companies attractive to private equity investors.
Demand for expertise was also being supported by digital transformation and sustainability objectives. Businesses needed specialist advice, data and digital processes to remain competitive and respond to new reporting requirements.
Many organisations lacked the internal resources or expertise required to create and implement sustainability plans. This created opportunities for Business Services providers and encouraged established consultancies to acquire niche specialists in areas where they expected demand to increase.
Attracting and retaining employees remained challenging across the post-Brexit UK economy, particularly for Business Services companies operating labour-intensive models.
Businesses were exploring flexible working arrangements and employee-development programmes to support retention. The challenge was to introduce these measures while maintaining or improving productivity.
Labour-led businesses continued to attract investment where buyers could see that staffing shortages would not restrict future growth.
The use of artificial intelligence increased significantly, particularly within consulting. Companies including Infosys and McKinsey developed dedicated AI divisions to improve productivity and efficiency.
Technology was becoming increasingly important to Business Services companies seeking to operate efficiently, scale their internal processes and demonstrate their ability to support client growth.
Business Services companies maintained their focus on ESG and sustainability despite the lower-investment and higher-interest-rate environment.
New reporting regulations, together with prominent cases involving greenwashing, highlighted the financial and reputational consequences of non-compliance. This increased the need for credible sustainability expertise and effective implementation.
Changes to UK government environmental policies created some uncertainty around the timing of investment programmes. However, the overall direction towards more sustainable business practices was not expected to reverse.
Companies that had already invested were expected to continue pursuing their plans, while those further behind had additional time to prepare.
Revenue and EBITDA multiples declined from their 2020 levels as buyers accounted for higher financing costs and reduced access to inexpensive debt.
Cash remained available for transactions, and demand was particularly strong for premium consulting and professional services businesses.
Consulting and professional services achieved the highest average public valuation multiples among the subsectors examined:
Demand remained strong for high-quality consulting businesses, supported by competition between buyers and the need for specialist expertise.
Facilities management businesses were trading at:
The subsector remained at the lower end of Business Services valuations because of its labour-intensive operating model and more limited use of technology and artificial intelligence.
Steady demand for facilities management services nevertheless continued to support investor interest.
Construction services businesses were trading at:
Construction services also remained towards the lower end of sector valuations because of its reliance on labour and relatively limited technological development.
Logistics, import and distribution businesses were trading at:
Marketing and communications businesses were trading at:
The subsector experienced greater variation in valuations as economic pressure caused some businesses to reduce spending considered discretionary.
However, companies continued to require marketing strategies and associated support. Trading was beginning to recover, although some organisations had reassessed where they allocated their advertising expenditure.
Business Services deal volumes fell by 50%, from 244 transactions in the third quarter of 2022 to 122 in the third quarter of 2023.
Reported deal value declined by approximately 90%, from around £11 billion in Q3 2022 to approximately £1 billion in Q3 2023.
Higher interest rates and reduced availability of inexpensive debt led many companies to concentrate on their internal operations instead of expanding through acquisitions.
Consulting and professional services accounted for the largest proportion of Business Services transactions during the first three quarters of 2023.
The subsector recorded:
Trade buyers completed slightly more transactions than private equity investors. Demand was supported by businesses seeking help to navigate uncertainty and by providers acquiring additional expertise.
Construction services recorded:
Across the first three quarters, private equity completed 37 investments and trade buyers completed 70 acquisitions.
Logistics, import and distribution recorded:
Private equity completed 31 investments, compared with 25 acquisitions by trade buyers.
Marketing and communications recorded:
Trade buyers completed 20 transactions during the period, compared with six private equity investments.
Facilities management recorded:
Trade buyers completed 13 acquisitions, compared with seven private equity investments.
Although overall transaction volumes declined, private equity’s share of Business Services activity increased from 34% in Q2 2023 to 38% in Q3.
Investor interest was supported by the sector’s growth potential, repeat revenue and specialist knowledge.
BGF was the most active investor during the preceding 12 months. Through its platform investment RSK, it acquired consulting businesses operating in sustainability and environmental services.
Exponent Private Equity also expanded Xeinadin through additional acquisitions in business advisory and accountancy.
Other active private equity-backed platforms included:
Marshall Fleet Solutions was the most active corporate acquirer during the preceding 12 months. Its acquisitions supported the company’s Ambition 2030 programme, which focused on developing sustainable products and services to help customers meet climate-action targets.
Consolidation was particularly evident within consulting and professional services. Private equity-backed groups and trade buyers pursued businesses offering specialist expertise or access to new markets.
Livingbridge-backed Jensten Group acquired More Telemarketing, a specialist insurance telemarketing company serving SMEs and corporate clients.
The acquisition was one of two deals completed by Jensten during the same week. Financial details were not disclosed.
Cap10 Partners completed a £214 million public-to-private acquisition of Sureserve Group, a provider of compliance and energy-support services.
The transaction valued Sureserve at approximately 0.74 times revenue and 8.3 times EBITDA. Cap10 intended to support accelerated growth through further acquisitions.
A consortium led by BaltCap acquired integrated freight-management business Xpediator for £62 million.
The transaction valued Xpediator at approximately 0.16 times revenue and 6.7 times EBIT. The investors planned to develop the company’s freight-forwarding services across the UK, Europe and international markets.
Beech Tree Private Equity-backed Obsequio Group acquired APS Security & Fire, a provider of fire and intruder-system design, installation and maintenance services.
APS was Obsequio’s first acquisition following Beech Tree’s investment to support its organic and acquisition-led growth strategy.
Bridgepoint-backed Matrix acquired pre- and post-employment screening provider Security Watchdog from Capita for £14 million.
Security Watchdog provided background-checking services across Europe, the Middle East and Africa. The disposal allowed Capita to strengthen its balance sheet and concentrate on its core growth strategy.
Kier Group acquired the rail division and HS2 contract of Buckingham Group Contracting for £9.6 million following cash-flow pressures and project losses at Buckingham.
The transaction safeguarded 180 jobs and provided Kier with access to additional core markets.
Gateley Legal acquired RJA Consultants for £6 million.
RJA’s work with the UK property-insurance market complemented Gateley’s construction and residential-development expertise. The transaction valued RJA at approximately 1.64 times revenue and seven times profit before tax.
Drees & Sommer acquired AA Projects, providing the buyer with access to the UK and Irish markets and supporting further expansion into North America.
AA Projects expected the partnership to support its long-term sustainability and growth.
Brave Bison acquired The Social Chain for initial consideration of £7.7 million, with up to £9.5 million of additional payments dependent on performance.
The acquisition expanded Brave Bison’s international presence and its ability to deliver global campaigns.
DFDS acquired McBurney Transport Group for £135 million.
The acquisition supported DFDS’s focus on cold-chain logistics and provided opportunities to connect McBurney with its wider European transport network. The transaction valued the business at approximately 0.94 times revenue and 6.1 times EBITDA.
The Business Services sector entered the final quarter of 2023 following a substantial decline in transaction activity, but demand remained for specialist companies with repeat revenue and loyal clients.
Consulting and professional services continued to attract the greatest volume of investment. Buyers were particularly interested in businesses offering specialist expertise, digital capabilities and access to growing areas such as sustainability and ESG.
Technology and artificial intelligence were becoming increasingly important to operational efficiency and scalability. At the same time, labour availability and employee retention remained central challenges for people-led businesses.
Higher financing costs continued to affect valuations and transaction structures, but competition remained strong for premium assets.
Deal volumes fell by 50%, from 244 transactions in Q3 2022 to 122 in Q3 2023. Reported deal value declined by approximately 90%, from around £11 billion to approximately £1 billion.
Consulting and professional services recorded the most activity, completing 249 transactions across the first three quarters of 2023.
Higher interest rates and reduced availability of inexpensive debt affected acquisition financing. Many businesses also focused on strengthening their internal operations rather than pursuing M&A.
Private equity’s proportion of sector transactions increased from 34% in Q2 2023 to 38% in Q3, despite the overall reduction in deal volumes.
Specialist Business Services companies could offer repeat revenue, loyal client relationships, low capital requirements and expertise embedded within customers’ operating models.
Consulting and professional services achieved the highest average public revenue and EBITDA multiples among the subsectors examined, at 1.8 times revenue and 11.2 times EBITDA.
AI and technology were being used to improve productivity, operating efficiency and scalability. Consulting firms were among the businesses increasing their investment in dedicated AI capabilities.
Buyers were seeking niche expertise, entry into new markets and capabilities in areas including digital transformation, sustainability and ESG.
