M&A trends in the business services sector

The global economy continues to face a range of economic headwinds. “General economic uncertainty, higher interest rates and energy price inflation is putting pressures on the cost of living and creating challenging business conditions,” says Lee Castledine, Partner at RSM UK and member of the RSM Global Financial Due Diligence Leadership Team. “Nevertheless, whilst some sectors have seen pressure on Merger and Acquisition (M&A) deal volumes, others have shown strong resilience, such as the business services sector”. 

Activity has remained robust in the midmarket bracket, where RSM corporate finance teams advised on 135 completed transactions across Europe in the last 18 months, including almost 60 in the first six months of 2023. Notably, completed business services deals increased by 20% last year compared to the previous year, highlighting the sector's ongoing strength. 

Business services subsectors proving attractive 

Within business services, several subsectors remain attractive for M&A despite the broader economic challenges: 

• Human capital businesses (such as consulting and staffing businesses) have remained attractive with features that include repeat customer bases, visibility of income and internationalisation. Those with a focus on specific niches, particularly within technology or healthcare, are favoured and often viewed as having high growth potential.
   
• Facilities management companies, like security and cleaning companies, provide services which will always be in demand. Cleaning businesses witnessed some competing challenges through the COVID pandemic with an increasing focus on workplace cleanliness offset by the increase in remote working. Companies in this subsector often look to expand using a buy-and-build strategy. 
   
• Professional services have seen an interesting trend in recent years, with accounting firms, in particular, gaining an increase in private equity investment. These firms are being viewed as low-risk, high-growth investment targets as the industry goes through a transformation with an increasing amount of service offerings, as well as regulatory and compliance requirements, supporting valuations. 

Considered approach to deal making 

Economic headwinds are causing buyers to focus on the resilience of potential targets. Sellers are more frequently being required to produce more data justifying projections, and buyers are more willing to wait for another quarter to pass to ensure they have an accurate assessment of current trading. Marcel Vlaar, Financial Due Diligence Director at RSM Netherlands says, “There is a really strong focus on current trading with a far higher weight given to the shorter, more recent period than historical data affected by trading conditions during the COVID pandemic.” 

Buyers are seeking resilience, and subsectors like facilities management, cleaning, and security are attractive investments due to both their stability and potential for bolt-on acquisitions. The market need for these services remains regardless of the economic climate. At the same time, sellers are also often seeking to move up the value chain before engaging in M&A. Consulting-led businesses can do this by acquiring more technology services so that they can access a subscription income base in addition to their consulting fees. 

According to Jonathan Wade, Corporate Finance Partner at RSM UK, “What we’ve seen in the staffing sector is applicable to business services as a whole. Sellers can increase their value by developing a deep niche, building their recurring contract income base or expanding into an international market, which offers buyers better growth prospects and diversifies their risk.” 

In this climate, it is critical to be prepared for longer due diligence processes and more data requirements before deals are closed. According to Daniel Kroes, Transactions Partner at RSM Belgium, “A step-by-step approach can be more appropriate. Start with financial due diligence on key value areas before moving into tax and other areas which may be more confirmatory to avoid a large investment in due diligence costs only to end with an aborted deal.” 

The role of Private Equity in the current market 

Private equity (PE) remains a strong area of activity in the current market, either through direct investment in businesses or through supporting the delivery of strategic buy and build plans. 

A feature of the current M&A market is the number of family-owned businesses seeking to crystalise some of their value, which is a prime target for PE firms. One of the impacts of the COVID pandemic has been to increase focus on the appropriate work / life balance and PE can present an attractive solution where sellers are looking for a partial, if not immediate, exit. There is usually a management team able to take on the business being sold, particularly where supplemented by a period of transition as customer relationships are transferred. 

Subsectors attracting the interest of PE firms include accounting firms, as previously mentioned, and legal practices. Escalating compliance requirements across Europe means these businesses can have a strong growth trajectory. They operate in a sector where skills are scarce. European regulation changes have allowed higher levels of investment in both these subsectors, and PE firms are taking advantage by investing at scale. 

The rise of data analytics 

Market resilience continues to mean sellers remain confident of exits and therefore supportive of making investment in structured sell-side work to inform potential buyers on M&A opportunities. 

Vendor-commissioned due diligence work continues to be a key market feature with a more traditional vendor due diligence product offering being supplemented by Financial Factbooks (FFBs). FFB’s present financials in a descriptive, factual manner but with a scope that is generally accepted as being more flexible whilst still reducing the risk of price chips in subsequent buyer due diligence. 

Data analytics has rapidly become a standard tool within due diligence generally but with the use of more powerful tools and the production of dynamic dashboards, processes are able to develop more rapidly. These dashboards are allowing bidders to perform their buy-side work more quickly with reduced need for extensive Q&A processes to interrogate business drivers. 

Conclusion 

Despite global economic headwinds, M&A activity in the business services sector is showing strong resilience, especially in the mid-market segment. Nevertheless, buyers are looking to test the resilience of target businesses. Sellers, on the other hand, are looking to push themselves up the value chain by growing into income streams that can be perceived as more valuable, such as technology services and subscription income. 

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