As M&A activity slowed in the second half of 2022, business services deals experienced an uplift as firms turned to these companies to access recurring revenue and build resilience—662 deals were completed in the year between Q3 2021 and 2022. While other sectors are feeling the pinch of economic and geopolitical headwinds, business services firms are getting plenty of attention in the M&A market. This trend is likely to continue throughout the rest of the year. In this article, we outline our 2023 predictions for the business services sector.
Those looking to sell their business services company may be in luck this year, as they are perceived to help build resilience. Business services firms, which include consulting, accounting, professional services and legal operators, are typically highly sought after during times of economic difficulty. These firms are valuable for their client businesses because they offer strategies or tools for companies to become more resilient or make necessary cutbacks to ensure their financial future.
Business services firms are also desirable to private equity firms, as they typically offer strong, recurring revenue from a long-standing customer base, cooperation between diverse businesses and the ability to acquire new capabilities depending on shifting market conditions via acquisitions or investment in new departments.
ESG scrutiny on business services deals will continue throughout 2023 as investors increasingly view ESG as a fundamental value driver. A corporate sustainability survey conducted by Barclays revealed that 75 per cent of businesses view compliance with environmental regulations as extremely important, with only 5 per cent saying it is not very important. The survey also demonstrated how important environmental sustainability is to consumers, with 87 per cent of businesses stating that it is either extremely or reasonably important to their customers.
Of course, there is far more to ESG than just the environment, especially for business services firms. The sector typically has a lower environmental impact than other sectors—the governance and social elements of ESG are more pertinent. Governance, which includes transparent accounting methods, accountability to shareholders and the selection of leaders with integrity and diversity, is a critical element of all firms.
The same can be said for social considerations, which include diversity, inclusion, social justice and corporate ethics. Clearly, a firm which can demonstrate a strong ESG proposition holds considerable selling power.
Firms that are not implementing comprehensive digital transformation strategies give themselves a built-in expiration date. The events of the pandemic and, most recently, the economic and geopolitical uncertainty stemming from rising inflation and the invasion of Ukraine have meant that swift but effective digital transformation is now non-negotiable.
However, some CEOs have chosen to tap the breaks on digital transformation strategies due to expense—one survey found that 40 per cent of CEOs have paused or reduced their strategies. Despite the current economic challenges, advancing technical capabilities remains a top priority because of the threat to organisational growth. Forward-thinking firms have put their foot on the digital transformation accelerator—72 per cent of CEOs say they are implementing an aggressive digital investment strategy.
For firms with the capital to acquire new assets, business services enterprises will help to fast-track the digital transformation process by providing technical solutions to streamline processes and improve efficiency and managed services to care for non-core functions, allowing firms to focus on their core services. As a result, business services firms with solid digital capabilities will get plenty of attention this year.
Notable 2023 Funds and Deals
Deals in the business services sector are off to a good start this year. Perhaps the most notable business services announcement of the year so far comes from EY. The firm is setting aside $2.5 billion to fund an acquisition spree for its consulting arm following its planned separation from its audit business.
Additionally, substantial capital that will be used to purchase business services firms has been raised. For example, WestView Capital has raised $1 billion for Fund V, targeting investments in business services, IT services, healthcare technology and outsourcing, software and growth industrial companies. We are certain that plenty more business services deal announcements will come over the next few months as more firms take steps to increase resilience, create a strong ESG proposition and boost technical capabilities.
It is expected that the next 11 months of 2023 will yield plenty more business services deals, including private equity-backed deals via bolt-ons and corporate ‘tidy-ups’ as firms seek high-quality businesses to maximise returns amid unfavourable economic conditions. In addition, more acquisition opportunities are likely to become available due to the risk of a capital gains tax rise, which may motivate business owners to sell sooner than anticipated. For those with access to capital, 2023 may be an opportune time to snap up business services firms at a favourable price to increase corporate resilience.