In the professional services sector, M&A activity is on the rise, with law firms, accountancy practices and consultancy businesses proving their attraction to investors.
It’s a trend we’ve been a big part of at CP. Since partnering with Waterland Private Equity in 2022, we’ve quadrupled in size and completed 10 deals in 16 months, welcoming more and more talented people across the UK and overseas.
But what are the key underlying themes behind this increase in M&A? And what are the core value drivers in the eyes of investors?
In their latest sector snapshot, the CP Deals team has used their specialist knowledge of the professional services M&A landscape – and our own experiences as a business – to take a closer look.
KEY MARKET THEMES
While the pandemic created newfound hurdles for every sector, it acted as a catalyst for professional services firms, with accelerated investment into technology, improved focus on work-life balance methodologies and virtual collaboration all core to their transformations.
The success of these strategies is evident in the market’s current sentiment. In 2024, 77% of professional services firms expect growth in revenues, with 25% expecting ‘strong growth’ (Source: Consultancy.uk) – a category we fall into at CP.
So, what are the key market themes behind those figures?
Evolution of LLPs
Traditionally, many professional services firms have been structured as partnerships, with little external capital, and operating a full profit distributing model. In some instances, this can slow down investing in systems for the future to preserve profit share.
Post-pandemic, the agenda has evolved. Now, there is more willingness from leadership teams to consider proposals from strategic acquirers who seek to buy in new geographies and market niches.
These types of transactions do call for extra thought, however, to ensure the next generation have adequate incentives to remain in the business beyond ambitions to be an equity partner.
Hybrid working
Post-pandemic, many firms maintained remote working practices to improve work-life balance for their people. Cue more virtual collaboration platforms to assist with meetings and remote project management, and a widened talent pool including the best people the industry has to offer.
At CP, we were already working remotely pre-pandemic, but it accelerated our thinking and evolved into Work From Anywhere. Anytime. Forever (WFAAF). So, we’re a case in point.
A changing workforce
As the makeup of the global workforce becomes dominated by millennials, Gen Z and Gen Alpha, there’s increased pressure and demand on firms to adapt their working styles, improve technology and adopt new, modern ethical practices – all of which are attractive to investors.
As well as the remote working developments mentioned above, CP became B Corp Certified after the pandemic, measuring and improving our societal and environmental impact at every level. And we’ve seen an increasing number of professional services clients head down the same route, which is fantastic.
Emergence of AI
To provide the best service, often professional services firms need to process and analyse a lot of data. That can be time-consuming and prone to human error, which is why AI is a growing force in the sector, deemed to be the key to reducing costs, increasing profits and improving employees’ job satisfaction.
Customer experience
Professional services firms are increasingly adopting technology to improve customer service, including the use of efficient communication channels, and prioritising the more effective sharing of data.
Cyber threats
As they use more technology and often hold confidential data, professional services firms have been a target for cyber-attacks. In a recent study, more than 80% of firms have experienced at least one attach in the past two years. (Source: Allianz.co.uk)
Revenue
Partly driven by volatility after the pandemic, professional services firms are seeking to obtain a deeper understanding of their revenue generation and pipeline, including greater adoption of CRM systems. Being able to provide revenue predictability can assist with resource planning and aid investment.
KEY M&A VALUE DRIVERS FOR PE
Private equity is looking to deploy capital in sub-sectors with high margins and strong platform potential. Professional services businesses are high-margin by nature, PE like their reliable income streams, and the opportunity for growth through bolt-ons and the integration of similar businesses in a fragmented market can give founders the option to de-risk whilst having ‘skin in the game’ for growth.
In terms of market dynamics, the key value drivers in professional services are:
Market opportunity
There has been significant investment across the professional services sector, and in particular, the accountancy space in recent years. Now, it’s expected that PE firms and national consolidators will look to make platform investments in other professional services sub-sectors.
Robust revenue streams
The professional services sector has proven to be more recession resilient than most, giving investors more confidence.
Competition
Professional services sub-sectors remain fragmented, with a significant number of smaller providers operating across the private / SME space. This means there is ample opportunity for buy and build investments.
When we look at company specifics, there are a number of prevalent value drivers in the market here too:
Revenue visibility
A high level of recurring revenue or predictability of cash flows will drive a higher market multiple, especially those that can demonstrate ways to improve WIP lock up.
Service range
A broad level of resources and disciplines to deliver services to a ‘firm client’ are both attractive. Businesses that operate in niche areas are also attractive to trade players looking to diversify their service offering.
KPIs
Firms with strong KPIs, such as revenue per Partner, recovery, utilisation and Net Promoter Score will be attractive to acquirers.
Staff training and competence
Increased investment in staff and low staff turnover compared to peers are good attributes.
Management team
A strong second tier management team that can lead the business will be attractive for a financial investor.
Systems
Front loaded investment in systems that enable the streamlining / automation of high-volume process work will be favourable to an investor.
WANT TO READ THE FULL REPORT?
Check out the CP Deals team’s full sector snapshot, including a deep dive into all the above, a timeline of notable recent professional services transactions, and all the deals the team has worked on too.
