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Mirroring the greater M&A market, deal activity in the business services industry has softened over the past 18 months, down from the highs of 2021. As the Federal Reserve raised interest rates to combat inflation, the cost of leveraged buyouts increased substantially. However, strategic buyers are sitting on large cash reserves and private equity dry powder is at an all-time high. Large players in the business services industry have always fueled growth through acquisitions, and lower middle market transactions can often be accomplished without the need for debt financing. We expect the second half of the year to outperform the first as business services acquirers ramp up their growth initiatives.


Key Insights

• 2021 and 2022 were unprecedented years for M&A volume; in 2023, we have seen a return to more typical transaction activity

• Business services companies are in high demand with recent AI developments. Many organizations will need outside vendors to help them stay informed and relevant in an AI environment

• As the cost of debt has increased, buyers are preferencing lower middle market transactions (enterprise value below $100M) that require less financing


The M&A Market for Business Services


The business services category, which includes industries such as consulting, staffing and recruiting, accounting, training, and financial services, has always seen high levels of M&A activity. Some of the largest players in the industry, such as the “Big 4” accounting firms, are well known for the rate at which they acquire and divest business units. The consulting firm Accenture (NYSE: ACN) is one of the most prolific acquirers, with upwards of 275 acquisitions completed since its inception. Although the rate of business services acquisitions ebbs and flows along with the general economic environment, there remains a consistent baseline of demand for high performing companies in the sector. In the current M&A environment, we see the trends of consolidation and AI-backed technological advancement as the key drivers of activity.

Consolidation Trends

Many companies, particularly those backed by private equity, aim to consolidate business services in the model exhibited by the Big 4 accounting firms, which hold business lines in nearly every one of the business services categories mentioned above. This is accomplished through the acquisition of smaller, established businesses. This allows the buyer to grow its talent base, access new customers, and expand into new markets. Synergies are realized as established services are cross-sold to newly acquired customers, and new service lines better serve the existing customer base. Growth through acquisition can also be a valuable way to acquire talented employees in tight labor market conditions. These “acqui-hires” can rapidly accelerate growth in a capacity-constrained service business.

Artificial Intelligence

The power of artificial intelligence to transform businesses and entire industries is just beginning to be understood by those outside of the high-tech sphere. An increasing number of businesses are working to understand how AI can impact their business, their customers, and their industry. This has resulted in increased demand for consulting services that can implement new technologies and retrain employees on ways of working. Additionally, the business process outsourcing industry is expected to experience strong growth led by the A.I. boom and the popularity of cloud computing. Business services companies should be focused on this new technology and the role it could play in their own business processes and in their service and product offerings. For business owners considering a sale, adding artificial intelligence capabilities could instantly create value and help to drive a higher purchase price.

In Conclusion

As we enter the second half of 2023, we expect to see strong Q3 and Q4 deal activity and tailwinds that drive deal flow well into 2024. Consolidation trends remain, and technology advancements will bolster the industry. As acquisitions become even more strategically necessary for the larger players in the industry to grow, owners in the lower middle market will see strong demand for their businesses.


Contact Us

Led by a team of former business operators and executives who have built and sold companies, Alexander Hutton is a boutique, middle market M&A advisory firm that has completed 224 successful transactions. We offer a unique understanding of what it takes to run a business and an accessible team dedicated to client service. By running a high-touch, competitive transaction process for each of our clients, we are able to help them achieve their ideal outcome.

Connect with the team at Alexander Hutton and talk to us about the future of your company.