Industry Overview
The business services industry comprises businesses that focus on building business systems to support other businesses and provide infrastructure to support and add value to their clients’ business. Examples of players in this industry include Software as a service companies (SaaS), Internet Technology (IT) consulting firms, data processing and hosting services, industry research providers, digital media and content marketing, security services, third-party HR and payroll services and more.
Target clients in the industry are normally other businesses and corporations. The industry is in its growth phase and businesses have increasingly been depending on third-party specialists to reduce labor costs and leverage industry-specific expertise. The industry is going through a rapid rate of technological change and disruption. Adaptation to technology and changing consumer behavior is a key success factor.
The industry is driven by economic growth and innovation which warrant the use of third-party services. As a result key drivers for this industry include e-commerce growth, corporate profits, and technological innovation.
Industry Drivers
E-Commerce Growth – Accelerated by the pandemic, E-commerce growth signifies the percentage of business done online. As e-commerce demand increases, retail companies looking to grow would improve technological infrastructure and security, leading to increased demand for the business services industry.
Corporate Profits – Higher corporate profits would directly lead to increases in demand for the business services industry. Businesses that perform well are more likely to update to the latest technology and software to maintain efficiency as additional data storage and processing capabilities are needed to serve a growing customer base.
Technological Innovation – Innovation in the data processing and storage industry has been on the rise in the past decade, requiring companies globally to continuously improve their business systems else risking losing competitive advantages and creating inefficiencies within processes. As a result, increased innovation within this space would lead to increased demand for industry services, as companies require 3rd party assistance in implementing new technology.
Recent Business Service Advisory Mandates
Selling a Business Services Company
Business services form a large component of the economy. Over the last two decades better internet infrastructure has led to greater visibility and a boom in business services that support IoT infrastructure. The pandemic further accelerated a shift to online business, acting as a catalyst for the industry. As Canada’s leading private market M&A Advisory firm Beacon understands that selling a business is an important decision. A dedicated business owner not only seeks to extract maximum value from the sale of a business but also seeks to sell the business to a competent buyer who can continue the company’s legacy. Beacon has worked on over 100 valuation and M&A advisory mandates in the business services industry, bringing extensive experience in deal negotiation to the table. Our experienced advisory team will assist your business in navigating the entire sell-side M&A process.
As an entrepreneur or business owner who is exploring a potential sale, it is important to understand some key factors specific to the business services industry that might impact the likelihood of a potential sale. These are factors that determine business attractiveness for potential buyers and investors.
Recurring revenue – Business services with an established and recurring customer base are considered valuable because of their book of clients. In addition, if the company’s customer base is well-diversified, it further reduces a company’s risk profile, warranting a higher valuation. Companies that can successfully implement a recurring revenue model either through a subscription and demonstrate high client retention are generally well positioned for a successful acquisition.
Experienced Professionals – The employees and their experience are the most valuable assets for any service business. Consequently, having a skilled team with the ability to deliver results and meet client expectations is a key success factor for such businesses. Having a defined training process is essential for a business service. In addition, if the company is dependent on key personnel to run specific operations, it is important to retain these employees through an ownership change.
Niche Service Offering – The business services industry is characterized by low barriers to entry and high competition. Consequently, companies in this industry must successfully carve out a highly specialized niche. Players can invest in R&D and technical training to better position themselves against competition to achieve so.
Margins – Companies in this industry are generally asset light and have low operating overhead. Consequently, companies the industry generate strong margins and cash flow. Consulting firms that have a strong track record or consistent top line growth and consistent high margins are considered attractive and can warrant a higher valuation. A caveat to this norm is the fact that often low margin companies will have room to implement cost-cutting measures and increase profitability. If this is the case, a buyer might acquire the company at a lower multiple and streamline operations to unlock value. While such a company might have a higher probability of sale, the exiting ownership will not receive a share of these profits.
With 40 years of combined experience serving businesses within Toronto, Ontario, and abroad, the Beacon transaction team has extensive knowledge and experience successfully working for several business service companies from a variety of industries. Whether it be a valuation or sale, our team can provide expertise and resources found only at larger corporations, paired with the personalized touch of our M&A Advisory team. Contact us today to get in touch with one of our advisors.
