Can you set out to build a salable business from the start ?
I frequently run workshops for entrepreneurial mid-market businesses titled “Building Business Value”. The point of these is to draw on the lessons of 30+ years as a corporate finance adviser to ensure that founders and management teams who might at some point seek to exit their businesses clearly understand the way the M&A process works.
By unpicking the value equation, the mysteries of completion adjustments and the logic behind driving up multiples I hope that potential business vendors will be able to manage the way in which they prepare for exit, to deliver the best possible outcome when the time comes.
Most potential vendors attend these workshops, or start to engage with advisers, when they are already actively on the way to an exit and inevitably there will already be things about the way that their business is run or presented that will have a value impact. Depending on the time to a planned exit some can be managed, and some probably can only be presented as positively as possible.
For some reason, over the last few days, my LinkedIn and Instagram feeds have been full of “built to let” opportunities to invest in new build student accommodation. It made me wonder how many businesses these days are similarly designed and built with a smooth and valuable exit in mind, without any of the entrepreneurial eccentricities which can be the bane of a disposal process.
The truth is that the earlier an entrepreneur starts to think about their exit the better. It will potentially stop them making value depleting decisions and give a strategic framework for decision- making, above and beyond annual profit.
What then are the biggest mistakes that entrepreneurs make which come home to roost when it comes to exit and where a value enhancing approach can be baked into a business early on? Here are my top five “elephant traps to avoid” and/or” value enhancers to focus on” as you design your business from the outset.
Revenue Repeatability
A business with evidence of repeat revenues will be worth more than a business which cannot not point to an underpinning level of repeatability. Whether you can design a business on a subscription basis, secure rolling customer contracts or just build a compelling evidence base of returning customers over the long term, a focus on this area will positively impact the multiple achieved at exit.
Management Continuity
For all the EMI schemes out there and the posts about succession, many entrepreneurs are still the single most important person in their business when they come to sell. A buyer or investor will want to see and spend time with the individuals who are going to take the business forward post exit and if all the evidence points to the departing shareholder being still the key driver and influencer it will have a value impact. Managing a gradual step back, ensuring that customer relationships are wide and deep within the organisation and detaching the brand from the individual are all steps that will embed value within the business prior to exit and can be baked in from the beginning.
Customer Concentration
Buyers and investors worry enormously about over-dependence on one or more key customers. For an entrepreneur it is completely counter-intuitive to turn away profitable business from a trusted customer and so for many businesses that platform customer is both a positive and a negative. Starting out with a clear intention to ensure a spread of customers and having KPIs which manage over- exposure is a way to avoid the risk of over-dependence when you come to sell. It requires discipline and a strategic approach to selling.
Ensure the business has everything it needs to be sustainable
This is a broad heading but it is surprising how often a key piece of software is owned by an external developer or ex shareholder, or that the asset base has been allowed to decline in the years leading up to exit, or that the “clever bit” of a business is locked into the brains of a handful of key team members or that a fundamental element of the technology roadmap has been parked in the couple of years leading up to exit. In designing a business for a valuable sale, the owners and management team should ensure that everything that makes the business work and creates differentiation is designed into the business itself. Embed knowhow and special capabilities into software, databases or (at least) “how to” toolkits; maintain investment in capital items and technology to remain ahead of, or at least in line with the market, and ensure that everything important is owned by the business itself so it is clean and ready for sale.
Don’t diversify too far from the core
Entrepreneurs are entrepreneurial. It goes without saying. This means that sometimes they see the opportunity to make money which is slightly left field of the core purpose of their business. They might see an acquisition bargain (which can quickly become a problem child), a lovely freehold building that the business can occupy (but that most acquirers won’t want) or decide that they can do their own logistics or their own software development in house rather than use outsourced solutions. Sadly, sometimes this leads to the development of non-core activities which make the business less, nor more, attractive to an acquirer or an investor. Once their knitting is defined, entrepreneurs should stick to it or at least consider the implications of branching out before doing so on a whim.
Not all entrepreneurs want to sell their businesses and not all of them are prepared to constrain themselves in the interests of ending up with a highly saleable asset. This is to be admired and celebrated, mine would be a boring job if all businesses were designed for an easy exit.
However, I do believe that there is a difference between an entrepreneur knowing the value implications of a strategy but “doing it anyway” and one who doesn’t understand the impact of their choices and has regrets consequently. With that in mind I believe that all entrepreneurs should understand how the M&A market evaluates things and to think about how they go about building their companies from the very start.
Building a salable business doesn’t compel you to sell, it just ensures that you always have the choice.
Can you set out to build a salable business from the start ?
I frequently run workshops for entrepreneurial mid-market businesses titled “Building Business Value”. The point of these is to draw on the lessons of 30+ years as a corporate finance adviser to ensure that founders and management teams who might at some point seek to exit their businesses clearly understand the way the M&A process works.
By unpicking the value equation, the mysteries of completion adjustments and the logic behind driving up multiples I hope that potential business vendors will be able to manage the way in which they prepare for exit, to deliver the best possible outcome when the time comes.
Most potential vendors attend these workshops, or start to engage with advisers, when they are already actively on the way to an exit and inevitably there will already be things about the way that their business is run or presented that will have a value impact. Depending on the time to a planned exit some can be managed, and some probably can only be presented as positively as possible.
For some reason, over the last few days, my LinkedIn and Instagram feeds have been full of “built to let” opportunities to invest in new build student accommodation. It made me wonder how many businesses these days are similarly designed and built with a smooth and valuable exit in mind, without any of the entrepreneurial eccentricities which can be the bane of a disposal process.
The truth is that the earlier an entrepreneur starts to think about their exit the better. It will potentially stop them making value depleting decisions and give a strategic framework for decision- making, above and beyond annual profit.
What then are the biggest mistakes that entrepreneurs make which come home to roost when it comes to exit and where a value enhancing approach can be baked into a business early on? Here are my top five “elephant traps to avoid” and/or” value enhancers to focus on” as you design your business from the outset.
Revenue Repeatability
A business with evidence of repeat revenues will be worth more than a business which cannot not point to an underpinning level of repeatability. Whether you can design a business on a subscription basis, secure rolling customer contracts or just build a compelling evidence base of returning customers over the long term, a focus on this area will positively impact the multiple achieved at exit.
Management Continuity
For all the EMI schemes out there and the posts about succession, many entrepreneurs are still the single most important person in their business when they come to sell. A buyer or investor will want to see and spend time with the individuals who are going to take the business forward post exit and if all the evidence points to the departing shareholder being still the key driver and influencer it will have a value impact. Managing a gradual step back, ensuring that customer relationships are wide and deep within the organisation and detaching the brand from the individual are all steps that will embed value within the business prior to exit and can be baked in from the beginning.
Customer Concentration
Buyers and investors worry enormously about over-dependence on one or more key customers. For an entrepreneur it is completely counter-intuitive to turn away profitable business from a trusted customer and so for many businesses that platform customer is both a positive and a negative. Starting out with a clear intention to ensure a spread of customers and having KPIs which manage over- exposure is a way to avoid the risk of over-dependence when you come to sell. It requires discipline and a strategic approach to selling.
Ensure the business has everything it needs to be sustainable
This is a broad heading but it is surprising how often a key piece of software is owned by an external developer or ex shareholder, or that the asset base has been allowed to decline in the years leading up to exit, or that the “clever bit” of a business is locked into the brains of a handful of key team members or that a fundamental element of the technology roadmap has been parked in the couple of years leading up to exit. In designing a business for a valuable sale, the owners and management team should ensure that everything that makes the business work and creates differentiation is designed into the business itself. Embed knowhow and special capabilities into software, databases or (at least) “how to” toolkits; maintain investment in capital items and technology to remain ahead of, or at least in line with the market, and ensure that everything important is owned by the business itself so it is clean and ready for sale.
Don’t diversify too far from the core
Entrepreneurs are entrepreneurial. It goes without saying. This means that sometimes they see the opportunity to make money which is slightly left field of the core purpose of their business. They might see an acquisition bargain (which can quickly become a problem child), a lovely freehold building that the business can occupy (but that most acquirers won’t want) or decide that they can do their own logistics or their own software development in house rather than use outsourced solutions. Sadly, sometimes this leads to the development of non-core activities which make the business less, nor more, attractive to an acquirer or an investor. Once their knitting is defined, entrepreneurs should stick to it or at least consider the implications of branching out before doing so on a whim.
Not all entrepreneurs want to sell their businesses and not all of them are prepared to constrain themselves in the interests of ending up with a highly saleable asset. This is to be admired and celebrated, mine would be a boring job if all businesses were designed for an easy exit.
However, I do believe that there is a difference between an entrepreneur knowing the value implications of a strategy but “doing it anyway” and one who doesn’t understand the impact of their choices and has regrets consequently. With that in mind I believe that all entrepreneurs should understand how the M&A market evaluates things and to think about how they go about building their companies from the very start.
Building a salable business doesn’t compel you to sell, it just ensures that you always have the choice.
Throughout the last few years, a desire to reduce back-office headcount, downsize office space and outsource non-core activities to specialist providers has driven demand for virtual receptionist activities. M&A activity has followed suit as sellers are enticed by growing valuation multiples and buyers are drawn to the sticky nature of the service, the high levels of cash generation and the ability for larger players to invest in technology to drive improved margin and client satisfaction.
By providing services 24 hours a day, 365 days a year, operators in the sector ensure that their clients do not miss customer leads or enquiries and that customer complaints are handled efficiently. The service represents a relatively low-cost investment for a professional customer interface and is seen by many clients as operationally critical. It is estimated that the outsourced call-answering services market in the UK was worth £144m in 2022 and has a total addressable market of c.£1.7bn, indicating a current market penetration rate of 9%. Improving awareness of the value of outsourced call answering services is helping drive increased market penetration from industry operators and this is driving significant growth in the sector.
Going into 2024, UK businesses anticipate voice to continue to play a critical role in how they interact with their customers over the next five years, despite the availability of digital channels, with voice regarded as the second most important channel for communication going forward by UK businesses just behind email. Consumers are increasingly using the voice channel for their more complex enquiries and other digital channels for more simple enquiries, accordingly, the growth seen in recent years is expected to continue.
Key sector market drivers
We have worked on a number of recent transactions in the sector and the following factors make a business highly attractive to potential acquirers (both trade and institutional);
Customer base: Virtual receptionist services are particularly attractive to SMEs that may not have the resources for a dedicated in-house receptionist. These businesses can benefit from cost-effective and efficient virtual receptionist solutions and having numerous smaller customers makes a business more resilient to customer churn which can be significant in the sector (i.e. with a number of clients trying a service and then leaving or using it only for holiday cover for employed staff).
Sector focus: Several operators have grown scale by focusing on a particular sector in order to gain critical mass. The logic behind this that by servicing a large number of clients in a particular sector, call agents within the business become more of a sector specialist and are therefore able to provide a better quality of service to the end customer.
Use of technology: Delivering a scalable and high-quality service to customers is greatly enhanced through effective use of technology to triage calls and ensure that call agents are used in the most efficient way possible. In the short to medium term, AI is broadly seen as a means to delivering a better service and enhancing gross margins in the SME market by automating some processes and increasing agent utilisation.
Low complexity of service: Low complexity of calls and scripts which can be easily absorbed into existing operations and serviced by call agents.
Key sector M&A drivers in 2024
The virtual receptionist market is highly fragmented, with c.100 smaller operators and a few well-funded PE backed entities consolidating the market. As well as this, operators in the sector are highly attractive to broader business processing outsourcers (“BPO’s”) who may be looking to add a virtual receptionist offering to the services they offer to SME clients. The following are considered the key drivers for consolidation as we move into 2024:
Economies of Scale: Where there is capacity within the existing operations, the acquiring business can generate cost savings within the target by centralising back-office functions, under utilisation within the existing call agent staff and multiple premises that can be consolidated into an existing site (or indeed removed altogether in favour of remote working).
Technology Enhancement: Acquiring companies seek to enhance their technology capabilities by integrating new features, functionalities, or innovations offered by the target company. This can help in staying ahead of the competition and meeting evolving customer demands. Equally, an acquiring business with a stronger tech platform than the target can drive more efficiency from the target’s existing customer base, for example, by reducing the lost call %. Smaller operators who cannot afford to invest in technology (including AI tools) are therefore seen as an attractive acquisition opportunity for larger operators looking to drive synergies out of an acquisition.
Global Expansion: Mergers and acquisitions can provide a pathway for companies to expand their presence globally. This is important in markets where there is a demand for virtual receptionist services on an international scale. Several BPOs in the US, Asia and the Nordics see the UK as a highly attractive market and are actively seeking bolt on acquisitions to get a foothold in this market.
Conclusion
The UK market remains highly fragmented and is made up of both larger businesses seeking to consolidate the market through acquisition and a significant number of smaller providers focusing on their local market or a niche vertical. As a result, there will undoubtedly continue to be a significant level of consolidation in the sector.
For over 30 years, HMT has advised hundreds of ambitious entrepreneurs, helping them realise the significant value that they have built up in their businesses. Our recent sector experience has given us access to numerous trade acquirers and institutional investors seeking acquisitions in the sector and we have a deep understanding of the value drivers and key areas of negotiation to equip us to optimise terms on behalf of a seller.
Throughout the last few years, a desire to reduce back-office headcount, downsize office space and outsource non-core activities to specialist providers has driven demand for virtual receptionist activities. M&A activity has followed suit as sellers are enticed by growing valuation multiples and buyers are drawn to the sticky nature of the service, the high levels of cash generation and the ability for larger players to invest in technology to drive improved margin and client satisfaction.
By providing services 24 hours a day, 365 days a year, operators in the sector ensure that their clients do not miss customer leads or enquiries and that customer complaints are handled efficiently. The service represents a relatively low-cost investment for a professional customer interface and is seen by many clients as operationally critical. It is estimated that the outsourced call-answering services market in the UK was worth £144m in 2022 and has a total addressable market of c.£1.7bn, indicating a current market penetration rate of 9%. Improving awareness of the value of outsourced call answering services is helping drive increased market penetration from industry operators and this is driving significant growth in the sector.
Going into 2024, UK businesses anticipate voice to continue to play a critical role in how they interact with their customers over the next five years, despite the availability of digital channels, with voice regarded as the second most important channel for communication going forward by UK businesses just behind email. Consumers are increasingly using the voice channel for their more complex enquiries and other digital channels for more simple enquiries, accordingly, the growth seen in recent years is expected to continue.
Key sector market drivers
We have worked on a number of recent transactions in the sector and the following factors make a business highly attractive to potential acquirers (both trade and institutional);
Customer base: Virtual receptionist services are particularly attractive to SMEs that may not have the resources for a dedicated in-house receptionist. These businesses can benefit from cost-effective and efficient virtual receptionist solutions and having numerous smaller customers makes a business more resilient to customer churn which can be significant in the sector (i.e. with a number of clients trying a service and then leaving or using it only for holiday cover for employed staff).
Sector focus: Several operators have grown scale by focusing on a particular sector in order to gain critical mass. The logic behind this that by servicing a large number of clients in a particular sector, call agents within the business become more of a sector specialist and are therefore able to provide a better quality of service to the end customer.
Use of technology: Delivering a scalable and high-quality service to customers is greatly enhanced through effective use of technology to triage calls and ensure that call agents are used in the most efficient way possible. In the short to medium term, AI is broadly seen as a means to delivering a better service and enhancing gross margins in the SME market by automating some processes and increasing agent utilisation.
Low complexity of service: Low complexity of calls and scripts which can be easily absorbed into existing operations and serviced by call agents.
Key sector M&A drivers in 2024
The virtual receptionist market is highly fragmented, with c.100 smaller operators and a few well-funded PE backed entities consolidating the market. As well as this, operators in the sector are highly attractive to broader business processing outsourcers (“BPO’s”) who may be looking to add a virtual receptionist offering to the services they offer to SME clients. The following are considered the key drivers for consolidation as we move into 2024:
Economies of Scale: Where there is capacity within the existing operations, the acquiring business can generate cost savings within the target by centralising back-office functions, under utilisation within the existing call agent staff and multiple premises that can be consolidated into an existing site (or indeed removed altogether in favour of remote working).
Technology Enhancement: Acquiring companies seek to enhance their technology capabilities by integrating new features, functionalities, or innovations offered by the target company. This can help in staying ahead of the competition and meeting evolving customer demands. Equally, an acquiring business with a stronger tech platform than the target can drive more efficiency from the target’s existing customer base, for example, by reducing the lost call %. Smaller operators who cannot afford to invest in technology (including AI tools) are therefore seen as an attractive acquisition opportunity for larger operators looking to drive synergies out of an acquisition.
Global Expansion: Mergers and acquisitions can provide a pathway for companies to expand their presence globally. This is important in markets where there is a demand for virtual receptionist services on an international scale. Several BPOs in the US, Asia and the Nordics see the UK as a highly attractive market and are actively seeking bolt on acquisitions to get a foothold in this market.
Conclusion
The UK market remains highly fragmented and is made up of both larger businesses seeking to consolidate the market through acquisition and a significant number of smaller providers focusing on their local market or a niche vertical. As a result, there will undoubtedly continue to be a significant level of consolidation in the sector.
For over 30 years, HMT has advised hundreds of ambitious entrepreneurs, helping them realise the significant value that they have built up in their businesses. Our recent sector experience has given us access to numerous trade acquirers and institutional investors seeking acquisitions in the sector and we have a deep understanding of the value drivers and key areas of negotiation to equip us to optimise terms on behalf of a seller.
