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.
At HMT, we work with mid-market businesses, their shareholders and management teams, to deliver deals. The firm (and its partners!) have been working in the UK Mid-Market for over 30 years and it serves us well to reflect each January on what we and our clients experienced in the previous 12 months – in the hope it might help us predict the next 12 !
We might have hoped to see the back of the uncertainty and volatility of 2020-2022 during 2023. Instead the war in Ukraine and the conflict between Israel and Gaza and the knock on effects on inflation, interest rates and an underlying sense of global instability quickly subdued a short-lived bounce-back in business valuations and 2023 continued, on the whole, to see lower deal pricing than pre-pandemic.
Some of this is easily attributable to the steady and significant increase in the cost of debt following the brief Truss premiership. While mid-market leverage has never returned to the vertigo inducing levels which predated the financial crash of 2008/9, with the launch of a plethora of new debt funds private equity had started to take more advantage of cheap and readily available debt. But with the prospect of some expensive refinancings down the road and different assumptions impacting new investment decisions, a harder view of deal pricing was inevitable in 2023. It is to be hoped that in 2024 a return to more normal debt pricing will increase PE confidence and underpin higher returns modelling but with continued political volatility and new global threats to supply chains, it remains to be seen.
As always there were sector winners and losers in 2023. This reflects those global trends and the perception of acquirers and investors of where the offering of a business plays to them. There is little reason to expect anything different going into 2024. With continued concerns about cost of living pressures and sustained and significant pressures on the public sector there is a clear preference amongst most mid-market private equity investors and their buy and build platforms for B2B rather than B2C propositions (nothing new there!). There is also a clear tendency for private equity to see safety in group-think (with apologies to our many private equity friends!) and so a concentration of appetite around business to business software, managed service providers (particularly with cyber security offerings and/or a compelling story around AI) and ESG has typically maintained value for those businesses, particularly if they are a credible platform investment for buy and build activity.
Other areas of activity have been a little more surprising. A series of private equity backed “roll ups” of small professional services (particularly accounting services) providers has created competition for quality assets in that market and a welcome exit for a collective of small firm partners. Similarly there has been a wave of activity in the auto repair sector, driven by increasing complexity and professionalism in the market, insurer demands and a shortage of capacity. Some of the multiples achieved in both of these sectors are significantly higher than might be expected based on received wisdom and traditional experience.
The underpinning logic in mid-market M&A is value creation. It has always been true that market consolidation comes in waves and both professional services (at the lower end) and auto repair offers real opportunity for investors and acquirers to drive efficiency and scale through M&A. Doubtless investors and acquirers will continue to identify sub sectors where this opportunity exists as well as to double down on their existing platforms. Being early into a consolidation play creates the best opportunity to create value but also presents the greatest risk !
Over the last few years the lines between trade buyers and private equity have blurred as platform investments across a whole host of industries have driven mid-market M&A as they leverage PE investment and debt to grow by acquisition. Where once this was all about scale, the art of buying and building has become more about strategic capabilities (as well as scale) in order to drive higher multiples at ultimate exit. This was a very clear trend in 2023 with both trade and private equity buyers very focused on meeting pre-defined criteria and rejecting opportunistic acquisitions that didn’t meet them. We wouldn’t expect this to change in 2024.
Another thing we don’t expect to change in 2024 is the depth, breadth and length of due diligence processes. Investors and acquirers are demonstrating extreme caution and no investment manager or M&A director wants to be responsible for overpaying or buying a pup. This is translating into an abundance of very detailed analysis and questioning to the point of driving clients to near insanity. Be prepared with the information you will need, but also brace for a process which is longer than they dare admit to at the outset.
A further trend that was very apparent in 2023 was the reduced appetite for and confidence in early stage technology and software businesses. After a reasonably positive period post pandemic at this end of the market, an oversupply of businesses looking for highly priced series A and B rounds seems to have come home to roost. Finding fundraising difficult, some of these companies turned to the idea of an exit but in many cases found much the same response from would be buyers. For early stage businesses, new money is potentially going to continue to be difficult to find, particularly for pre-revenue companies or those with high cash burn and slower than predicted ARR growth
All in all the “wall of cash” or “dry powder” which we all read is sitting on large corporate balance sheets and in private equity funds waiting to be deployed, will continue to drive activity in the mid-market. But the experience of companies looking for a share of that cash will vary depending on their scale, growth profile and sector. Some businesses, however fundamentally sound, will continue to struggle to secure any attention. Others will hit an investment or acquisition sweet spot and do better than they (perhaps) should.
Our advice to shareholders and management teams looking to do a deal in 2024 would be to do your homework, understand appetite and multiples in your sector and what is driving value. Ensure your business is properly deal ready and make sure your expectations are in the realistic range. Brace for a longish process and some bruising testing of your financials and strategy.
We hope that the easing of inflation and interest rates will continue into 2024 and that the cautious confidence of investors and buyers plus the imperative to deploy cash, will continue to drive activity in the mid-market.
At HMT, we work with mid-market businesses, their shareholders and management teams, to deliver deals. The firm (and its partners!) have been working in the UK Mid-Market for over 30 years and it serves us well to reflect each January on what we and our clients experienced in the previous 12 months – in the hope it might help us predict the next 12 !
We might have hoped to see the back of the uncertainty and volatility of 2020-2022 during 2023. Instead the war in Ukraine and the conflict between Israel and Gaza and the knock on effects on inflation, interest rates and an underlying sense of global instability quickly subdued a short-lived bounce-back in business valuations and 2023 continued, on the whole, to see lower deal pricing than pre-pandemic.
Some of this is easily attributable to the steady and significant increase in the cost of debt following the brief Truss premiership. While mid-market leverage has never returned to the vertigo inducing levels which predated the financial crash of 2008/9, with the launch of a plethora of new debt funds private equity had started to take more advantage of cheap and readily available debt. But with the prospect of some expensive refinancings down the road and different assumptions impacting new investment decisions, a harder view of deal pricing was inevitable in 2023. It is to be hoped that in 2024 a return to more normal debt pricing will increase PE confidence and underpin higher returns modelling but with continued political volatility and new global threats to supply chains, it remains to be seen.
As always there were sector winners and losers in 2023. This reflects those global trends and the perception of acquirers and investors of where the offering of a business plays to them. There is little reason to expect anything different going into 2024. With continued concerns about cost of living pressures and sustained and significant pressures on the public sector there is a clear preference amongst most mid-market private equity investors and their buy and build platforms for B2B rather than B2C propositions (nothing new there!). There is also a clear tendency for private equity to see safety in group-think (with apologies to our many private equity friends!) and so a concentration of appetite around business to business software, managed service providers (particularly with cyber security offerings and/or a compelling story around AI) and ESG has typically maintained value for those businesses, particularly if they are a credible platform investment for buy and build activity.
Other areas of activity have been a little more surprising. A series of private equity backed “roll ups” of small professional services (particularly accounting services) providers has created competition for quality assets in that market and a welcome exit for a collective of small firm partners. Similarly there has been a wave of activity in the auto repair sector, driven by increasing complexity and professionalism in the market, insurer demands and a shortage of capacity. Some of the multiples achieved in both of these sectors are significantly higher than might be expected based on received wisdom and traditional experience.
The underpinning logic in mid-market M&A is value creation. It has always been true that market consolidation comes in waves and both professional services (at the lower end) and auto repair offers real opportunity for investors and acquirers to drive efficiency and scale through M&A. Doubtless investors and acquirers will continue to identify sub sectors where this opportunity exists as well as to double down on their existing platforms. Being early into a consolidation play creates the best opportunity to create value but also presents the greatest risk !
Over the last few years the lines between trade buyers and private equity have blurred as platform investments across a whole host of industries have driven mid-market M&A as they leverage PE investment and debt to grow by acquisition. Where once this was all about scale, the art of buying and building has become more about strategic capabilities (as well as scale) in order to drive higher multiples at ultimate exit. This was a very clear trend in 2023 with both trade and private equity buyers very focused on meeting pre-defined criteria and rejecting opportunistic acquisitions that didn’t meet them. We wouldn’t expect this to change in 2024.
Another thing we don’t expect to change in 2024 is the depth, breadth and length of due diligence processes. Investors and acquirers are demonstrating extreme caution and no investment manager or M&A director wants to be responsible for overpaying or buying a pup. This is translating into an abundance of very detailed analysis and questioning to the point of driving clients to near insanity. Be prepared with the information you will need, but also brace for a process which is longer than they dare admit to at the outset.
A further trend that was very apparent in 2023 was the reduced appetite for and confidence in early stage technology and software businesses. After a reasonably positive period post pandemic at this end of the market, an oversupply of businesses looking for highly priced series A and B rounds seems to have come home to roost. Finding fundraising difficult, some of these companies turned to the idea of an exit but in many cases found much the same response from would be buyers. For early stage businesses, new money is potentially going to continue to be difficult to find, particularly for pre-revenue companies or those with high cash burn and slower than predicted ARR growth
All in all the “wall of cash” or “dry powder” which we all read is sitting on large corporate balance sheets and in private equity funds waiting to be deployed, will continue to drive activity in the mid-market. But the experience of companies looking for a share of that cash will vary depending on their scale, growth profile and sector. Some businesses, however fundamentally sound, will continue to struggle to secure any attention. Others will hit an investment or acquisition sweet spot and do better than they (perhaps) should.
Our advice to shareholders and management teams looking to do a deal in 2024 would be to do your homework, understand appetite and multiples in your sector and what is driving value. Ensure your business is properly deal ready and make sure your expectations are in the realistic range. Brace for a longish process and some bruising testing of your financials and strategy.
We hope that the easing of inflation and interest rates will continue into 2024 and that the cautious confidence of investors and buyers plus the imperative to deploy cash, will continue to drive activity in the mid-market.
