Value Drivers and M&A Trends in the Virtual Receptionist market
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.
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.
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