Andrew Howson
Deal Advisory Partner - Transaction Services
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James Fieldhouse
Deal Advisory Partner - M&A
2024 has been a strong year for mergers and acquisitions (M&A) in the Professional Services (PS) sector. Despite ongoing global economic challenges - including inflationary pressures, geopolitical instability, and fluctuating interest rates - the PS sector has proven resilient.
The year has seen consolidations, strategic partnerships, and a surge in cross-border deals, highlighting how firms are leveraging M&A to drive growth and enhance capabilities in an increasingly complex global market. Here, we look back at the key trends seen in PS in 2024.
Private Equity (PE) involvement - The appetite for PS firms among PE investors has been fuelled by the industry's relatively stable cash flow and potential for high returns. Although not a new phenomenon, the headlines of PE investing in the PS sector, particularly accountancy, in recent weeks have generated much interest, debate and commentary in the industry.
Firms with strong client relationships and deep expertise in high-demand areas, such as data analytics, tax advisory, and compliance, have been particularly appealing.
With their strong financial backing and focus on value creation, PE firms have been active in consolidating fragmented sectors of the PS market through buy-and-build strategies, such as in recruitment and niche consulting.
Read more about our thoughts on PE trends in the accountancy sector.
There has been a notable rise in bolt-on acquisitions. These smaller, targeted acquisitions are designed to complement and integrate seamlessly with existing operations, enabling firms to enhance specific capabilities or enter new markets quickly to grow revenue and leverage operational efficiencies. Smaller deals are often easier to integrate, reducing the risk of disruption and ensuring a smoother transition.
2024 has continued to see the strategic acquisition of firms to enhance existing capabilities and broaden service offerings. PS firms have actively sought to acquire specialised consultancies and technology firms.
PS firms have sought geographic diversification and access to new markets via cross-border M&A, enabling access to new client bases and mitigating risks with local economic fluctuations. Firms are increasingly acquiring businesses in emerging markets such as Asia-Pacific, Latin America, and the Middle East, where demand for professional services is on the rise.
Cross-border deals bring access to local talent with regulatory expertise and market knowledge. This has allowed firms to offer tailored services to multinational clients and better navigate regional complexities.
After a prolonged period of volatility, PS M&A is stepping into 2025 with more stability following the release of the UK Autumn Budget and passing of the UK and US elections in 2024. A myriad of factors, from increased investment from PE to improvements in technology and AI, make this an exciting time for PS M&A, while changes in the tax regime and other challenges require attention. We expect 2025 to be shaped by the dynamic interplay of market forces, technological advancements and sustainability factors.
During the recent period of economic fluctuations, professional service companies have shown their ability to maintain stability in times of uncertainty, particularly those within accountancy services due to regulatory driven recurring revenues. This has attracted PE firms to the sector and along with prospects of improving profit margins from automation through AI and potential to consolidate and merge with other professional service businesses to improve market coverage, this trend is likely to continue as PE firms view the sector as an attractive investment proposition.
Professional service firms are often seeking growth via investment to allow expansion into new markets. As interest rates and inflation begin to stabilise in the UK and the impacts of Brexit are more certain, acquiring a UK business represents a good growth opportunity in a recovering economy with unique market access.
In-person communication barriers arising during the pandemic acted as a catalyst for professional services firms, expediting investment into technology. As this continues, there are increasing numbers of tasks, which were previously labour-intensive and repetitive, which are being performed by AI or machine learning tools. This is generating cost savings for professional service firms, therefore improving profit margins, attracting more investors to the sector.
The need to attract and retain high-quality talent in an extremely competitive environment is a key risk to professional services companies and in turn staff retention is becoming a critical factor in M&A decisions. Alongside this, the need for certain competencies which are hard to attain or develop in the business, will be acquired through M&A activity.
There is increasing recognition that sustainable practices lead to long-term financial success, resulting in companies who are focused on ESG criteria being more attractive to investors. The regulatory environment is also encouraging businesses to look towards sustainable practices, such as the Government’s commitment to net zero by 2050. Companies are increasingly looking towards M&A to strengthen their compliance efforts and acquire expertise in the area to benefit the whole Group.
The Bank of England has reduced the base rate twice this year and policymakers are expected to cut rates up to four times in 2025. This will act as a stimulus for M&A activity as the cost of borrowing decreases, making transactions leveraged by variable debt instruments more attractive.
Due to staff costs making up a large proportion of overall costs in a professional services business, the increase in employers' NI and minimum wage from the Autumn budget will negatively impact profit margins from April 25 onwards. These reduced profits, to the extent not mitigated through increased operational efficiencies or cost-cutting measures, will in turn impact upon the attainable valuation of a company as part of an investment or sales process.
The planned increase of 4% in Business Asset Disposal Relief (BADR) was also announced in the Autumn Budget and this is expected to cause a slight uptick in M&A activity pre-April 2025 among many eligible SME businesses as shareholders wish to take advantage of the lower rate. Following this, there may be a slight increase in price expectations from sellers in this remit post-April, however, this is not predicted to significantly impact the levels of M&A activity, particularly given the overall quantum of potential tax savings involved.
Several Professional Services companies face an ageing population of owners with several practising founders nearing retirement age. Owners at this age are likely to consider an appropriate exit path to ensure they are comfortable in retirement, and this is further encouraged by changes to inheritance tax in the Autumn budget, meaning decisions need to be made earlier as to whether the business will be kept in the family or sold externally.