M&A activity in professional services has surged in recent years. Conor Mehigan of Renatus Capital Partners explains the deal drivers

Recent weeks have seen a number of high-profile transactions announced in the professional services sector, namely Partners Group’s acquisition of Version 1 and KPMG’s acquisition of KMCS. Professional services has historically been a challenging area for M&A, as acquirers have been hesitant to invest significantly in companies whose IP, reputation, relationships and skills are vested in people who walk out the door every evening.

Deal drivers in the sector now include:

+ Companies looking to acquire strategic capabilities to keep up with trends e.g. digital transformation, ESG consulting etc.

+ Companies expanding into new service verticals or geographies

+ Difficulty for firms in attracting staff to grow organically, and seeing an acquisition as a way to acquire talent to service existing and new clients

In Association with

+ To reduce reliance on legacy revenue streams such as audit and tax

+ Private equity interest in the sector increasing

+ Resilience of these types of businesses during Covid.

The ‘Big Four’ accountancy firms have been extremely active in recent years. Deloitte has made several acquisitions relating to its consulting arm. In 2020, the firm acquired DNM, an international consultancy company, providing solutions in the areas of cloud, managed services, and analytics.

In 2021, Deloitte acquired Belfast data and digital transformation business, Etain. The business provides custom software and digital transformation services and now forms part of Deloitte’s consulting business.

These businesses are likely to have an element of recurring revenue, and given Deloitte’s appointment of Harry Goddard as CEO, the previous head of its Consultancy practice and a non-accountant, we are likely to see further expansion in this area.

Earlier this year, EY acquired Client Solutions, which provides software development and IT consultancy services to large enterprises. In 2018, EY acquired DKM Economic Consultants to expand its government, infrastructure, and economic advisory services.

PwC bolstered its regulatory compliance offering with the acquisition of KYC-Pro, a regtech solutions provider. It is estimated that European banks spend over €1bn annually on their KYC management.

KPMG’s M&A focus has been to improve its offering to the planning and construction industry. In 2020 the firm acquired Future Analytics, which provides services in the areas of planning and economic consultancy. In April 2022, KPMG announced the acquisition of KMCS, a construction and cost consultancy services company.

Professional services has also attracted private equity interest in recent years. Two noteworthy PE deals in the sector are|:

+ Partners Group’s recent announcement that it intends to acquire a majority share in Version 1. It is reported that the deal values Version 1 at over €800m, x18 times forecast EBITDA for FY22. Version 1 was founded by Justin Keating and reportedly received investment of c.€90m in 2017 from Volpi Capital, a private equity investor, valuing the business at a reported c.€190m at the time. Version 1 has tripled in size over the last five years with Volpi’s Capital’s backing.

+ In 2021 London private equity firm Synova acquired a majority stake in Doran + Minehane (D+M), a Munster-based accounting services specialist to the global hedge funds industry. The company’s client base includes some of the largest investment managers and fund administrators globally.

Professional services firms generally transact at mid to high single-digit EBITDA multiples. The valuation drivers are as follows:

+ Scale pays! The larger the firm the more attractive it is to acquirers as the same level of work is required to complete a large transaction as a small transaction. A larger company is also likely to have more diversified revenue streams which reduces the risk to acquirers.

+ Growing vertical. Changing trends and new technologies drive demand for certain professional services to enable companies to adapt. One such trend is the digital transformation to the cloud that most large companies are undertaking. Companies such as Version 1, Accenture and the Big Four consultancy departments have been extremely busy delivering these projects for their clients.

+ Value of the Platform vs. Individuals. Some professional service firms such as corporate finance and PR firms rely on a small number of high-profile employees with strong reputations to drive new business. Firms that have developed processes and corporate IP to deliver projects for clients generally demand a premium, as there is less risk of the business deteriorating if key employees leave.

+ Synergies. Potential cost and revenue synergies available to the acquirer are likely to impact valuation. For example, the Big Four have significant reach to companies in all sectors of the economy and can leverage the network to drive additional business for newly acquired capabilities. Examples of cost synergies would include integrating back office functions or rebranding the newly acquired company to the branding of the acquirer and save on marketing costs.

+ Nature of revenue. Repeat and recurring revenue is more valuable than one- off revenue as it allows companies to compound growth over the years.

+ Revenue concentration.  Companies with a high dependency on a small number of clients for the majority of their revenue is riskier than companies with a diverse revenue base across a number of industries.

Companies can mitigate against some of the risks of acquiring professional services businesses by incorporating deferred consideration into a transaction, or incentivising employees with share options or equity rollover. However, for M&A to be successful there has to be cultural alignment as the people will always be the essence of professional services firms.

Photo: KPMG recently strengthened its offering in the construction sector with the acquisition of KMCS. Pictured (l-r) are Fiona Mullally of KMCS, Seamus Hand and Mark Collins of KPMG, and Nigel Spence, Orla McGuirk and Pat Walsh of KMCS. (Pic: Julien Behal)