Acquisition closed. How do you stop the assets from walking out of the door? Insights from our Business Services Summit

Disclaimer: Unless noted otherwise, views and analysis expressed here are the author's own and based on public sources. The article is intended for informational and entertainment purposes only. This is not financial advice. Please consult a professional for investment decisions.

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I am making my way home from London. Still feeling buzzy and light-headed from our inaugural Business Services Networking Summit that took place on Wednesday. The 150-plus participants hailed from a wide array of industries including professional services; IT services; and of course, beloved installation / route based services:

I know you are dying to know what we discussed, so here are my notes from the Summit’s 3 panels:

• Panel 1: De-risking human-centric business models

• Panel 2: More than one way of doing M&A - the IT Services perspective

• Panel 3: Operational value-add in business services rollups

Before we begin, big shoutout to our trusted partners SourceScrub and PPH Financial! SourceScrub is out go-to deal origination software. Pavleta from PPH Financial is our go-to Fractional CFO for serial acquirers. Financial Due Diligence. Managing cash flow. Negotiating with the lenders. There is nothing that Pavleta cannot do!

Panel 1: De-risking human-centric business models

Our panelists were Sylvie Gale‑Coudene (Group Head of M&A People at Azets); Logan Naidu (Founder / Group CEO of Kernel Global and Dartmouth Partners) and James Peck (a Tax Partner, Cooper Parry). 

Regular readers of this blog will recognise the names Cooper Parry and Kernel Global as two examples of highly successful PE backed professional services rollups! Azets too is PE backed (PAI and Hg Capital). 

Sylvie kicked off with the importance of culture and managing change in ensuring repeat successful outcomes in a buy & build strategy. She knows what she is talking about, having previously spent 23 years at Accenture, where she led strategic talent integration of a portfolio of 30-35 acquisitions, with a $3B yearly investment. 

Next, Logan presented us with a conundrum. Recruitment firms are highly cash generative yet lifestyle businesses. Excess cash quickly builds up in the absence of dividends. Given this, and the low sector multiples, why are there so few recruitment rollups in the UK? According to Logan, the No.1 obstacle is…again, culture. As he put it, “assets walk out of the door every day and choose to back the following morning”. The industry is both peripatetic (people constantly moving around firms) and tribal (seemingly close competitors carry distinct identities). 

Finally, James talked about differentiating Cooper Parry in the saturated market of accountancy and tax services. I highly recommend you read Cooper Parry’s culture book, but to summarise, it starts with a relaxed dress code, continues with unlimited holiday and finishes with what James called “the inflection of mindset”.  

Panel 2: More than one way of doing M&A - the IT Services perspective

For this panel, we gathered two M&A practitioners (Aaron Townsend from BP3 Global and Anu Tayal from FluidOne) and a lower mid market PE investor (Nicholas Ashford from Fordhouse). If you haven’t heard about BP3, it is a provider of Robotic Process Automation services for regulated industries like insurance, banking and energy. FluidOne is a Managed Service Partner owned by the UK PE firm Livingbridge. 

By way of warm-up, we talked about constructing M&A funnels. First, the PE perspective. How long does it take to find the right platform for a nascent buy & build strategy? In Nick’s experience, it depends. When Fordhouse was looking for the IT services platform (they ended up on ZenZero, exited to Macquarie after 3 years), it had “cast” 20-30 targets. Whereas with the accounting platform the decision was made after seeing 4 opportunities. 

Anu shared his funnel - it looks like this:

• 30 opportunities screened monthly, with 10% deemed interesting

• 1-2 deals closely examined monthly

• 4-5 deals closed p.a.

I will leave you with two quotes from Nick:

• “We never model any cross-sell in M&A because it is very difficult to convince customers to part ways with the incumbent supplier”

• “Bringing in debt sharpens the mind of the CFO”

Panel 3: Operational value-add in business services rollups

Do rollups offer much value-add beyond leveraged multiple arbitrage?

Absolutely - provided you are willing to roll up the sleeves!

For this panel, we lined up heavyweights like Matthias Willrich (co-founder/CEO of EterniTeam, the “Teamshares of Germany); Alex Lomax (ex investment banker, the founder of UpVolt - “the UK’s 1komma5); and Luis Reyes (ex consultant and a co-founder of a Spanish maintenance fire safety rollup). 

Luis, who had 21 acquisitions under his belt, kicked off by sharing lessons learnt. Critical success factors are quick iteration, process, and measurement. There are 4 specific learnings:

1. Have clarity on how deep you need to integrate and why. Things like maximising daily revenue per technician (via route densification); and limiting SG&A to 10-12% of revenues. 

2. Test & learn approach. If the demo fails, they kill the idea. If it can be salvaged, they relaunch it incorporating the learnings 

3. Look for the hidden workflows i.e. tasks that get dropped during reorganisations. Example: a person was spending minor time on preparing reports on material consumed for installation subcontractors. When that person was moved to the central team, the task was dropped, causing friction with the partners.

4. Listen to your employees! Seemingly trivial changes may affect field teams in a big way.  

Next, Matthias shared his vision for EterniTeam - and how it is different to Teamshares (which we covered not long ago). To frame the opportunity, 1 in 4 German companies are facing closure due to a lack of succession plan. A staggering 231,000 businesses could close by the end this year for this reason (source).

And that’s where EterniTeam comes in. It takes over the company, hands over the operational control to the handpicked successor - and gradually transfers the ownership to the employees. 

Sounds a lot like TeamShares, right?

• Focus on small businesses with a need for succession

• Focus on employee (and successor) equity involvement

• Returns driven by cash flows, as opposed to subsequent resale

However, there are differences:

• Teamshares does not really have an industry focus (having acquired multiple retail businesses for example), whereas Eterniteam is focused on “handyman” / crafts businesses

• Successors are drawn from a talent pool, versus Teamshares’ accelerator model

We concluded the panel with Alex’s vision for UpVolt. 

The rollup, which has so far acquired one business and is closing in on a couple more, is a UK pure play. The British photovoltaic market is significantly behind Germany (its 18 GW of installed capacity is 1/5th of Germany’s), where unicorn installers like Enpal and 1komma5° have blazed the trail (read our deep dive). Plenty of targets to go after: c.200,000 annual solar installations are performed by 2,500 businesses. The market leader has a 3% share!

Similarly to 1komma5°’s founders though, Alex’s vision for UpVolt goes beyond improving the humble panel fitters. He talked about operating and managing decentralised energy assets using the Skygate software and offering Enpal-style financing. We wish Alex and the rest of our panelists the best of luck!