Major public equity indices reversed previous declines in Q1 2023, ending the quarter up 7% quarter-over-quarter but still down 12% year-over-year. Ongoing labor shortages, supply chain disruptions, and the regional banking crisis have added to investor concerns about the overall health of the economy. However, the increasing likelihood for interest rate cuts following the collapse of certain regional banks has spurred more positive sentiment in the public markets.

Valuation multiples within the Business Services subsectors covered by BGL have also increased, and at a higher rate than the public markets. All three BGL Business Services composite indices are outperforming the S&P 500 year-over-year, averaging slightly over 9%.

    • Within the Human Resources Outsourcing subsector, the median EBITDA multiple in Q1 2023 was 8.3x, representing a 15.6% increase over Q4 2022. Multiple expansion can be attributed to increased use of outsourcing services due to economic constraints, especially in the leisure and hospitality, healthcare, and government industries.
    • Within the Contact Center Services subsector, the median EBITDA multiple was 9.0x in Q1 2023, representing a 12.8% decrease from Q4 2022. Despite increased adoption of cloud- and AI-based solutions and ongoing technological advancement of industry hardware and software, macro conditions, including economic uncertainty and a tight labor market, are having a greater negative impact on the subsector.
    • Within the Fixed Asset Management subsector, the median EBITDA multiple was 12.0x in Q1 2023, representing a 10.5% decrease from Q4 2022. The decline in valuation can be attributed to the ongoing labor shortage outweighing the sector’s resistance to economic uncertainty.

Volatile equity markets and credit availability have tempered M&A activity in the Business Services sector. However, the ample supply of equity capital will continue to serve as a catalyst for M&A, with both corporate and private equity buyers competing for high-quality assets. Heading into the second quarter, market indicators suggest that sector transaction activity will continue to outperform the broader market.

BGL’s Quarterly Business Services Update highlights public company operating metrics and M&A activity in the Human Resources Outsourcing, Contact Center Services, and Fixed Asset Management subsectors. BGL remains committed to informing clients of the current state of the Business Services market and is always available to discuss appropriate M&A strategies and financing alternatives with its clients and prospects.