BPO & Tech-Enabled Business Services

Q1 2023 Market Update Economic Effects on Near-Term Valuation

A Brief Review of Q1 2023

M&A activity is starting to return to pre-pandemic levels, but is still down 5.1%  from the previous quarter. However, there is a decline of 29% on average enterprise value per transaction. The sector with the most resilient valuations were technology. Slow growth or underperforming companies as expected experienced the largest suppression in Enterprise Value.

With the current market conditions and slowing economy including the increasing cost of debt to finance acquisitions will put downward pressure on multiples.

 
 

  • Valuations remain suppressed compared to the Pre-COVID years, especially in those segments that enjoyed previous high valuations such as software development and data and research.

  • Strategic buyers will remain opportunistic and value-oriented buyers throughout the next 4-6 quarters.

  • Private Equity has been the second most active and are looking for add-ons to take advantage of multiple arbitrage.


Near Term Forecast 2023-2024

In the near-term organizations will be required to illustrate business model scalability and productivity improvements, more variable cost structures, and leadership teams that are willing to change and adopt to the changing economic and market conditions.

As organizations look for ways to increase their “Recurring EBITDA” and implement more variable cost structures they should be looking to outsource non-mission critical functions.

 
 

  • BPO and Technology Enabled Business Services on an average should Operate at 28%-35% Gross Profit Margin. We also expect an increase demand for these services which is historical trend during recessionary periods.

  • The Institutional Investor community will expect “Recurring Revenue” growth greater than 20% in the near term to increase Enterprise Value higher than in year 2022.

Conclusion

In general, Companies looking to position themselves for Enterprise Value increases during these “disruptive and problematic” times will be required to;

  • Companies will need to illustrate high “Recurring Revenue” profiles

  • Differentiated Competitive Positioning

  • Strong Unit Economics

  • Demonstrated Financial & Operational model discipline

  • High “Recurring EBITDA” profile in order to enjoy higher valuation metrics.

Enterprise Value increases above what will be the sector average will be dependent on the Company’s ability to illustrate the following:

  • Year over Year Revenue Growth of a minimum of 20% through a Portfolio approach of new client acquisition; channel partnering, strategic partnering, effective marketing combined with “Direct Sales”

  • A scalable cost of customer acquisition process

  • Implement Business Processes that create “Predictable Recurring EBITDA through Productivity and Scalable Business Processes and KPIs.

  • Illustrate that Leadership that has “adapted” to market changes and has outside advisory expertise that augments the skill deficiencies of the Leadership team.

We at Ephor we have 32+ Years of Experience as Investors, Board Members, Advisors, and Operators

in the Technology Enabled Business Services & Business Process Outsourcing (BPO) Services Sector.