UK service sector on a roll: new business, new staff

For most of the 20th century the British economy was built upon the stable foundations of a world-leading manufacturing sector. But gone are those days; in 2015 we are undoubtedly living in the age of services.

In 1948, manufacturing accounted for 41 per cent of UK GDP; by 2013 this figure had dropped to just 14 per cent. In the same 65-year period the services sector jumped from contributing 46 per cent of the UK’s GDP to a staggering 79 per cent.

The message for business buyers is clear: the services sector represents a safe and potentially highly profitable area for investment.

Massive and still growing
The Markit/CIPS UK Services Purchasing Managers’ Index stood at 56.7 in February, following a strong performance of 57.2 in January. When anything above 50 indicates expansion, these figures demonstrate the impressive rate of growth still being experienced in this sector. Indeed, January 2015 marked the 25th consecutive month of growth for the sector, illustrating just how stable development has been.

Furthermore, the same piece of research found that in February service-offering businesses recruited new staff at the second fastest rate since the survey began back in July 1996. The evidence suggests that this already huge sector is still growing.

Of course, the services sector is a broad one – it incorporates financial and professional services, IT, hotels, restaurants, bars, hairdressers, transport and more. What they all have in common though is a reliance on Britain’s economic recovery; as ING economist James Knightley points out, “rising real wages, strong employment and favourable tax” have boosted consumers’ spending power, in turn meaning services businesses “are optimistic on the prospects for growth in 2015”.

In short, for anyone looking to acquire an established business and turn a quick profit, there is no better sector to buy in. Furthermore, for business buyers looking for an acquisition opportunity that will offer a steady, long-term return, again the services sector is the industry of choice.

But despite the strength of the services industry, there are many strategic considerations that must still be made if a business buyer is to capitalise on the sector’s success.

Things to consider
Firstly, the business buyer must be comfortable with the fact that service businesses often offer little in the way of tangible assets. It might seem simple but it is a concept alien to some. Typically there will not be warehouses, equipment, stock or products – rather one must have a deeper understanding of the relationship between the service provider and the end user, whether that is a B2B or B2C model.

Selling services rather than products is a different beast altogether. It requires stronger relationships with customers to ensure long-term business. It will also require more work to establish the business’ place in the market. Special offers, branding and USPs are among the things that must be carefully considered to fend off rivals in what is often a competitive market.

Another key question one must ask when buying a services business is: what can I do to build this business? Adding complementary services, upselling to existing customers and making the delivery of the services more cost-efficient are all available options. But ultimately, any new prospective owner must have a clear strategy in mind if they are to maximise success and boost profits in their new venture.

Driving a business forwards
A lot can be gleaned from the example of Transdev PLC, which bought UK firm Cabfind.com in February 2015.

Transdev is a public transport operator that moves three billion passengers per annum worldwide. Cabfind, meanwhile, provides transport-on-demand cars and coaches to more than 120 corporate accounts including Channel 4, Capita, TNT and HM Prison Service.

In the week prior to the deal being announced Cabfind had revealed a 13.2 per cent increase in turnover – taking it to £17 million – and a 54 per cent increase in staff. Not content with riding the wave of success Cabfind was experiencing within the UK’s booming services sector, the new owner announced that it would be investing in more vehicles, allowing Cabfind to serve a larger customer base and thus increase profits.

Importantly in this case, Cabfind.com founders Chris Jordan and Tim Jordan announced they would be staying on to continue to steer the company after the acquisition. Skilled personnel and senior staff with a knowledge of the market can be critical to the success of a services business – keeping existing employees on post-merger can be an extremely beneficial approach if the buyer is to hit the ground running and turn over a quick profit.

Diversifying through acquisition
Looking at another example: in December 2014 it was announced that Intermarketing Agency had bought specialist digital agency Teabag. The deal secured the buyer all of Teabag’s staff and clients.

Moreover, Intermarketing Agency said in the aftermath of the deal that it hopes to benefit from Teabag's digital and motion experts in order to expand its digital capabilities.

As markets evolve, new competitors will emerge offering modern and innovative solutions. For more long-standing companies, evolving their existing practises to cater to a changing market can be difficult, meaning that acquiring a rival that specialises in other areas can be the best approach.

Intermarketing Agency’s desire to expand further into the digital space through the acquisition of Teabag is a great example of this, bringing new expertise to expand their company’s services.

This deal highlights the importance of keeping customer relationships at the heart of the acquisition process; various elements of the target business will often need to be kept intact for success to be possible.

Staff do not only spearhead the sales process, they are often involved in the entire customer experience, including the delivery of the service. Buyers of smaller service companies need to be careful of any long-term relationships the vendor has with clients. Can the deal terms be structured to protect customer relationships after the acquisition?

Whatever the exact nature of the acquisition – be it a bolt-on or a fresh start – buying a services business can be a large value-adding opportunity, if done right. If the buyer has sufficient knowledge of the particular service, the market and a clear idea of how they can enhance the company or reduce costs post-purchase then there are great financial gains to be enjoyed.

The services sector has proved itself to be the bedrock of the British economy, with the collective performance and size of these firms growing all the time. While that does not guarantee a profit, it does make the odds far more favourable for business buyers. Understanding and protecting the customer relationship will be pivotal; layer on top of that ideas for growing the customer base and improving efficiency and the chances of success are high.

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