How M&A in Facilities Management is Outpacing the Broader Market

The Mergers and Acquisitions (M&A) market has faced significant challenges in recent years. Higher interest rates have curtailed investments, while high inflation and global conflicts have created a cautious business environment, slowing deal activity. Despite this, the facilities management (FM) sector has outpaced the broader M&A market, recording a healthy number of transactions and demonstrating its resilience. In 2023, most deals occurred in the lower and middle market segments, with hard FM making up approximately 70% of transaction by volume.

Several factors explain the buoyancy of M&A activity in the FM sector. Over the past decade, FM was somewhat overlooked as private equity (PE) firms and investors pursued industries like technology, healthcare, and engineering, targeting innovation and intellectual property assets. However, times have changed and PE houses have honed in on FM as a sector, recognising that buildings and the smooth running of them, offers innovation aplenty, strong recurring revenues, and large scope for bolt on services. Given its relatively untapped potential, FM presents significant opportunities for consolidation, revenue growth through modernisation, and the introduction of cleantech and automation solutions. In fact, private equity has driven over half of the M&A transactions in FM since 2020, with several well-capitalised, sector-specific PE firms leading the charge including HIG through their buy and build platform andwis and Synova Capital through its equivalent, Mecsia.

The drive to net zero has also stimulated M&A interest in the sector. The demand for green energy and energy management solutions accounted for around 12% of FM deals in 2023. With net zero a key pillar of government policy, it is conceivably possible that the UK will follow countries like France and the Netherlands by introducing whole-life carbon assessments for buildings and strongly incentivise retrofits over new construction, creating new revenue streams for FM and further investment into the sector. Additionally, data-focused FM operators, have also proved an attractive acquisition target, offering acquirers new revenues from the ability to deliver robust analysis and predictive maintenance solutions to clients.

Another dynamic at play in driving M&A activity is more personal and human. As a sector, FM presents a sizeable number of baby boom founder/owners who have built up very successful businesses, often from the ground up, who are nearing retirement age and are getting sale ready. Their appetite to exit has been further whetted by the government’s talk of 4-day weeks and increased employee entitlements from day one, which would be particularly punitive for owners of soft FM businesses which are heavily workforce reliant. Moreover, the likely rise in employer national insurance would be profoundly burdensome for businesses with large payrolls and tight margins. This is especially true for soft FM companies, such as those offering cleaning and maintenance services, where the public sector—one of the largest clients—are continually seeking to reduce their FM spend in an attempt to balance shrinking budgets.

While automation could potentially offset the impact of some employment legislation reforms, the substantial cost and operational burden involved in implementing new technologies are pushing older business owners toward M&A as an exit strategy.

The broader economic landscape is also influencing M&A activity. The Prime Minister, Keir Starmer, has warned of a challenging autumn budget on October 30, where “the broadest shoulders will carry the heaviest burden”. As per Labour’s pre-election pledges, three quarters of tax revenues are out of scope, making capital gains that accounted for only 1.4% of tax revenue financial year 2023/24 an attractive target. The threat of substantial rises to capital gains tax is creating much uncertainty and weighs heavily on all business owners contemplating an exit. A delayed introduction of an increase could lead to a race across the M&A finishing line, creating an artificial surge in M&A activity which would then be followed by a lull as valuations adjust to the new regime. On the other hand, punitive CGT increases could cause owners to reconsider their exit strategies, opting instead for succession planning, such as passing the business to a family member or appointing a managing director. Regardless of the scenario, any increase in CGT—whether immediate or gradual—will inevitably impact M&A activity and may lead owners to consider a variety of Exit routes, not least, Employment Ownership Trusts (EOTs) which are currently exempt from CGT – but aren’t right for every business.

Small and medium-sized enterprises (SMEs) are the backbone of the UK economy, accounting for 53% of turnover (excluding the financial services sector) and 61% of employment in 2023. Overburdening SMEs with higher taxes and stricter employment regulations risks stifling growth and potentially killing the proverbial golden goose. M&A interest will continue if the conditions are right, and it’s important that the government delivers on its pro-business rhetoric by offering businesses support rather than presenting them with challenges.

The UK’s facilities management sector remains a compelling investment opportunity due to its scale, density and age of buildings, high-quality client base, and its ability to innovate to meet regulatory and environmental targets. Under these conditions FM presents opportunity and an attractive acquisition target.