Business Services Sector Operating Performance 2023 Compared to 2022

Ephor Newsletter Q2 2024

Well, here we are again at the end of the 1st Quarter of another year. At Ephor we hope and trust that year 2024 has started off meeting expectations, with the remainder of the year's forecast favorable as well.

Normally every 2 years, (however due to “Covid” we have not done so since the year-end data of 2019 was provided) we survey our peers in the sector, from 2 primary research sources:

  1. From our proprietary group of ~60 of our peers as well as

  2. Other “nonproprietary to Ephor survey resources” representing ~ another 125 of our peers.

We use this information/data to “analyze and benchmark” our sector operating results. Therefore, in this newsletter, the operating results on a peer-to-peer basis for operating year 2023 compared to 2022 performance are summarized at a “high level” for your reference.

Please note that at Ephor we fully realize that “Exact Comparisons” and benchmarking to your business is nearly impossible, therefore utilize the comparison data as “directional” guidance, and self-evaluation.

In the area of Revenue Growth:

The top 25% of our peers suggested revenue growth for 2023 compared to 2022, on a YOY basis increased by an average of +18%.

  • The top 5% averaged 22% revenue growth over 2022.

  • The middle 50% of our peers suggested revenue growth was materially flat from 2022 to 2023, <3% to >5%, on an average revenue performance basis.

  • The lower 25% of our peers suggested revenue contracted by an average of <7%, on a 2022 to 2023 YOY comparison basis.

Further analysis of the business processes & outcomes indicated that:

Of the “top 25%” quartile performers, the revenue increase was driven mostly by not just a direct sale venue dependency, however when direct sales initiatives are combined with formal referral programs and formal channel distribution business processes. Therefore a “Portfolio of new Revenue Sources” is critical to sector leadership in revenue growth.

Regarding the middle 50% peer group: the data strongly suggest there is a near-exclusive dependency on direct sales programs, principal selling, and/or trade/association-level marketing only. These “single-threaded” basic venues almost always result in “mediocrity” and average revenue growth performance.

Regarding the lower 25% peer group in revenue performance: the data indicates less than acceptable revenue performance is a result of either the loss of a large customer, dependency on direct and/or principal selling, and ineffective Go-to-Market processes in general.

Regarding the Areas of EBITDA and Profitability:

The top 25% of our peers suggested EBITDA performance in the range of +13% to +21% on average of Revenue to EBITDA, driven mostly by exogenous “covid recovery,” combined with upper quartile revenue growth and gross profit performance increases.

  • The top 5% averaged +28% of EBITDA to revenue.

  • The middle 50% of our peers’ suggested EBITDA performance was in the +6% to +11% of revenue average. In a high-interest rate and inflationary environment. Performance at this level simply does not create sufficient "internal capitalization" to support sector and internal growth initiatives.

  • The lower 25% of our peer group suggested EBITDA was an average of -3% to a positive average of +3% of EBITDA to revenue.

  • The lowest 5% illustrated negative EBITDA performance of > -8% EBITDA to revenue performance.

Further analysis of the business processes indicated that:

Of the “top 25%” quartile performers, the impressive EBITDA performance was driven mostly by profitable revenue growth (versus just selling on “price”), an increase in gross profit % over 2022, combined with illustrated and proven productivity and scalability metric improvements, plus a business models/processes that reflect more variable costing versus fixed costs structures. As such the organizations in the top 25% performance quartile are the best candidates for "Wealth Transfer Initiatives" and worthy of institutional investment.

Regarding the middle 50% peer group: as a point of reference this peer group reported +8% revenue growth, therefore “some” revenue growth is a requirement for “mediocrity” EBITDA performance, combined with comparable increases in gross profit and inclusive of effective variable versus fixed costing management.

Regarding the lower 25% peer group in EBITDA performance, or as we call them the “underperforming peer group”. This peer group is dominated by high-risk profile business models. These risk factors include but are not limited to direct sales-dependent revenue models: selling on price under the assumption that “we will make it up on volume”, excessive fixed costs driven by too much unutilized “capacity”, illustrated lack of productivity and scalability improvement, often combined with an ineffective accounting and CFO function, and leadership that is resistant to change and living in the past! For more information visit our "Playbook for Success"

General Commentary, Trends and Conclusions:

For those that are interested, in order to keep this newsletter at a manageable length we choose not to provide benchmarking and performance data on Gross Profit and SG&A levels. Should you desire additional information, especially on gross profit benchmarking, please Contact Us.

In general, the sector has recovered quite nicely from the “COVID Impairment”, with many of the best business models returning or exceeding “Pre-COVID” operating performance levels. Of note our sector’s performance is consistent with the other 3 sectors we monitor for our institutional investors. Additionally, & relative to our sector:

Revenue and demand growth has impressively increased recently and is expected to continue sector revenue growth rates in the 11% to 14% range in the near term.

Operating EBITDA, in general, is lagging slightly behind the revenue growth, due mainly to price pressures, labor cost, and WFM influences, combined with the lack of productivity and scalability of the cost structures (driven mostly by inflationary pressures) plus leadership's reluctance to CHANGE and ADAPT to the changing market dynamics.

Access to Capital and/or Merger and Acquisition activities will continue to be sequestered, with capital and access to exit options at favorable valuations being “an exclusive privilege” for the least risky, most efficient business models of the top 25% quartile performers.

In closing: we at Ephor are excited and remain very bullish regarding the near-term “state of the sector”. The survey information concludes in general “the operating assets” in the sector are slightly underutilized yet quite capable of satisfying sector growth in the near term. As such, at Ephor we are confident our sector and our peers can and will continue to create family and institutional wealth in the near term.

We wish you well in Q2 2024!

Garry E. Meier

Strategic Advisory Practice Lead

Ephor Group, Inc.