Are You Acquiring A Boutique Professional Services Firm? Be Careful.
Published on 16 Mar, 2016 Published under Valuation
What makes boutique professional services outfits valuable?
The people who work at such firms.
And, what can make acquisition of such professional services firms dubious?
Again, the people who work at such firms.
Most of the smaller professional services organizations usually thrive on the reputation and goodwill, earned over a long term of consistent performance. Many a times, this goodwill is more or less a personal asset of the leadership team of a firm. Appointment of any professional services firm takes place after thorough due diligence by the clients, which is typically front-ended by senior executives of such firms. When clients appoint a professional service firm, actually they appoint an executive that they are comfortable dealing with.
Hence, the top executive of such boutique professional services firm can have a huge influence on its clients. That makes revenues and profits of the professional services firm quite deceptive. So if a professional services firm is acquired without ensuring continuity of the top management at the firm, revenues may dry up after the acquisition. Apart from the client relationships, top executives of a professional services firm also mean a lot for actual delivery of services to these clients.
The dual role of these executives also adds to the deception. A few exceptions apart, most of the small professional services firms are owned by their top executives. The dual role of these executives with the firm may distort its profitability as remuneration for the both the roles of being an executive and owner of the business can be either in the form of salary or profit distribution. Hence, the profitability numbers of these firms should not be taken at face value.
Be careful if you are planning to acquire a professional services company. Do not pay for the revenues or profits that you find in the books. Rather, pay for the assets that will stay with you after the acquisition.
Moreover, you may wish to look out more for the professional services firms that have taken considerable steps to reduce their dependence on its top executives and made themselves more valuable by converting their acquired knowledge, through the years of practice, into processes and well-documented solutions. Technology maturity plays a pivotal role, and hence should be one of the criteria for you to look into before loosening your purse strings.