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 smaller professional services organizations thrive on reputation and goodwill, earned over a long term of consistent performance. Many times, this goodwill is more or less a personal asset of the
Hence, the top executive of such boutique professional services firm can have a huge influence on their 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
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 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 their top executives and made themselves more valuable by converting their acquired knowledge, through years of practice, into processes and well-documented solutions.
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This post first appeared on Aranca.com.