Private Equity – Is it the next major threat to professional industries?

[jamesh1467]

I have increasingly seen private equity buying up professional services firms in our industry. Or combined Civil/Survey firms. On the East Coast, it was very prevalent when I was there, too. My understanding is that the reason why is that most* firms are having a hard time finding buyers for the large ownership shares when a large owner is trying to retire. No one in the industry can meet the asking price, so they need to look elsewhere for a buyer.

I have always found this odd for one reason. Private Equity has no ethics. I view them as the scourge of the earth and the absolute bottom barrel of business. If all you care about is money and you don’t care in any way, shape, or form for how you make that money, but you are incredibly smart to know you don't have ethics and you choose not to have ethics, Private Equity is where you go.

My concern is what is happening to the professionals within those firms and how I expect they are being pressured to use their licenses in firms run by PE, compared to the ways licensed professionals are asked to use their licenses in ways that a firm whose sole direction was governed by licensed professionals would expect its employees to use their licenses.

Now please note that I am not naive, I have large disagreements and know many people who are solely in this industry for the money. I know at least 5 to 10 people personally who I would immediately take their license away if I ever got the chance. I’m sure we all know people like that. But for the most part, I have found that almost all of those people who are in this for the money still hold to some sort of public good when they make decisions. They still have a professional license and are better than the loan shark, the pawn shop guy. The drug dealer. Etc. They are still professionals, and typically, at one point before they got all googly-eyed with money, they had some good in them. They typically chose the work we did and chose the ethics of our profession at one point. Private Equity, on the other hand, not so much.

For the most part, our business revenue comes from the hourly earnings of licensed or, hopefully, soon-to-be licensed professionals. We do not exactly have a revenue model that can be optimized as other businesses can. At least not without screwing over the very professionals that are the backbone of the industry by forcing them to work more for less pay so that the business or the private equity firm can get more money for their work. I understand some use fixed fee contracts, but many, if not most, contracts I see nowadays are T&M, not to exceed, and all the profit comes from the rates and the effective multiplier.

I get very concerned about where this goes if PE is successful and what it means for the license. The bigger and bigger a business gets, the more and more diminished the individual license within that business becomes, and I fear these things will get so large that no ethics will really ever be associated with the license because there will always be someone else looking to be successful on the corporate ladder. And we will get to a point where someone will always do what you won't until we get to the point of legitimate fraud and other issues that are illegal in every industry because we allowed businesses into our industry that are too big to actually control. Then we aren't professionals. We are just like everyone else with just an extra bureaucratic hoop to jump to the next rung of the corporate ladder of this "Professional" Survey License.

I would pose the following questions:

• Should private equity be allowed to buy professional companies with professionals practicing that are licensed by our board?

• If not, how would we create laws that prevent these types of companies from entering (or I should say gaining prominence because they are already here) into our industry without impacting the typical purchase and sale operations between licensed professionals?

• Is there a larger issue when we create and value companies so highly that those in the next generation of the industry cannot get or afford the loans to buy the companies from those who are retiring?

For those of you who are not familiar with Private Equity or its impact/devastation on other industries, including other professional industries. I would encourage you to watch this video.

https://youtu.be/6pzLhWCxH_g?si=ygoRaTK3aYr6JZk6

Please note that this in no way means I am trying to turn away from the bigger-ticket discussions of standard of care or deregulation. But this is a very valid and upcoming issue for almost every license the board administers, not just the PLS.

One approach I was considering was a statewide law capping the effective multiplier in contracts with professional services provided under our license. Or, in effect, a cap on how much a company can pull from a contract for itself without giving the equivalent amount to the professional providing the professional services.

Another one that comes up is to force partnerships instead of corporations

[DWoolley]

James: your thread hits on a topic I have interest in and developed some opinions. I do not know if the 100 or so readers of this forum will be as interested as me. I have more to say than is readable in a single post. Let’s begin.

If the profession is serious about integrity, it has to confront a harder truth: governance failures rarely begin with private equity. They begin with valuation behavior at the point of exit. No retiring owner views himself as the custodian of long-term institutional virtue; he views himself—understandably—as someone who worked for decades and is entitled to harvest the equity he built. That instinct is human. It is also the moment when discipline either holds or collapses.

When an owner cannot find a third-party buyer at his target price, two paths typically appear. One is private equity, which will pay more than a strategic buyer if the firm can be levered and rolled up. The other is an internal ESOP transaction, often financed with company debt at a valuation that the open market would not support without leverage. In both cases, liquidity is achieved up front. In both cases, the firm absorbs debt or financial pressure to fund that liquidity. In both cases, the justification is identical: “I earned it.”

The uncomfortable reality is that true market value is what an arm’s-length buyer will pay without financial engineering. If the only way to achieve a target valuation is through leverage—whether provided by PE or embedded inside an ESOP—then the excess is not market value; it is future operating pressure pulled forward. That pressure does not fall on the departing owner. It falls on the next generation of professionals who must generate the cash flow to service the structure.

Debt service does not negotiate with professional judgment. It expresses itself through higher utilization expectations, tighter overhead tolerance, deferred reinvestment, and thinner QA/QC margins. In private equity, that pressure is explicit and exit-driven. In an inflated ESOP, it is culturally disguised as employee ownership but economically similar: growth becomes mandatory, not strategic. The next tier works to retire the prior one.

This is not an indictment of capital. It is an observation about incentives. An owner who maximizes his exit price—through PE or an aggressive ESOP—has already demonstrated that liquidity ranks above institutional durability at the moment of transition. That is rational behavior. But if employees’ interests are subordinate at the point of sale, it is difficult to argue that the general public’s interests will somehow fare better once leverage and margin pressure enter the system.

The license was designed to ensure that professional judgment governs technical decisions in the interest of public protection. When governance structures allow financial extraction to outrun sustainable earnings, the license risks becoming an input to a financial model rather than the controlling authority. The issue is not whether someone “earned” his payout. The issue is whether the capital structure left behind preserves independent professional control—or quietly converts it into a cost center that must perform to service yesterday’s exit.

And it is hard to point to a single villain in this scenario. The retiring owner is acting rationally. The buyer—PE or ESOP trustee—is acting within mandate. The next generation often participates willingly, believing in growth projections. Even the market is doing what markets do: pricing risk and opportunity. The tension is systemic. Incentives align around liquidity and leverage at the point of transition, not around long-term stewardship of professional judgment. When outcomes later deteriorate—compressed margins, diluted oversight, subtle erosion of standards—there is no obvious bad actor to indict. It is the structure itself doing exactly what it was designed to do.

DWoolley

[DWoolley]

Message to ESOP participants and PE owned firms:

If you have read this far and you are working inside a firm that is relentlessly preoccupied with growth—growth that materially exceeds what modest, organic expansion would normally support—then you are already inside the model.

The question is not whether it exists. The question is where you sit within it.

Ask yourself this: how much pressure are you willing to absorb in the name of “opportunity”? Higher utilization mandates. Thinner margins for error. Deferred reinvestment. Compensation chained to expansion that must continue because the structure demands it—more profit, more growth, always more.

But the harder question comes next: are you prepared to do what the structure will eventually require of you? Leveraged growth models survive by moving obligation forward. The debt never vanishes; it is serviced, refinanced, or repackaged into the next transaction. At some point you are no longer absorbing the pressure—you are transmitting it.

You become the one explaining to the next tier why the numbers must keep climbing. Why this is simply how business works. Why they, too, can shoulder it. You tell a capable young professional that lower cash compensation today is “equity tomorrow.” That temporary sacrifice is the path to ownership. That restrictive vesting schedules are commitment, not constraint. That buying into the firm—often with reduced pay and limited liquidity—is an opportunity, not a balance-sheet obligation tied to yesterday’s exit price.

If you are honest, you know what they are buying is not pure upside. It is participation in a capital structure that must continue expanding to justify itself. You repeat the language once used on you. You reassure them they too can one day “be an owner,” after the debt that financed the prior transition has been paid down—by their labor.

That is how these structures perpetuate—not through villains, but through compliance. It functions less like a single bad transaction and more like a chain letter. It works until it doesn’t. Leveraged succession models have a saturation point. Growth cannot outpace economic reality indefinitely. When that point arrives, the early beneficiaries have already exited. The last cohort holds the obligation.

That is the character test. Not whether you can endure pressure—but whether you are willing to normalize it, repackage it, and hand it forward with a straight face.

Dwoolley

[Jim Frame]

My decision to start my own business 33 years ago was driven by the realization that a promised ownership stake in the corporation I worked for wasn't ever going to be fulfilled. (There was a lot more to it, of course, and the decision was at least as emotional as it was rational, but that's irrelevant to this discussion.) I'm very grateful that I took that step, though, as it allowed me to practice the profession without the kind of pressure from above that Dave describes. Whenever I mispriced a job and had to bust the budget in order to provide the required service, I just shrugged it off as a learning experience, or simply the cost of doing business. The early years were lean but manageable, but eventually I was able to comfortably support my family solely from that one source of income. And when technology allowed me to work solo, I embraced it, grateful that I could leave the role of employer behind. (I had a smart and reliable field assistant for almost 20 years, and fortunately he was transitioning to a different line of work just as I was segueing into a one-man operation.) I worked hard, but not so hard that I had to miss my son's baseball games or forgo an annual summer trip to the Yosemite high country.

Now, at the tail end of my career, I wonder if there's still a place for the small-time land surveyor as a new entrant to the business. Not everyone has the desire or the personality to play that role, of course, but I don't think I would have enjoyed my career nearly as much had I spent it working for a large corporation.

[DWoolley]

Jim, I am glad you shared your story for the readers. I was familiar and yet, enjoyed thinking about it. It worked out for you—and that matters. You built something on your own terms, supported your family, and practiced without the pressure structures we have been discussing. That is not nostalgia. That is an accomplishment—one that was also aided by right place, right time. It is not entirely replicable today.

It is also a story of another time in California—and likely elsewhere; I can only speak to California because that is the terrain I know. There was a period when the regulatory burden was lighter and compliance overhead did not consume meaningful portions of staff. As a single example, there was a time when prevailing wage exposure was not a six-figure risk from a paperwork mistake. Technical competence and relationships were often enough to get a foothold, and the statutory tradeoff was clearer. Today, the burden of prevailing wage compliance often operates as a forcing mechanism, pushing firms toward signatory status and the assumption of millions of dollars in unfunded pension liability. That alone can render a modestly valued firm economically unattractive in another way.

That landscape has shifted.

The state regulatory system, whether by design or effect, offers little margin for error. Risk is front-loaded. The upside is constrained unless one is willing to cut corners, operate in legal gray areas with vigor, or shift burdens forward. The professional exodus is real. These are lean professional business years—call them the beginnings of the professional potato famine years if one prefers a blunt metaphor. People leave quietly. Some leave loudly. Many simply stop encouraging the next generation to try. Offshoring and artificial intelligence may eventually compress the system further and extinguish whatever misplaced optimism remains.

Your path was viable, my path was viable. It may still be viable in narrow lanes—for those willing to accept a level of risk that does not endanger a family balance sheet, or in rare father-to-son or father-to-daughter transfers where expectations are modest and continuity is internal. But it is no longer the broadly accessible model it once was. I could not do today what I did decades ago. Many would-be competitors never get a foothold now—not because they lack ability, but because the barrier is no longer technical skill. It is capital depth and administrative endurance.

And survival is not the same as thriving. The business model has become defensive architecture. The posture is crouched—absorbing, documenting, insulating—rather than building, expanding, innovating and mentoring.

On exit, the choices are equally sobering. There is rarely a robust market for a small firm beyond asset value and a modest transition arrangement. To extract meaningful value, one often must rely on someone else’s optimism—someone persuaded by a growth narrative that does not fully account for the embedded risk. Barnum had a name for that dynamic, and history has not repealed it.

Even giving it away—handing the keys to someone capable and seemingly worthy—is not without peril. Mismanagement, dishonesty, or simple inexperience can force the former owner to step back in the saddle, rebuilding from behind the eight ball. I have seen it. I have known many professionals who worked to the end; their “exit” was not a liquidity event but a life-altering health, often a bit of cancer or heart issues, or family issue that forced the decision. The firm closed or was handed off because the body or the family demanded it. Most of these firms are shuttered within a few years.

Among small operators, the cleanest transition sometimes feels like the darkest joke: die in the chair, ideally before 70, after a good steak—medium-rare—a cold gin with fresh lime, in bed with the TV on, and no lingering regrets. Every day after 68 can begin to feel like a form of purgatory, waiting for the sound of gnashing teeth in the afterlife. For many small operators, that may be the only clean transition the market reliably offers.

DWoolley

[Jim Frame]

For many small operators, that may be the only clean transition the market reliably offers.

When I do decide to retire, I expect the transition to be simple: sell whatever equipment still has some market value, convert my E&O insurance to tail coverage, send a "thanks for the patronage, but I'm done now" letter to my regular clients, and update the web page. Even if my business name had any residual value, I wouldn't want to see it on someone else's work. No regrets and no worries seems like the best way to go.

[PLS7393]

For many small operators, that may be the only clean transition the market reliably offers.

When I do decide to retire, I expect the transition to be simple: sell whatever equipment still has some market value, convert my E&O insurance to tail coverage, send a "thanks for the patronage, but I'm done now" letter to my regular clients, and update the web page. Even if my business name had any residual value, I wouldn't want to see it on someone else's work. No regrets and no worries seems like the best way to go.

I'm right there with you Jim! When I'm done, I'm done and won't have any regrets. The private practice land surveying business I developed and built, represents and holds my name, which I am proud of, and has enabled me to prepare for financial retirement. My maps validate my stability and reputation to repeat clients, and the public, which others following my footsteps will be able to follow with ease. Nothing to hide in my work!

I will simply ride off into the sunset, and spend more time on the golf course (I hope).

[LS_8750]

I collected my last paycheck from a multi-national firm back in 2000, in the height of the Dilbert era.
Corporate burnout is real.
Check your soul at the door.

[Robert Martin]

For many small operators, that may be the only clean transition the market reliably offers.

When I do decide to retire, I expect the transition to be simple: sell whatever equipment still has some market value, convert my E&O insurance to tail coverage, send a "thanks for the patronage, but I'm done now" letter to my regular clients, and update the web page. Even if my business name had any residual value, I wouldn't want to see it on someone else's work. No regrets and no worries seems like the best way to go.

I'm right there with you Jim! When I'm done, I'm done and won't have any regrets. The private practice land surveying business I developed and built, represents and holds my name, which I am proud of, and has enabled me to prepare for financial retirement. My maps validate my stability and reputation to repeat clients, and the public, which others following my footsteps will be able to follow with ease. Nothing to hide in my work!

I will simply ride off into the sunset, and spend more time on the golf course (I hope).

I guess I'm in the same boat as Jim and Keith. But I'm only 40 years old, so I assume I'm way behind them... That being said, I do consider "my control" too valuable to simply file away and retire. Almost all of my projects on are NAD83(CCS 1), field points, record lines, and resolution lines are in a master GIS file with layers in Google Earth. I have GRID coordinates on so many monuments in the county, those coordinates are extremely helpful when estimating new jobs, and performing certain jobs. I've thought about what to do with "my control" if I retire, but that may be 30 years away... things might be a lot different in 30 years... I'm not going to stress about it now.

[jamesh1467]

I know there's an underlying tone of tension between big businesses and small businesses within the CLSA. But this wasn't about that. It was about Private Equity specifically. And just to make sure I am clear. The idea or the trigger to make this post was when I saw a small firm in bay getting bought out. Yes one man shops will likely not be bought out, but small 10 to 20 person firms that make up a good majority of the industry do seem to be on PE's radar just like the big businesses.

The only reason big firms were brought into the conversation is that PE typically go for bigger and bigger firms. The larger the firm, the more money you make. Law of large numbers. They get a small firm, they will make it a big firm or merge it into a bigger and bigger firm. Just wait. And speaking from experience, the larger the firm the less control they have on quality. The less young professionals get trained. Etc. The people aren't bad in those big firms, in fact some people in those big firms think they are way, way more ethical than people in smaller firms. But those big firms aren't set up to make good professionals. They are set up to suck as much money out of their government clients as possible while limiting liability. That means they don't actually care about making a good long term professional and growing them. They just care enough to keep them trapped in a system to make money off them. What takes a few years in small firms takes 10 in big firms, etc. The flip side of that is that small firms cannot do the size of work that the big firms do, they just can't. There are tradeoffs to both. But that's not the topic of discussion.

People who are not professionals controlling and forcing professionals to make decisions so that they are not realistically free and independent to make decisions without putting their job and career at risk. That's the issue.

If two licensed professionals come together (an owner and a employee) and decide to do unethical things or grow a specific business philosophy, that's a standard of care problem within the license itself. Not an external threat from outside the license. Its two different discussions. They weren't intended to be convoluted.

[LS_8750]

Welcome to the machine:

https://www.youtube.com/watch?v=HzhyLxk ... rt_radio=1

[DWoolley]

James:

You are right to focus on independence of professional judgment. That is the core issue. My point is simply this: the pressure you are describing often exists before private equity arrives and before an ESOP transaction closes. Ownership can amplify it. It does not invent it.

If you want to understand whether a firm’s structure will protect professional independence, look at its incentives long before you look at its cap table.

Look around your workplace. What dominates the conversation? Budgets? Deadlines? Utilization? Growth targets? Or credentials?

Budgets and deadlines are constants in any professional firm. They exist in the background of every project. They do not require daily repetition to remain real. Yet in many environments they are discussed incessantly—tracked, posted, circulated, compared. That repetition is not informational. It is directional. It applies pressure. Pressure to increase utilization. Pressure to grow faster than organic demand would naturally support. Pressure to absorb non-billable time off the clock. Everyone already knows the budget and the deadline. The repetition reinforces what matters most in that system.

Growth stress is another tell. Is the firm pursuing steady, sustainable expansion, or is growth treated as an obligation? When growth must exceed organic capacity to satisfy financial expectations, behavior changes. Hiring accelerates. Overhead is squeezed. Utilization targets rise. Training is deferred. That dynamic is visible long before any PE acquisition - and mandatory for the acquisition.

Now ask the parallel question: how often are licensure, exam progression, LSIT or EIT status, responsible charge development, or professional advancement discussed with the same intensity? Do you have people who have been in the firm for years without a PE, PLS, LSIT, or EIT—and no one seems concerned? Is credential progression a condition of advancement? Is it even a condition of continued employment in technical roles?

If budgets and growth are discussed constantly and credentials are not, the incentive structure is visible. Firms relentlessly monitor and reinforce what they value. If licensure is optional, rarely discussed, or quietly sidelined, that is not oversight. That is policy by omission.

Ask another simple question: is there a constant preoccupation with lowering overhead?

Overhead reduction sounds responsible. It sounds disciplined. But overhead includes training. It includes mentorship time. It includes exam preparation reimbursement. It includes non-billable development. You cannot simultaneously run a serious training program and aggressively compress overhead. The two move in opposite directions. Training consumes margin in the short term. It pays back slowly, if at all, on a spreadsheet.

If the dominant managerial language is “reduce overhead,” “protect margin,” “increase utilization,” and “grow,” then professional development will always be secondary. Not because anyone is malicious. Because the math does not reward it.

If you are part of a firm with “owners” or ESOP trustees headquartered in another office, another state, or another country, understand that your direct supervisor is operating under the same pressure. He or she has targets. Margin thresholds. Utilization floors. Growth expectations. Failure to meet them has consequences.

When that supervisor resists adding structured training, or hesitates to approve time for exam preparation, it is not necessarily personal. It is structural. Recommending expanded training increases overhead. Increasing overhead reduces margin. Reduced margin invites scrutiny. Scrutiny invites replacement.

The incentive pressure exists long before any private equity transaction. It exists long before an ESOP closing. It is embedded in the performance metrics that determine compensation and job security.

I do not think the PE firms are the villains.

DWoolley

Clark, I have been curious and always forget to ask, why the avatar of Kit Carson?

[DWoolley]

Utilization Rate Primer

If anyone is unfamiliar with utilization rates—and how I became intimately familiar with them—allow me to explain.

Utilization is the percentage of an employee’s compensated time that must be billed directly to projects. A 90–92 percent utilization target effectively assumes near-total billability. Professional work, however, includes coordination, safety meetings, equipment logistics, mentoring, documentation, and administrative friction that are not billable. To achieve a 90-plus percent utilization rate on a forty-hour paycheck often requires working materially more than forty hours.

I worked inside a system where utilization performance was published every Friday. The previous week’s rate, trailing weeks, and year-to-date numbers were printed on goldenrod paper and posted on the breakroom bulletin board. A small crowd would gather to look. The numbers were not discussed. They did not need to be. Everyone knew where they stood among their co-workers.

Immediately afterward, we held a mandatory staff meeting directly beneath the board, framed as a “look-ahead” scheduling session. Coffee and donuts were provided. The placement was not accidental.

Fridays were not celebrations of the end of the workweek for me. They were performance report cards. Each week I remember thinking, I can do better. I can work more. And so I did. Saturdays became routine—alone in a large, quiet office—arriving around 5:30 in the morning to work on whatever could be billed without interruption.

As a chief of parties, there was substantial unbillable responsibility built into the role. Even working sixty-plus hours per week, paid for forty, it was possible to post a 70 percent utilization rate against an 85 percent expectation. In that system, that was underperformance.

During one quarterly review, a labor logistics manager from another office remarked that I had outperformed anyone previously in that position. He asked what the key to my success was. The answer, apparently, was simple: arrive before dawn on Saturdays and bill uninterrupted hours until late afternoon. That was the formula. I was, in that sense, a “high performer” at a 70 percent rate. I did not mention the occasional generosity of co-workers who would slide me a few billable hours from a fixed-fee project with excess budget—quiet donations to what might be called the professional interoffice tin cup.

I also had a quiet contingency plan. If I had plans that prevented a full Saturday, I would come in the preceding Sunday and log billable hours, still making it home before my roommates were awake. Nothing innovative. Just more hours.

There was an upside. When you work that much, you do accumulate money. Not because of overtime—there was none—but because you have very little time to spend it. It is remarkable how inexpensive life becomes when you are either at work or sleeping. My checking account grew. I was able to buy my first house while working there.

This is not a story about me. It is a primer for those unfamiliar with how utilization pressure operates in practice.

Each year felt compressed—closer to a year and a half of learning for every year worked. At ten years in, I carried something closer to fifteen in exposure and responsibility. Not all compensation is monetary. I was regarded as competent in land surveying—though I am not certain what the benchmark truly was—but the pattern repeated itself throughout much of my career: I was willing to trade margin for exposure, hours for experience. I allowed my work to be leveraged by others in exchange for access to more responsibility and, more importantly, knowledge.

When I approached a professional who possessed knowledge I wanted, and I structured it so it would not cost him time or money, he usually made the time. That was the arrangement. My gain was education.

Returning to the PE and ESOP discussion, the point is that this incentive architecture existed long before any transaction. Private equity can intensify it. An ESOP can formalize it. But the behavior is already trained into the system.

DWoolley