California Surveyors Forums

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

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

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