M&A Focus – Pitfalls when Selling People Businesses
Tuesday, 6 January 2026
Introduction
Selling a professional services firm is unlike selling a product-based business. In “people businesses”, the primary assets are not machinery, intellectual property or stock – they are staff and the client relationships they nurture. This makes mergers and acquisitions (M&A) of these businesses uniquely challenging. Financial terms matter, of course, but culture, trust, and continuity can also make or break deals. In this short article we discuss some key considerations and common pitfalls, along with practical steps to mitigate risk, when selling a business whose value lies predominantly in its talent.
Why People Businesses Are Different
Professional services firms, whether traditional professions like law and architecture, or more modern businesses like financial advisory or PR businesses, depend predominantly on human capital and client confidence. When ownership changes, uncertainty can ripple through the organisation. Staff worry about their future; clients worry about continuity. If these concerns aren’t addressed early on in a transaction timeline, the deal can either unravel before completion or fail to deliver value post-sale.
Cultural Compatibility
Acquisitions and mergers of people businesses fail often because of cultural misalignment than financial error, so it is vital that both parties consider “fit” as part of their due diligence process. Whilst the culture of a firm can be difficult to define in meaningful terms, it is invariably enshrined and reflected in its working practices and policies. That means it is possible to diligence in broadly the same way as one might approach the financials. For example, reviewing a buyer’s policies on decision-making, remuneration and client management as well as observing board dynamics and understanding operational structures will all offer the seller clues as to a firm’s culture and help determine whether bringing the two businesses together is likely to be a success.
In a similar vein, selling to a buyer whose strategic priorities, such as aggressive cost-cutting or rapid expansion – might conflict with firm culture, can quickly damage a firm’s reputation and client relationships. Particularly if any of the sale consideration is dependent on future performance of the business (see Earn-Out Structures below) sellers must understand, and be comfortable with, the buyer’s plans for it.
Retention of Key Talent
If star performers exit the business as a result of a transaction, clients will quickly follow and so sellers (often in consultation with their buyer) will wish to consider their retention strategy. From a legal perspective, the “carrot” element of a retention strategy might include deal bonuses (which are not tax efficient), a share of deferred consideration or a rollover of equity (with agreed tie-ins where appropriate), whereas the “stick” will likely involve a review of the firm’s restrictive covenants to ensure they are enforceable.
Earn-Out Structures
Earn-outs and deferred consideration, where part of the price paid for a business depends on its future performance, are common in professional services transactions because the value represented in its people and clients can quickly dissipate. By deferring some of the price paid over a period of months or years, buyers can incentivise sellers to facilitate a smooth handover and be sure they are only paying for genuinely retained value. Sellers should expect to be asked to defer some consideration (and well-negotiated provisions for buyer conduct during the earn-out period should prevent manipulation of the results).
Valuation Challenges
Buyers will be conscious that, even in the absence of express change-of-control rights, clients of professional firms usually retain a unilateral right to terminate their instructions once the buyer takes ownership. From a seller’s perspective, highlighting systems and processes that reduce dependency on any particular clients can strengthen a valuation case. And if “client concentration” is seen as a significant risk, sellers should consider seeking assurances (even if non-binding) from those key clients that the transaction will not alter their relationship with the target business.
Confidentiality and Communication
Whilst leaks are almost inevitable at some stage in the deal process, premature disclosure of a potential transaction can unsettle staff and clients. At best, this leads to wasted management time dealing with enquiries and providing the necessary assurances. At worst, it can trigger damaging departures which may even sink the deal. Non-disclosure agreements (NDAs) and controlled data rooms are essential. Sellers should generally keep knowledge of the deal to a core senior working group within the business and implement staged communication strategies (involving professional PR advisers where necessary). Messaging, both internally and externally, will usually have the aim of reassuring clients and staff that continuity and stability are a transaction priority.
Conclusions
Whilst people businesses bring unique challenges to the M&A process, there is much that sellers can do to prepare their business and staff for a sale. Retention strategies can be implemented, governance and compliance frameworks strengthened, and credible, detailed forecasts can be prepared, all of which will reduce transaction risk.
Selling a professional service firm is both a legal and a human process. Success depends on trust, culture, and good process management. Owners who prepare early, communicate wisely, and choose the right buyer will not only maximise their financial returns but also protect the legacy they have created.
Jonathan Haley
Partner, Corporate and Head of Professional Partnerships
Farrer & Co LLP
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Farrer & Co is an independent London law firm and synonymous with the highest quality legal advice and service. We advise individuals and businesses on all aspects of private capital M&A. Jonathan Haley is a partner in the Corporate team specialising in LLP and Partnership transactions.
