M&A Trends in 2025: What Professional Service Firms Need to Know Before Selling

Professional services firms remain highly sought after by private equity (PE) investors. As of February 2025, the M&A landscape is showing promising signs of resurgence, with expectations of increased deal activity throughout the year. Key factors contributing to this optimism include:

• Pent-Up Demand: Deals that were postponed during previous market downturns are now being revisited, leading to a backlog of potential transactions.
• Strategic Adaptation: Companies are increasingly pursuing M&A to stay competitive and adapt to evolving market demands.

Additionally, private equity (PE) is projected to see a significant rebound in 2025, with Ernst & Young projecting a 16% increase in deal activity. A report from Morgan Stanley also highlights that favorable economic conditions and increasing corporate spending on AI are likely to drive further M&A activity.

Pre-Transaction Considerations for Professional Services Firms

While the M&A market is poised for growth, professional services firms contemplating a sale should consider several critical pre-transaction and due diligence factors to ensure a smooth transaction. Below are key areas to assess:

1. Industry-Specific Legal Requirements: Different sectors have their own legal frameworks and restrictions that could impact the sale. For example, accounting firms are subject to federal and state regulations that complicate ownership by private equity investors, while recruiting firms must evaluate state-specific compensation laws and pending legislation in each jurisdiction where they operate.
2. Tax Planning: Whether you’re looking to allow a non-equity partner to receive cash proceeds or rollover equity in a tax-efficient manner, considering spinning off a business segment, evaluating options for handling deferred compensation, or otherwise, planning ahead permits firms maximum flexibility in addressing tax-related challenges posed by a transaction.
3. Privacy and Cybersecurity Diligence: Cybersecurity and data privacy issues are among the most significant risks in any transaction. These issues, if left unaddressed, can result in detrimental effects, like exclusions under representation and warranty insurance policies, or may even derail the deal entirely. Professional services firms should conduct thorough internal assessments to identify and address vulnerabilities, especially those related to industry-specific or location-specific compliance issues.
4. Timekeeping Practices: Proper timekeeping is essential for any professional services firm looking to sell. Prospective sellers should ensure that their timekeepers are regularly inputting billable hours to avoid a last-minute scramble to calculate work-in-process accurately. A lack of proper timekeeping can raise red flags for potential buyers.
5. Financial Hygiene: Buyers will expect a clear presentation of financial records. Whether your firm employs cash or accrual accounting, maintaining accurate and consistent financial statements is essential. Any discrepancies or inconsistencies can delay the due diligence process. If your firm is not GAAP compliant, be prepared to explain any deviations from the GAAP standard.
6. Insurance Coverage and Loss-Run History: Insurance is an important consideration in M&A transactions. Buyers typically review two to five years of loss-run history to assess potential liabilities. Professional service firms should ensure they have comprehensive coverage in place and that their loss-run history is well documented and available for review. Prospective sellers should also note the growing trend of buyers requiring the acquisition of tail insurance policies for post-closing coverage.
7. Documentation and Corporate Clean-Up: A well-organized set of corporate documentation is essential for a smooth transaction. Prospective sellers should prepare key documents in advance, including tax filings, organizational documents, stock certificates, equity/incentive compensation details, major vendor agreements, and leases. Depending on the state of the company’s records, a pre-sale corporate clean-up might be necessary to ensure that everything is in order for buyer review.
8. Employee Classification and Compliance: Employee misclassification is a common due diligence issue that can result in significant liabilities. Professional services firms should verify that all employees, including independent contractors and foreign workers on visas, are properly classified according to legal standards. Correct classification is critical to avoiding compliance issues that could derail the deal.

Preparing for a Sale in a Dynamic M&A Landscape

The M&A market for professional services firms is dynamic, and the factors influencing deal activity will continue to evolve. By addressing these diligence considerations well in advance of a potential sale, professional services firms can position themselves for success in an active market.

If you have any questions or need further guidance on preparing for today’s M&A landscape, please don’t hesitate to reach out to Maggie C. Miller, Evan M. Wild, or another member of LP’s Corporate group.