Three mistakes I see in Italian funds trying to buy boutique law firms
The market for consolidating professional boutiques is seeing Italian mid-market funds enter prematurely. Three recurring mistakes in the structures I have seen over the last eighteen months.
The context
In the last eighteen months, at least six Italian mid-market funds have announced strategies for consolidating professional boutiques (law firms, tax advisory firms, M&A advisory boutiques). The narrated rationale is recurrent: bull case on intellectual work against the commoditisation of legal Big Four, opportunities for cross-sell synergies, scalability of operational platforms.
Working from the sell-side in three of these operations, I have observed three structural mistakes that recur. Worth naming, because they are avoidable.
Mistake 1 — Identifying the wrong asset
Funds tend to structure the acquisition as if the asset were the recurring revenue or the client portfolio. It is not. The asset in a professional boutique is the relational capital of the partners, and relational capital is non-transferable by definition.
A boutique billing €8m with three partners is not bought the way one would buy the same €8m of a small services company. Continuity of revenue depends on the continuity of the partners' personal presence on the mandates. Buying the boutique without rigorous lock-up mechanisms (5-7 years) means, statistically, buying a capsule that evaporates by 30-50% in the first two years.
The more sophisticated funds know this and use aggressive earnout structures. The less sophisticated funds pay cash upfront and then find themselves with a materially different asset from the one imagined.
Mistake 2 — Underestimating key person risk
In most Italian boutiques, a share of between 40% and 70% of revenue is generated or intermediated by a single person. Often the managing partner. The best boutiques — those commanding high multiples — are often the most concentrated, not less, because concentration signals positioning and selectivity.
Anglo-Saxon funds have consolidated key person insurance structures. Italian funds often omit them or underdimension them. Consequence: the fund ends up with an asset whose market value is materially correlated to the health and operational will of one person. Volatility unpriced at acquisition.
Mistake 3 — Confusing revenue with capacity
A boutique billing €5m per year does not necessarily have €5m of recurring capacity. Often it has €3m of recurring capacity + €2m of extraordinary mandates (one-off operations, contentious matters with specific outcomes, project work).
When a fund structures the deal on the multiple of total revenue, it pays for capacity that does not exist. The first year post-deal, revenue apparently drops by 25-30%, not because anything went wrong, but because the extraordinary mandates were by nature non-repeatable.
The correct approach is quality of earnings with segmentation between recurring, semi-recurring, extraordinary. Multiple applied distinctly per category. It is boring, it is slow, but it is the only way not to pay for air.
What changes if these three mistakes are corrected
Structurings would become harder for the seller — lower multiples, longer earnouts, stricter key person clauses. They would also, however, become more sustainable in the medium term. The trajectory I have seen in three operations — euphoria at execution, alarm in the first 18 months, deal restructuring in a position of weakness in the first 24-36 months — would be avoided.
For those selling a boutique, the derived advice is the opposite: want these defensive structures, even if they seem less advantageous. A sustainable earnout is preferable to cash upfront followed by litigation. The closing speed is inversely proportional to the quality of the subsequent relationship. Always.