Due Diligence Checklist for Buying an Executive Search Firm

Break down revenue by retained vs. contingency fees for the trailing 36 months

Retained search provides upfront non-refundable fees; contingency revenue is volatile and tied to placement success, dramatically affecting valuation.

Red flag: Less than 20% of revenue comes from retained engagements, signaling unpredictable, lumpy cash flow with no client commitment.

Identify revenue contribution by individual recruiter or partner

Reveals whether the business can survive if one or two key billers depart post-acquisition.

Red flag: One recruiter or the founder accounts for more than 50% of total billings in any of the last three years.

Review average fee size, placement volume, and repeat client billing rates annually

Higher average fees and repeat client rates indicate premium positioning and durable client relationships.

Red flag: Average fee size has declined year-over-year or fewer than 30% of clients returned for a second engagement within 24 months.

Request add-back schedule with documentation for all owner discretionary expenses

Clean EBITDA calculation is required to validate the asking multiple and SBA loan eligibility.

Red flag: Seller cannot provide accrual-basis financials or refuses to document add-backs with receipts and explanations.

Map revenue concentration — list top 10 clients by percentage of total revenue

Excessive concentration in one or two clients creates catastrophic revenue risk if relationships don't transfer post-close.

Red flag: A single client represents more than 25% of total revenue or two clients together exceed 40%.

Review all active client engagement letters and master service agreements for assignment clauses

Some client contracts prohibit assignment to a new owner without client consent, threatening revenue continuity at close.

Red flag: Material client agreements contain change-of-control clauses requiring client approval before transfer to a new owner.

Assess relationship tenure and primary contact person for top 10 client accounts

Client relationships owned by the founder rather than the firm signal high attrition risk post-transition.

Red flag: The majority of top client relationships are managed exclusively by the founding partner with no team overlap.

Confirm existence and terms of any exclusivity or preferred vendor agreements with repeat clients

Documented preferred vendor status with repeat clients provides defensible, recurring revenue that supports valuation.

Red flag: No formal written preferred vendor or exclusivity agreements exist despite the seller claiming long-term client loyalty.

Review employment agreements, non-solicitation clauses, and non-competes for all active recruiters

Without enforceable non-solicitation agreements, departing recruiters can immediately poach clients and candidates post-close.

Red flag: Key producers lack signed non-solicitation or non-compete agreements, or existing agreements are unenforceable in the firm's state.

Conduct confidential interviews or assess tenure, satisfaction, and compensation of top three billers

Recruiter flight post-acquisition is the single most common destroyer of value in search firm deals.

Red flag: Top billers are actively interviewing elsewhere, dissatisfied with compensation, or unaware of the pending ownership change.

Evaluate recruiter compensation structure — base salary, commission split, and bonus arrangement

Below-market compensation increases post-close attrition risk; misaligned incentives can destroy performance quickly.

Red flag: Commission splits are significantly below industry norms or have been recently reduced without recruiter consent.

Assess whether a second-in-command exists who can manage operations independently of the founder

A capable operational leader reduces transition risk and supports lender confidence for SBA financing.

Red flag: No team member has client-facing relationships or operational authority — all decisions flow through the founder alone.

Audit the ATS and CRM platforms — identify which systems are used and who owns the data

Proprietary candidate databases are a core intangible asset; data trapped in personal accounts has no transferable value.

Red flag: Candidate and client data is stored in the founder's personal LinkedIn, personal email, or unstructured spreadsheets.

Assess database size, recency, and vertical depth — number of active candidate profiles by seniority and function

A deep, curated database of pre-vetted senior candidates is a defensible competitive asset that justifies premium valuation.

Red flag: The ATS contains fewer than 2,000 active profiles or records have not been updated in more than 18 months.

Confirm all software licenses, subscriptions, and data agreements are transferable to a new owner

Forced migration to new platforms post-close creates operational disruption and unexpected transition costs.

Red flag: Key platforms are on personal accounts or single-seat licenses that terminate upon the founder's departure.

Review the documented search methodology — sourcing, screening, shortlist, and presentation process

A repeatable, documented process allows new owners and recruiters to maintain quality without founder dependency.

Red flag: No written search process exists; methodology lives entirely in the founder's institutional knowledge and personal relationships.

Review the proposed deal structure — asset vs. stock purchase and allocation of liabilities

Asset purchases protect buyers from undisclosed liabilities; structure affects tax treatment for both parties significantly.

Red flag: Seller insists on a stock sale without disclosing pending disputes, client complaints, or outstanding recruiter claims.

Assess whether an earnout tied to revenue and biller retention is included and how milestones are defined

Earnouts align seller incentives with post-close performance but must be clearly defined to prevent disputes.

Red flag: Earnout metrics are vague, lack audit rights, or give the buyer unchecked ability to manipulate qualifying revenue.

Confirm seller's planned post-close role, duration, and transition obligations in writing

A structured transition period with the seller actively introducing clients and recruiters reduces attrition materially.

Red flag: Seller is unwilling to commit to more than 30 days of transition support or refuses any post-close involvement.

Verify SBA loan eligibility — confirm the firm meets lender requirements for goodwill-heavy service businesses

SBA 7(a) financing is available for executive search acquisitions but requires clean financials and buyer injection of 10%.

Red flag: Financials are cash-basis, lack consistency across three years, or key-man risk is too concentrated to satisfy lender underwriting.