The perils of investing in publicly listed professional services firms on display again

Posted at Legal Practice Intelligence - 13 February 2017 - by Peter Frankl


McGrath Ltd share price since listing to 10/2/17

What could possibly go wrong? What could go wrong with investing in a business where the key asset is the people who come to work each day?

Almost all businesses claim that their people are the most important asset but there is a difference when it comes to professional services businesses.

When a professional leaves a professional services firm they usually take a chunk of clients and revenue with them. Even worse, professionals are not so easy to replace. Even if you can replace the technical skills, you might not be able to replace the revenue that has walked out the door.

A real estate agency shares much of the same risk attributes as a law firm. When a high revenue-earning agent leaves an agency, the revenue gap that it leaves can be financially painful.

McGrath Estate Agents listed on the ASX in December 2015. Prior to its listing, its history (since 1988) and trajectory of performance could be described as illustrious without any exaggeration.

Seven months into its listing, a joint CEO was appointed to ride alongside CEO John McGrath. A few weeks later, John McGrath resigned from his Joint CEO role. A few weeks later again, one of the bedrocks of the success of the business, Matt Lahood resigned.

At the end of last year, out went one of its superstar revenue generators, agent Ben Collier. 

At the end of January 2017, the company announced:

McGrath confirms the recent net departure of 36 sales agents from its Company owned offices segment. While the company is actively recruiting, the usual time for an agent to become fully productive means these new agents will not match the volumes required to maintain our previously expected second half earnings. The Company Owned segment currently has 225 sales agents.

McGrath's Chief Executive Officer, Mr Cameron Judson said: "We continue to have a concerted, ongoing focus on talent identification, to attract, develop and retain high performing and emerging sales agents. We have recently launched 'McGrath Future', a compelling remuneration and longer term wealth creation framework specifically for high performing agents. We have an unparalleled track record of growing and nurturing the best real estate agents in Australia, and aim to maintain that.

When key fee earners leave a professional services firm, it is bad news for the firm. When they leave to join a competitor or start up their own firm, it is even worse.

In a typical professional services business, the professionals are the main business owners. When the dynamics of ownership changes, such as in the case of a public listing, the dynamics of business risk also changes, which is especially relevant for external investors.

© 2017 Legal Practice Intelligence


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