You know the drill. You receive the CIM, the historical financials look clean, and the EBITDA margins are sitting comfortably at 15-20%. The Quality of Earnings (QofE) report comes back with a few standard adjustments, but nothing alarming. You sign the deal.
Six months later, margins have collapsed to single digits, the "committed" backlog has evaporated, and your best consultants are exiting. What happened? You fell into the Financial Diligence Trap.
In the professional services sector—unlike SaaS or manufacturing—financial statements are a lagging indicator of a uniquely volatile asset: human time. Financial diligence tells you how profitable the firm was when the founders were grinding 60-hour weeks. It does not tell you if the firm can replicate that performance under your ownership.
The market signals are already flashing red. According to the 2025 Professional Services Maturity Benchmark by SPI Research, average billable utilization across the industry has dropped to 68.9%, well below the 75% threshold required for healthy profitability. Consequently, average EBITDA margins have plummeted to 9.8%, the lowest in five years. If you are buying based on trailing twelve-month (TTM) financials without auditing the operational reality, you are likely overpaying for a deteriorating asset.
To avoid the "post-close plunge," you need to move beyond standard financial due diligence and conduct a Revenue Quality Audit. This process interrogates the operational machinery that generates the revenue, rather than just the revenue itself.
Most firms track "utilization" loosely. They might count training time, business development, or even "bench time pending assignment" as productive. You need to calculate the Realized Billable Utilization. Ask for a dump of time-entry data and compare hours scheduled vs. hours billed. A gap of more than 5% indicates massive inefficiency or scope creep that isn't being captured in the P&L.
For a deeper dive on setting the right targets, review our guide on IT Services Billable Utilization Targets.
In services, a "signed contract" is often just an intention to spend. In 2025, B2B services firms are seeing churn rates of 10-15%, with "bad" performers exceeding 20%. During diligence, audit the Backlog Aging. How many "active" projects haven't had a billable hour logged in the last 30 days? These are zombie projects that inflate the valuation but contribute zero cash flow.
Is the firm's margin driven by a repeatable process, or by three "hero" architects who know where the bodies are buried? If the latter, you are buying a ticking time bomb. High margins often disguise a lack of documentation. When those key employees leave (and they often do post-acquisition), the margin leaves with them. This is the hidden tax of tribal knowledge that destroys deal value.
If you are looking at a services asset today, you cannot rely on the CFO's spreadsheet. You need an operator's lens. Here is your action plan for the final stages of diligence or the first 100 days:
The era of financial engineering in services is over. The winners in the 2026 vintage will be the firms that master Operational Engineering—buying firms with good bones but bad processes, and systematically installing the infrastructure for scale. Don't buy the revenue; buy the machine that builds it.
