Part of a series on legal strategies for architects, engineers, and other design professionals.
Private equity has discovered the potential profitability of the design professions. Architecture, engineering, and construction management firms generate steady fee income, hold long-standing client relationships, and are often owned by founders approaching retirement. That combination is exactly what many financial sponsors look for. Yet, design firms sit behind a wall that most industries do not have: the requirement for design professional ownership. So how does private equity money actually get in?
This post answers that question in plain terms. It walks through the entity rules that govern design practices, explains the structures that let outside capital participate, digs into how passive sponsor capital is actually housed, and uses a real transaction as a case study.
Can private equity own an architecture or engineering firm?
Not directly, in most cases. New York law requires that any entity offering architecture or engineering services be owned and controlled by people who hold the relevant professional license. A traditional professional corporation must have every shareholder, officer, and director licensed and registered. A professional service limited liability company (PLLC) must have every member and manager licensed. A limited liability partnership must have every partner licensed. A pure financial investor holds none of those licenses, so it cannot simply buy shares in the practice the way it would buy into a manufacturer or a software company.
That restriction exists to protect the public. The license is personal to the professional, and the state wants the person responsible for a building or a bridge to answer to a licensing board, not to a distant shareholder focused only on returns. The result is a genuine barrier to entry for capital. It is not, however, an absolute one.
One entity is built for outside owners: the Design Professional Service Corporation
New York created a special vehicle that cracks the door open. A Design Professional Service Corporation, or DPC, is a corporation that may provide engineering, architecture, landscape architecture, land surveying, geology, or any combination of those disciplines.
The feature that matters for investors is ownership. In a DPC, non-professionals may own shares, provided they hold less than 25 percent of the shares. The same ceiling applies to governance: non-professionals may serve as directors and officers, so long as they make up less than 25 percent of those positions. Licensed design professionals must retain more than 75 percent of the ownership and control.
For an investor, that under-25-percent slice is meaningful but limited. It permits some outside participation inside the licensed entity itself, which the older professional corporation form does not allow. It does not, on its own, deliver the kind of majority economic stake a private equity sponsor typically wants. So the DPC is rarely the whole answer. It is sometimes one piece of a larger structure.
Why passive sponsor capital cannot simply sit in the DPC
This is where many people misunderstand the DPC. The under-25-percent allowance is real, but it is not an open door for a fund to park equity in the licensed firm. Three features of the rule keep passive capital out of the professional entity itself.
The non-professional shares belong to employees, not outside funds. The DPC exception was written to let a firm reward and retain its own people, including through an employee stock ownership plan. The non-licensed shareholders are generally expected to be employees of the corporation. A private equity fund is not an employee. It cannot take the under-25-percent slice as a passive financial holder in the way it would buy a minority stake in a normal company.
The shares are tied to employment and must be bought back. When a non-professional shareholder leaves the firm, the DPC is required to redeem those shares within a short window, typically about 30 days, unless they are resold to another employee. Equity that must be surrendered the moment the holder stops working there is not the kind of durable, transferable interest a fund can build a return around. The rule is designed to prevent exactly what a passive investor wants: a detached, long-term ownership stake.
Licensed design professionals must keep majority ownership and control. More than 75 percent of the shares, more than 75 percent of the directors and officers, and the top leadership roles all must stay with licensed design professionals, and the single largest shareholder must be a professional. A control investor cannot get to a majority through the DPC. The math simply does not allow it.
Add to this a separate rule: the licensed firm generally may not run businesses other than the professional services it was formed to provide. It cannot become a holding company for unrelated operations or a vehicle for outside investors to pool capital. So even the economic value that a sponsor is buying, the goodwill, the systems, the brand, and the platform for growth, needs somewhere else to live. That somewhere is a separate company.
Where passive sponsor capital actually sits: the management company
Because a sponsor cannot hold a durable majority in the licensed firm, the economics are moved into an entity that is free to accept outside capital. This is the heart of the structure.
The management company holds the capital and the value. The sponsor forms an ordinary business entity, usually a limited liability company, that does not offer design services and is therefore outside the licensing rules. This management company, sometimes with a holding company above it, is where the fund’s capital goes and where the equity a fund can actually own resides. It holds the non-professional assets: the goodwill and going-concern value, the equipment and systems, the back office, the real estate, and the brand.
A long-term services agreement channels the economics. The licensed practice and the management company sign a management or administrative services agreement, typically for a long term. The management company provides the administrative backbone: finance, human resources, marketing, technology, facilities, and general business support. The practice pays for those services. That fee stream, together with the enterprise value built up in the management company, is how a sponsor earns its return. The sponsor is paid for running a business, not for owning a piece of a license.
Founder economics come through rollover, not DPC stock. When selling owners keep a stake in the deal, that rollover equity is issued at the management or holding company level, where non-professional ownership is permitted, rather than as DPC shares. It aligns the founders with the sponsor without running into the professional-ownership limits. The licensed practice stays professionally owned; the shared upside lives in the company that is allowed to hold outside investors.
So the answer to where the passive money sits is: almost never in the licensed firm, and almost always in the management company and the holding company above it. The DPC’s under-25-percent allowance tends to serve employees and an ESOP; the sponsor’s real position is the management platform and the services relationship.
The guardrails that keep the structure legal
Routing economics through a management company is well-established, but it has limits that a sponsor ignores at its peril. Two lines cannot be crossed.
No control over professional judgment. The management company can run the business side, but it cannot direct the licensed work. Decisions about design, professional staffing, and how services are performed must stay with the professionals. Governance features that let an outside company effectively control the practice, such as the power to install or remove the firm’s leadership at will or to override professional decisions, are the features that draw regulatory and litigation scrutiny.
No fee-splitting. The management fee must reflect the fair value of the services actually provided. A fee set as a straight percentage of the practice’s professional receipts, or arrangements that function as a share of professional profits, can be treated as improper fee-splitting or as the unlicensed practice of a licensed profession. Sponsors typically use fair-market-value service fees and careful fee design to stay on the right side of this line.
Structures that push too hard on control or economics have generated real disputes in other regulated professions, and the lessons carry over. The durable version of this model keeps professional judgment with professionals and keeps the management fee tethered to genuine services.
Case study: a private equity investment into a design firm
The following case study is based on a real transaction. All names, identifying details, and party-specific figures have been anonymized.
The target. A New York design professional corporation offering architecture, engineering, project management, and construction management services. The firm, taxed as an S corporation, was owned by a group of its licensed principals.
The buyer. A newly formed management company organized as an out-of-state limited liability company, backed by a private equity sponsor. A related holding company sat above the buyer.
The structure. Rather than buying stock in the licensed firm, the buyer used a combined asset purchase and exchange. It worked in three quick steps at closing:
- First, the firm contributed a portion of its assets, essentially its goodwill and going-concern value, up to the holding company in exchange for equity units. This is the “rollover,” the piece the selling owners keep a stake in.
- Second, the holding company pushed those contributed assets down into the buyer.
- Third, the firm sold its remaining assets to the buyer for cash.
The net effect is that the operating and economic assets of the business moved into the sponsor-backed management company, while the licensed practice remained available to continue as the entity that renders design services. Notice where the passive capital landed. The sponsor’s money and the selling owners’ rollover equity both sit at the management and holding company level, not in the licensed firm. The investor gained control of the enterprise value without taking prohibited ownership of the licensed practice.
The price. The deal carried a base purchase price of roughly ten million dollars, subject to customary adjustments for working capital, debt, transaction expenses, and taxes. Part of that value was not paid in cash. It was rolled over into equity in the holding company, aligning the selling principals with the sponsor going forward.
The earn-out. The sellers could earn up to an additional one million dollars over two years, split across annual targets, if the business hit defined profitability thresholds measured by trailing EBITDA. Earn-outs like this bridge the gap between what a seller thinks the firm is worth and what a buyer will pay up front, and they keep the founders motivated during the transition.
The restrictive covenants. For five years after closing, the selling principals agreed not to compete with the business or solicit its employees within a defined territory. In a professional-services deal, the people are the asset, so protecting client relationships and talent is central to the sponsor’s investment thesis.
Why this structure works
The transaction threads the needle. The licensed practice keeps its professional ownership and its authority to offer design services, satisfying the state entity rules. The sponsor captures the enterprise value through the management company, the rollover equity, and the earn-out, all of it housed where outside capital is allowed. And the restrictive covenants protect the goodwill the buyer paid for. Each moving part answers a specific legal or commercial constraint.
Key takeaways for design firm owners considering a sale
- Direct sale of your firm to a financial buyer is usually off the table. Licensing rules keep ownership of the practice in professional hands.
- A DPC allows limited outside ownership. Ownership up to just under 25 percent, but those shares are meant for employees and an ESOP, not for a passive fund, and they are bought back when the holder leaves.
- Passive sponsor capital sits in the management company. The capital does not sit at the licensed firm. That is where the fund’s equity, the rollover, and the enterprise value live.
- The connective tissue is a services agreement. The management company earns fees for real services, and that fee stream plus enterprise growth is the sponsor’s return.
- Guardrails are not optional. The management company cannot control professional judgment and cannot take a fee that amounts to splitting professional profits.
- Deal value often comes in layers. Cash at closing, rollover equity that keeps you invested, and an earn-out tied to future performance.
- Expect restrictive covenants. A multi-year non-compete and non-solicit is standard when the value you are selling is your reputation and your people.
Frequently asked questions
Can a private equity firm buy a majority of an architecture or engineering firm in New York? Not the licensed practice itself. The firm that offers design services must stay majority-owned and controlled by licensed professionals. Investors gain majority economics through a separate management company rather than by owning the practice.
Can a fund take the under-25-percent stake allowed in a DPC? Generally no. That allowance is built for employees and employee stock ownership plans, the shares are tied to continued employment, and they must be redeemed when the holder leaves. A passive fund is not an employee and cannot hold that slice as a durable investment, which is why sponsor capital goes into the management company instead.
Where does the sponsor’s money actually sit? In the management company and the holding company above it. Those are ordinary business entities that do not offer design services, so they are free to accept outside capital. The licensed firm stays in professional hands.
How does the management company earn a return? Through fees for the administrative services it provides to the practice and through the enterprise value built in the management company. The fees must reflect the fair value of real services, not a share of professional profits.
What is a rollover in these deals? It is the portion of the sale price the selling owners take as equity in the new ownership structure instead of cash. In a design firm deal that equity is issued at the management or holding company level, not as licensed-firm stock, so it keeps founders invested without breaking the ownership rules.
Why are earn-outs common in design firm sales? They bridge valuation gaps and tie part of the price to future performance, which reduces the buyer’s risk and rewards sellers who help the business grow after closing.
Summary
Private equity cannot walk in the front door of a licensed design firm, but the door is not locked. The licensed practice stays in professional hands, while the capital, the enterprise value, and the sponsor’s return live in a separate management company connected by a long-term services agreement. The DPC’s limited outside-ownership allowance mostly serves employees, not passive investors, so the real sponsor position is the management platform, not licensed-firm stock. For firm owners, understanding where the money sits, and the guardrails that keep the structure sound, is the first step in evaluating whether and how to bring in outside capital. Liabilities, taxes, incentive compensation, and exit strategy all deserve careful attention before choosing a path.
Mr. Shimick is a Partner at Whiteman Osterman & Hanna, LLP. You can contact him at (518) 487-7678 or by email at sshimick@woh.com.
Last updated September 10, 2026.
Disclaimer: This post provides general information for educational purposes and is not legal, tax, or accounting advice. Tax rates, thresholds, and elections change; consult qualified counsel and tax advisors about your firm’s specific circumstances.