2018 Mid-Year Executive Outlook

With the first half of the year already behind us, it’s time to check in with A/E leaders across the country for our annual Mid-Year Executive Outlook. A robust national economy and strong industry fundamentals have made executives as confident as we can remember, but challenges loom as we enter a mature cycle phase. These individuals touched on a wide range of subjects such as how they are coping with talent shortages, sectors with the best growth prospects, guidelines on making sensible acquisitions, and plans for the summer.

John Brusa, Jr., P.E.
President & CEO
Barton & Loguidice
Syracuse, NY


How has B&L’s performance fared so far in 2018?

Performance for 2018 has been strong to date. With this trend, we are optimistic we will meet or exceed our 2018 goals for revenue and staffing. We are definitely seeing workload pick up in all markets as our backlog is up more than 21% year-to-date.  Many opportunities are available, but competition remains high. We continue to service our core clientele while making smart go/no-go decisions to make the best use of our resources in expanding markets.

Given tight labor markets for A/E professionals, have you had to change your approach to hiring and retaining talent?

Like most firms, we definitely have become more aggressive in both the recruiting and retention of talent. For recruiting, we continue to advance our efforts on many different fronts including, increased internal recruiting incentives, retaining a search firm, launching a new website, and pursuit of a dedicated talent acquisition position.  Retention efforts have come from promoting our family culture and core values, accommodating flexible work schedules when possible, enhanced training programs, and ensuring our benefit packages are competitive.

You became B&L’s President and CEO in 2017. Have there been new policies or initiatives you’ve chosen to pursue?

In my short time as President and CEO, the focus has been on reinvesting in our most valuable asset, our employees. In 2017, we made significant improvements to our benefits package to make it more competitive in today’s market. These improvements include providing a more robust retirement savings to our employees, converting to a PTO policy, and adding a holiday. We also invested in our fleet vehicles, which has helped with efficiencies, and overall program savings. As we grow, we continue to look at options for the overall company structure to improve on our already high client satisfaction and allow for efficient integration of acquisitions.

You recently launched a brand new website look and layout. What were your goals in how you present the company online?

Since it was more than 10 years since our last website update, it was definitely time for a website overhaul. The main goal was to provide a clean looking responsive website design that incorporates new technology and videos to highlight B&L’s family culture, core values and technical expertise. The new site allows a simpler user experience and helps recruit top talent to the company.

B&L has made select niche acquisitions of design firms as means of growth. What do you typically look for in target firms?

Once you analyze the initial key indicators of size, financials and market areas, it really comes down to focusing on personnel, synergies, and culture. At the end of the day, both firms need to come out stronger with the merger, leading to synergistic long term growth and stability. If the overall culture and core values do not align, then the chances for long term success are diminished. Supporting talent and resources are also considered, including how they can adapt into the team over the long term.

What are your plans this summer for rest and relaxation?

For me, rest and relaxation comes from spending time with my family. My family loves to hike and we typically plan various mountain excursions throughout the summer. Venturing into the backwoods and enjoying God’s creation has always has been relaxing for me, and it’s a great way for my family to unplug from today’s world and spend quality time with each other without all the technology and distractions. It’s good exercise too!

Al Barkouli, Ph.D., P.E.
Chairman and CEO
David Evans and Associates
Portland, OR


How has DEA’s performance fared so far in 2018?

Our fiscal year starts in November, so we recently finished the first half of 2018. We are seeing very robust, organic growth and our overall performance is better than last year.

Given tight labor markets for A/E professionals, have you had to change your approach to hiring and retaining talent?

Our first priority is to retain our talent. We give close attention to retention factors such as employee appreciation/recognition and sharing news of the firm’s performance and projections. As we grow, there are new opportunities for our people to develop their careers and make a difference. On the hiring side, we recently implemented an employee referral program to encourage employees to recruit for us. Hiring has been challenging, but our in-house recruiting team has done a fantastic job of finding talent.

DEA works in various markets from transportation to energy to land development across offices nationally. Where have you seen the most promising opportunities for growth?

Geographically, all of the markets in the western U.S. are hot. For DEA, the greatest opportunities are in the transportation market.

DEA has acquired several engineering firms over the last 5 years as a means of strategic growth. What do you typically look for in target firms?

The number one factor for us is cultural fit. We believe that cultural fit is essential to subsequent integration and a merger’s success. We begin by assessing whether the outlook of a firm’s top leadership aligns with our values and core ideology. After that, we look for a strategic fit and how a firm fits into our overall strategy.

You have been with DEA since 1988. What advice would you give young engineering professionals starting their careers today?

Think about how you can make a positive difference from day one. When you do something that you are passionate about, it will help you enjoy life.

What’s on your summer reading list?

I am reading Playing to Win, How Strategy Really Worksby A.G. Lafley and Roger L. Martin in preparation for our company’s strategic planning session.

Chad Surprenant, P.E.
President & CEO
Mankato, MN


How has ISG’s performance fared so far in 2018? 

To date, 2018 is shaping up to be a fantastic year for ISG.  We are up approximately 27% in revenue from 2017 year on year to date.  In general, the markets we serve are trending positively.  Being busy, I think we lost a little focus and tried to stretch a little on some proposal work early in the year.  We could have fared better in that timeframe, but a market leader retreat helped right that before any pain was felt, and we are back on a nice winning streak.

Given tight labor markets for A/E professionals, have you had to change your approach to hiring and retaining talent? 

We are constantly changing and evolving our hiring.  We have developed a very attractive firm, strong culture, and invested heavily in marketing and talent to tell our story better through multiple means; personal, social media, and videography to name a few.  It is working. Our Talent Engagement team has a marketing background, and from that we focus heavily on staff referrals and building personal relationships.  Our Human Resources group is somewhat separate from Talent Engagement.  The Human Resources team maintains competitive benefits and other employee welfare focus.

As a multidiscipline firm working across many services and markets, where have you seen the most promising opportunities for growth? 

ISG is located in the upper Midwest, but we perform work nationwide.  As a true multidiscipline firm serving many markets, we believe it is very important to understand our geography’s core economy. From there, we provide service to those markets which keep that economic engine humming, such as food & beverage, industry, K-12 education, and agricultural drainage and then the markets that are needed (public works, civic/culture, residential, etc.) to support those primary economies.  Fortunately, our core economy is generally food and agriculture based, and those are always necessary.

ISG is 100% employee-owned through an ESOP. How has that been a competitive advantage? 

The ESOP culture is one that we had prior to becoming one, so the transition has been very easy.  Being an ESOP, and wanting to communicate its virtue has been focal in our communications with current staff, prospective employees, and acquisition targets.  In all three of those camps, it has been advantageous; current staff have great pride in what they have grown and want to stay to see where it goes, prospective employees see it as a very real retirement plan option, and acquisition targets recognize that they are going from one ownership position to another.  We have been told that becoming an ESOP will amplify the current culture you have, and we believe that to be true.

You have made select acquisitions of architecture and engineering firms as means of growth? What do you typically look for in target firms? 

Since our first acquisition in 2012, only 25% of our growth in staff has been through acquisition.  The primary factors we look at when considering an acquisition are; geography, specialty service, strength of clients, and strength of staff.  We function as a single profit center firm with a decent sized geographical footprint.  For example, if we are considering a firm who has a specialty service and a geographic-centric business model, we know that we can take their specialty expertise out to the market over a considerably larger footprint which allows us to increase their business line while being more selective in choosing the client and thus more profitable than the acquisition target was before.  Just recently, we executed our first acquisition with the primary intent of human resources.  The acquisition target was a subconsultant service provider, and with ISG being a multidiscipline firm, we knew we would likely not retain their client base, but we wanted the people. Most of our growth is organic, and expansion geographically and/or acquisition is often to provide aspirational opportunities for our emerging leaders.

What are your plans this summer for rest and relaxation?

I coach my youngest son’s 13 year old travel baseball team.  We are in the midst of weekend tournaments now, but our state tournaments will be over in late July.  Hopefully, we can work in a few long weekends here and there.  Another local business person and I bought a Northwoods League Baseball Team, the Mankato MoonDogs.  We have been watching several of those games at our recently renovated, ISG designed, ballpark, but would love to catch more games on the road.

Jared Loos, P.E., AIA
Philadelphia, PA


How has EwingCole’s performance fared so far in 2018?

We have experienced a great first half of 2018 and are extremely busy and have been growing in almost every office location and market.  We are experiencing our second year in a row of double-digit growth.  We continue to see excellent project opportunities and expect to remain busy well into 2019.

Given tight labor markets for A/E professionals, have you had to change your approach to hiring and retaining talent?

We have implemented several new methods for identifying new candidates and some have proven to be very effective.  Our retention strategies continue to evolve; however, we historically maintain very good retention metrics.  We have always placed a high value on professional development and employee benefits. We have expanded our human resources team and continue to evolve this to meet the expectations of the newer (younger) workforce.

As a multi-studio design organization working across offices nationally, where have you seen the most promising opportunities for growth?

For EwingCole, we see the most growth opportunities in the southern and western US. Nationally, our most significant growth is in the Science and Technology market, although we have also seen regional growth in our other core sectors such as Healthcare and Academics.  We are continually assessing these opportunities; however, it comes down to servicing our national clients in the locations and the industries they require.

What are the biggest concerns your clients face today?

This varies widely by market sector and by client.  One consistent theme is prioritizing needs, so they make the right long-term decisions for their facilities while limiting upfront expenditures. This decision-making process can be somewhat paralyzing for some organizations.

How can the architecture profession better convey its value in terms of differentiation, acumen and fees?

First, I think as an industry, we need to exercise a bit more self-control and discipline.  We are all too quick to adjust fees, or pursue opportunities with selection processes that may not be in our overall best interest.  We have seen that turning down certain opportunities has focused the attention of some of our clients in a positive way.  It also creates an opening for a candid dialogue of where we can provide the most value.  It’s simpler than anyone wants to make it.  Find clients who value quality of service – and then provide it – consistently.

What are your plans this summer for rest and relaxation?

We just returned from a two-week family trip to Italy, so our big adventure for 2018 is behind us, although we had a wonderful time and the kids got quite an education.   For the rest of the summer we will make as many long weekend trips down the Chesapeake Bay as we can.  We like to visit St. Michael’s, Rock Hall, and Annapolis by boat and unplug from emails, iPads, Xboxes, and any other intelligence draining electronic device.

Chris Solomon, PLS
President & CEO
Austin, TX


How has SAM’s performance fared so far in 2018?

I am pleased to note that our performance to date is very positive. We have surpassed our revenue plan for the first half of the year by 10% and compared to the same period in 2017, we experienced year-over-year growth by 30%. Our strong performance is driven by the development and expansion of our core end markets.  We currently have the best balance of market diversification in the company’s history.  We remain optimistic we will meet or exceed our 2018 revenue goals and continue to see strengthening of the business through the successful execution of our strategic initiatives.

Given tight labor markets for surveying and engineering professionals, have you had to change your approach to hiring and retaining talent?

The unemployment rate has been low for quite some time, so we have had to get creative and explore new ways to attract and build our talent pipeline.  Our social media campaign allows us to share our company’s culture, core values and branding to prospective candidates. Through this initiative, our employees are more engaged, and we continue to build brand ambassadors internally, while gaining brand recognition, externally. We have also implemented new programs such as SAM’s Veteran Hiring Program, to share our career opportunities with Veterans who are transitioning to civilian roles.  We expanded our University Relations & Internship program, along with our high school STEM initiative; giving the next generation of engineering and surveying professionals the opportunity to explore jobs and roles within our firm and industry.

Our people are what make us successful, so it is important to retain them by continuing to provide best-in-class benefit programs and more importantly, opportunities to grow in their careers.  This year, we invested in our learning and development program by hiring an L&D Manager whose primary focus is to build internal training programs so that employees develop the necessary skills and competencies needed to be successful in the career paths they wish to pursue.

As a multidiscipline organization working across various client sectors and offices nationally, where have you seen the most promising opportunities for growth?

In late 2016, we acquired So-Deep, Inc. to advance our east coast expansion as part of our three-year strategic plan.  This move provided an extended service offering (SUE), geographic footprint and client base; through which we have been able to leverage our complete suite of services in this region.  Last month we acquired Nobles Consulting Group, Inc. (NCG).  The acquisition of talent and service capability across both of these organizations is unparalleled, and is allowing us the opportunity to meet our clients’ needs like never before.

New technologies have radically changed surveying tools and techniques over the last 5 years. How does SAM stay on the forefront of these developments?

Providing best-in-class deliverables as efficiently as possible to our clients is one of the keys to our success, and staying on the forefront of technology advancements is central in achieving this.  We also believe that putting the most advanced tools in the hands of our employees enables them to find more efficient ways of performing their tasks, and the approach also fosters a higher level of employee engagement.  We continually work to build deep relationships with technology providers in our industry in order to try and understand what the next generation of technology might look like and when it will be available. We also attend industry and technology related conferences and perform large amounts of research to understand what new advancements are being developed and how we can best implement them. Additionally, we have a group of great employees in our Applied Technology Department who work and partner with the rest of the company to find, develop, and deploy the latest in hardware and software solutions along with improved workflows in order to maintain our position as a technology leader in our industry.

You mentioned your acquisition of NGC, a surveying and mapping firm in Florida – how does their team help advance SAM’s strategic expansion goals?

We are very excited about the career and business opportunities this relationship brings for both the NCG and SAM Teams. NCG’s reputation in the Southeast is second to none, and Allen Nobles’ investment in industry education, staff, and technology has set the bar high. NCG’s team is well- respected and considered by the land surveying profession to be one of the best in the State of Florida. Their great reputation will be leveraged to deliver our full suite of services to their existing client base, and expand our geographical presence through the many untapped and under-marketed clients/opportunities that exist in the Southeast.  Both firms share similar core values and cultures, and we look forward to what the future holds for the team.

What are your plans this summer for rest and relaxation?

We live in Austin, Texas, and due to its exponential growth, the city is a fast- paced environment which can be exhausting at times. My family and I love escaping to the Hill Country in Texas; things move at a much slower pace which is very refreshing.  My rest and relaxation comes in the form of working on our ranch in the Hill Country. There is always grass to mow, weeds to spray and wildlife feeders to maintain. I grew up in the Midwestern U.S. working on my uncle’s grain and livestock farming operations and was able to see, first-hand, the fruits of my labor.

One of the main drivers for me entering the Land Surveying profession was that I enjoy being outside and spending time on our ranch allows me to share the love for the outdoors with my wife and three daughters. Our girls’ favorite part of the ranch is taking photographs of the wildlife and feeding the cattle. In today’s demanding business environment work-life balance is very important, and our time at the ranch helps me stay centered and focused. Early mornings on the porch allow me to enjoy a cup of coffee and reflect on the current business challenges, ways to continue strategically advancing the business, and introspecting for opportunities for personal development.


November 7-9, 2018
Ritz-Carlton Golf Resort
Naples, Florida
Click here for more details and to register.

Get Your Firm ‘Sale Ready,’ Even If It’s NOT for Sale

You’ve decided to sell your house, so you fixed that broken screen door, pruned the hedges and cut the lawn. Why do those things now? Because you want to show your house in the best possible light to potential buyers to maximize its sales price. You’ve “gotten your house in order.”

Like selling a house, to effect a successful sale of your firm, you need to get that house in order, too. You want to present your firm in the best possible light to all potential buyers—external or internal—to maximize the gain from selling what you’ve painstakingly built. Although beauty is in the eye of the beholder (the buyer, in this case), and no two buyers are exactly alike, the following are five common areas of interest to buyers in which to get your house in order.

  1. Solid Operational History

Attractive acquisition targets have a reliable and consistent history of increasing sales, revenue and profitability. This scalability is the mark of effective firm leadership and a well-run business. Buyers like to know that, once acquired, the firm and its management team will continue to drive growth, cash flow and operational excellence. After all, the buyer needs a return on his or her investment, and past performance can be an indicator of future performance.

  1. Complete, Well-Organized Company Records

In the due-diligence process, a buyer will ask to see many records, including financial statements, corporate governance documents, legal contracts, employment agreements, insurance documents, employee manuals and shareholder agreements. Missing, incomplete, incorrect and contradictory records make it difficult for a buyer to understand your business, which creates unnecessary risk. In this case, they will likely move on to another acquisition target, as they have limited time and many other targets to evaluate.

  1. Realistic Expectations

Before beginning the formal sales process, you must have a realistic expectation of the value of your firm, because a potential buyer will not invest the money or time to evaluate your firm for acquisition unless they believe you’re willing and able to negotiate a fair price at closing.

If you believe your business to be worth $10 million, and the market believes it to be worth $5 million, the sales process will go nowhere fast. A business valuation performed by an experienced valuation expert is a small but strategic investment to keep that scenario from happening. Not only will you get an un-biased idea of the market value of your firm from which you can base negotiations of sales price, but you also get feedback on how you can make your firm more valuable.

  1. Strong, Reliable Processes

Processes that drive client acquisition and retention, mitigate project risk, create accountability and produce reliable financial data are key to scalability, longevity and profitability—the hallmarks of valuable professional service firms. If your processes are too dependent on you as the owner, that limits scalability, longevity and profitability in the long term. To increase the marketability and value of your firm, run it so it can run without you.

  1. Clean Financial Statements

A savvy buyer (the kind you want) will be well-versed in reading financial statements. They will be looking for key components from which they can derive and apply metrics to determine the value of your firm. Financial statements that are well organized, prepared using the appropriate GAAP accounting methods, and conform to industry norms make the buyer’s due diligence process easier and faster. Conversely, messy financial statements are difficult to work with and can be indicative of problems in other areas. If you’re not sure if your financial statements are up to par, ask your CPA for help. Or, better yet, have your financials compiled, reviewed or audited, depending on your situation and budget.

Excellence in these five areas makes your firm more valuable to a potential buyer, whether that buyer is external or internal. When you think about it, the things that make a firm valuable to a buyer also make it valuable to the owner. The time and effort invested in getting your firm’s house in order for a sale will pay big dividends, whether you decide to sell the firm or retain ownership.

Join Carl in Dallas on May 8th or in Las Vegas on September 19th for our one-day Ownership Transition Strategies Seminars: http://rog-partners.com/events/seminars-events/.

Why Are Firms Valued Lower When Selling Internally Versus Externally?

I’ve spoken with countless, exasperated A/E firm owners over the years who’ve asked me why their firm’s internal valuation doesn’t reflect a number similar to what they believe they can reasonably expect from an external sale. Most, but not all of the time, they’re first generation owners who are not sure why they’re expected to sell shares internally at a discount to what they might receive on a pro rata basis if their company were to sell to an outside acquirer.

Understanding the various levels of value can go a long way in helping guide expectations for firm owners and potential owners alike, and in this perspective, I’ll provide a fundamental explanation of each level of value with the hope of demystifying some common misconceptions.


A firm’s valuation will vary significantly based on the level of the interest being valued. The differences in levels reflect the risk of achieving two things: expected cash flows and expected growth.

Starting with the highest level of value – control – a controlling interest stake affords its ownership the right to exert control over key business decisions that it believes will allow it to improve earnings and increase growth prospects. As such, there is a premium associated with what an acquirer believes it will be able to generate in terms of future cash flows and top-line growth that is represented in a control premium paid to gain those future benefits. When AECOM acquired URS in 2014, it paid $56.31 per share, a number that represented a 19% premium over the trailing 30-day average closing URS share price. This premium was what AECOM paid to gain control of URS.

The level immediately below control is marketable minority, which is the most straightforward level of value. When you purchase shares of AECOM, you become a minority shareholder of AECOM; those shares are unrestricted, which means that you have the ability to monetize those shares quickly at a marginal cost in an open market with multiple buyers and sellers. What you don’t have as a minority interest owner, however, is the ability to make any business decisions on behalf of AECOM. This lack of influence over a Company’s decision-making process is reflected in the discount for lack of control (“DLOC”). We often see DLOCs in the range of ~10% to ~30% with our clients.

But the level of interest relevant for almost all privately-held companies, especially those that have an internal market for shares – the non-marketable minority interest – dictates that yet one more discount be considered. Unlike your shares in AECOM, owners of non-marketable minority interests aren’t able to quickly convert their shares to cash without risking a significant loss in value. Publicly-traded stocks aren’t subject to this holding-period risk, while privately-held company shares are, since there is no readily available market in which shares can be transacted. Additionally, a blockage discount is a byproduct of the illiquidity associated with this level of interest. This discount may further decrease value based on whether the block of shares being transacted is so great that in order for a timely transaction to occur, the price of the shares must be discounted.

These inherent restrictions associated with a privately-held ownership interest dictate that there be a discount to reflect the illiquid nature of such an interest. This discount is known as the discount for lack of marketability (“DLOM”). DLOMs for firms (non-ESOP) we work with are generally between ~20% to ~40%.


Final Thoughts

While the basic tenets of the various levels of value apply to almost all firms, there are two types of firms I encounter regularly for which additional consideration and planning are required to ensure successful transitions, internally or externally. The first type are the firms who buck industry performance trends…in a good way, that is. Regardless of what’s occurring in local, national or global economies, their profit margins are consistently high during a downturn and even higher when the economy is booming. These firms usually see a smaller gap between what they might transact at internally versus what they might command in an external acquisition.

The other type of firm is one that relies on a material portion of its revenues from set-aside contracts. These firms, regardless of whether they’re performing below, at, or above industry medians, can quite often trade at a higher price internally than they could reasonably expect to get from an acquirer.

There is no “one size fits all” approach to determining and applying discounts or premiums. Although all shareholders benefit from the various perquisites of ownership, the extent of such benefits can vary widely, especially based on what level of value best represents their ownership interest.

Is now the time to sell your firm?

I remember when the US economy declined and M&A activity slowed in December 2007. It was easy to conclude, after years of robust design and construction activity, that we were no longer in a sellers’ market as the buyers of A/E firms were dictating transaction terms and considerations.  What stood out to me during that time was that the acquiring firms spent more time and due diligence on revenue visibility because a payback on their investment became less certain.  A lot has changed since then.  As we start our annual valuation updates with our A/E clients, I see more firms with increasing confidence in the future outlook for their services, but there is also a talent war that is making it difficult for firms to meet future growth plans.  As a result, ROG is engaging with more firms interested in acquiring A/E firms to fill that talent gap.  Is this the sign for a seller’s market?

Setting aside politics, 2017 began with promise as the Trump administration focused its attention on the US economy by reducing the regulatory environment and promising a corporate tax cut with the latter becoming a reality on December 22, 2017.  Key economic statistics are leading us to believe that 2018 could be another year of growth.  The Architecture Billings Index for January 2018 came in at 54.7, which is the highest level at the start of a year in more than a decade; the Dow Jones Industrial Average increased 24.3% in 2017; the S&P 500 increased 18.4% and; confidence from consumers and small business owners are at highs that we have not seen since the early 2000s.

Timing the market to maximize the value of the sale of your A/E firm can be risky.  The best time to sell is when your near-term growth is strong, and any indication of slowing growth in the long-term is not clearly visible.  We are at a stage in which companies are seeing great growth opportunities, but the access to talent is limited as the good ones are already working.  Does this mean that the cost of acquiring talented employees is about to get too expensive?  Would it be more economical to acquire a firm full of talented employees?  As firms look to fill areas of voids within disciplines, market sectors, or geographic regions it may just be a better opportunity to move quicker by acquiring a firm.

The tax cut is on your side.  The Tax Cut and Jobs Acts lowered corporate tax rates from 35% to 21%, or as I would put it, reduced the tariff of producing goods and services in the US – regardless of where it is consumed.  This means that not only US-based companies would be interested in investing in the US, but also foreign companies because the tariff has been reduced for hiring US-based employees.  The pent-up demand for infrastructure spending, increasing manufacturing investment, and the residential housing shortage are all leading to more upside potential than downside risk in revenue visibility. With valuations being very strong, using your company stock as currency is more attractive because the dilution to your ownership is smaller and the lower tax rate has effectively reduced the cost of using equity securities by 40% (21%/35%).

There are some potential headwinds.  Just as I am writing this article, Jerome Powell, the new chairman of the Federal Reserve, indicated that rate hikes will be needed to keep inflation at a 2% target. Currently, inflation is at 1.8%.  As interest rates climb, your valuation is likely to decrease.  On average, the S&P 500 price to earnings ratio (“P/E”) is around 14 to 16 times.  Today the P/E ratio is 25.7x, which is being driven by growth potential and a low-interest rate environment.  It is not unusual for P/E multiples to fall to single digits when inflation takes hold. With a talent war for qualified design professionals, companies increasing wages and paying out bonuses, the signs of inflationary pressures are a reality.

Even if you’re not ready to sell, taking some chips off the table and taking some of your transaction consideration in stock of the acquiring firm may allow you to enjoy the benefits of today’s higher valuation and still capture the upside potential with your new firm.


The Tax Cuts and Jobs Act and Your Firm’s Value

On December 22nd, the Tax Cuts and Jobs Act (TCJA) was officially signed into law.  Among the sweeping changes were substantial reductions in the corporate tax rate from a top marginal rate of 35%, to a flat 21%, along with an elimination of the corporate alternative minimum tax (AMT).  This time last year we theorized about what a potential corporate tax rate cut might mean for company valuations.  But now theory has become reality, with major implications for A/E firms across the U.S.

At the simplest level, profitable firms could see an increase in after-tax earnings of approximately 22%. The tables below illustrate the change in effective combined federal and state corporate tax rates for hypothetical firms in Iowa (one of highest corporate tax states), and in Wyoming (a state with no corporate income tax).

Estimated Combined Corporate Income Tax Rate Prior to TCJA

Estimated Combined Corporate Income Tax Rate After TCJA

Note that the above analysis assumes a C-corporation tax structure. The effective tax analysis for pass-through tax entities, including S-corporations and LLCs is much more complex, and will be the subject of a future Perspective.

All other things being equal, increased after-tax earnings would naturally lead to a commensurate increase in enterprise value (the value of a firm before consideration of its debt and cash balances), but business valuation is a bit more complex, and other factors, such as cost of capital, public company valuation multiples, and longer term economic trends must be considered.

With respect to the cost of capital, the TCJA puts limitations on the deductibility of interest expense. However, given that the typical firm in the A/E industry is lightly leveraged, this is unlikely to be a factor in most cases. The larger consideration will be whether baseline interest rates will increase in 2018, and by how much. In the latest meeting of the Federal Reserve’s Open Market Committee, the target range for the federal funds rate was increased by 0.25%. Inflationary concerns could spur further interest rate hikes in 2018, with the ultimate effect being a higher cost of capital, slightly offsetting the impact of increased earnings on company values.

As it relates to publicly traded firms, the perfect market theory would suggest that the cash flow impact of the TCJA is already accounted for in current market pricing. This seems to be supported by the broad expansion of the U.S. stock market over the past year. The Dow Jones Industrial Average has increased from 18,259 on November 7th, 2016 (immediately prior to the election), to 24,754 on December 22nd, (the date of the tax bill signing), which equates to an increase of 35.6%. Given that estimates for the Dow’s earnings per share for 2018 over 2017 suggest growth of only 11%, the market is clearly counting on significant incremental earnings benefits from the TCJA.

With respect to the narrower sector of publicly traded companies in the A/E industry, as the chart below indicates, these firms also saw stock price growth over the last year, with much of it coming in the final quarter of the year, which corresponds with the negotiation and eventual passage of the TCJA. The firms shown below include Tetra Tech (TTEK), AECOM (ACM), Stantec (STN), Jacobs Engineering (JEC) and NV5 Global (NVEE). We note that these firms have varying concentrations of earnings in the U.S., and therefore some will benefit more than others from a lower U.S. corporate tax rate.

AEC Publicly Traded Companies Share Price Trends


The impact of longer term operational and economic trends is more difficult to gauge. Some lingering questions include:

  • Will the tax cuts spur an increase in economic growth as intended?
  • Will further economic growth, combined with already low unemployment rates put significant upward pressure on wages (and downward pressure on operating profits)?
  • If the next big legislative initiative is infrastructure, how will this impact A/E firm outlooks?

So in short, most firms should expect a material positive impact on their fair market value as a result of the TCJA. If you establish your firm’s value through the use of a professional business appraiser, he or she should be accounting for the impact of TCJA. If you are using another method to establish your firm’s value, such as a simple formula, this might be good time to re-assess that formula.

Five Takeaways on 2017 A/E M&A Activity

With the country in transition settling into the dynamics and drama of a new administration, the underlying positive momentum of both the U.S. economy and A/E industry has certainly been significant. At a macro level, we’ve seen this unfold with a soaring stock market, back-to-back quarters of 3%+ GDP growth and a plunging unemployment rate. And while unleashing a major U.S. infrastructure package was not in the political cards this year, A/E executives seemed not to notice. Backlogs are up across major client sectors, hiring needs are as acute as ever, recent setbacks in oil & gas and mining activity have abated, spending on capital equipment and software has risen, and A/E consolidation rolls along. As validation, new private equity investment into a number of the industry’s most recognizable and blue-chip A/E and environmental organizations was evident.

With better visibility, at least in the short-run, growth-oriented leaders have ramped up their M&A pursuits while potential sellers have felt increasing emboldened, highlighting their healthier financial performance and overall sanguine outlook. By our research, the number of 2017 North American A/E and environmental consulting transactions will finish the year generally flat from 2016 levels. However, we feel the size and scale of activity are poised to break out in 2018, primarily driven by a massive generation of Baby Boomer owners still woefully unprepared to successfully transition their firms and unlock value for themselves.

Key A/E M&A takeaways include the following:

1. The CH2M-Jacobs merger solidifies a new global echelon of players – Many were stunned in August to hear that two of the industry’s largest and iconic names had joined forces in a $2.8 billion merger with 75,000 employees worldwide. But in fact, this combination just reinforces the incarnation of an elite number of multi-disciplined organizations, working seamlessly across markets and borders. If I had told you four years ago that CH2M, URS, AMEC, MWH Global and Atkins would all be absorbed by other global consolidators, I imagine most would have never believed it. Understandably, these tie-ups have now created deeper conversations in the boardrooms and executive suites of other sizable consulting firms. Will others be able to “go it alone” given their own size, strategic, succession and ownership/capital limitations?

2. Confidence fuels deal making – The two most critical elements needed to spur M&A activity are healthy balance sheets and executive confidence, and our industry has both today. The ACEC Engineering Business Index just reported its largest-ever quarterly increase, the AIA Billings Index has been elevated all year due to strength in inquiries and new design contracts, and the NFIB Index of Small Business Optimism remains high given owner expectations of stronger revenue, regulatory relief and expansion needs. With recruiting challenges everywhere as a limiting factor to growth, the “buy vs. build” calculus has shifted. CEOs have increasingly added synergistic acquisitions as an integral part of 2018 business plans.

3. But prosperity breeds complacency – Sadly, good times don’t last forever. While we’re currently experiencing a period of optimism and good fortunes, industry leaders need to be on alert for warning signs on the horizon. The Fed is set to raise interest rates. Markets are overheating in certain sectors (commercial, office, multifamily and lodging construction across numerous cities). More states faced mid-year revenue shortfalls in the last fiscal year than in any year since 2010. Higher wages needed to attract and retain architects and engineers risk profit margins unless productivity and utilization levels can be increased. Many owners kick the can down the road on succession planning and exit strategy thinking for another time as flush bonuses and distributions paralyze decision making.

In the context of M&A activity, buyer complacency emerges in lacking the proper valuation, due diligence, risk assessment and integration discipline. Elements of mature cycle M&A engagement often include assessing “hockey stick” financial results of targets over the last 12-18 months (is it sustainable or representative?), the increased desire of earnouts to mitigate downside risks, and contemplating future cost savings or staff redundancies should a target firm’s results suddenly decline.

4. M&A convergence of A/E professional services with technological assets – As our industry enters the 21st century, rapid scientific and technical advancements are creating exciting and revolutionary design changes in buildings, ITS/highways, power grids, energy systems, data centers and telecommunication networks, to name a few. As a result, we are witnessing an intersection of traditional A/E firms acquiring companies with unique hardware, software and product-related synergies. Great examples this year included targets specializing in: 1) data analytics for utilities; 2) water infrastructure software and modeling; 3) EHS enterprise technology and IT services; 4) advanced control systems for smart cities and industrial automation; and 5) geospatial firms with proprietary GIS/mapping software and unmanned aircraft systems.

5. The taxman cometh – While the new tax bill still has to be reconciled and finalized, to say that architecture and engineering leaders are disappointed with the changes coming out of Washington would be an understatement. Pass-through S-Corporations, which comprise the majority of A/E firms, would be excluded from lower rates compared to other businesses. We are already seeing owners crunch the numbers and assess their options, including taking a serious look at C-Corporation conversion, particularly if their firms might lose Section 199/DPAD deductions and are negatively impacted (personally) by reduced state and local tax (SALT) deductions.

Dave Sullivan, National A/E Tax and Advisory Partner at the Boston-based firm DiCicco, Gulman & Company does not see a negative impact on future M&A activity with this proposed law. However, he also does not see anything that would necessarily accelerate it. For sellers, capital gain rate changes are not on the table, and although there is limited clarity on where ordinary income rates will ultimately fall, they do not appear to be rising. For acquirers purchasing assets, there may be accelerated deductions available that would create additional cash flow during the post-transaction period. We’ll have to see where the dust settles with all of this heading into next year.

At ROG + Partners, we possess strong relationships and years of experience navigating A/E and environmental buyers and sellers through the M&A process and towards winning combinations. Whether you are seeking to grow through acquisitions or by evaluating your firm’s strategic and ownership alternatives, please contact us as to how we can help your organization.

We are pleased to have assisted our clients with the following recent M&A transactions – http://rog-partners.com/transactions-2/.

On a final note, Season’s Greetings and a happy, healthy and prosperous New Year from all of us here at ROG + Partners!

When those aging baby boomers just won’t retire

“When Alan turned 60, he announced his intent to retire at age 65.  That was ten years ago.”

Alan co-founded a successful consulting engineering firm when he was in his 30’s. Over the years the practice grew steadily, adding new staff, offices, and owners along the way. When Alan turned 60, he announced his intent to retire at age 65. That was ten years ago.  Now, at age 70, he still enjoys his work, and while he’s cut back on hours, business travel, and administrative duties, he still manages a significant portfolio of business. The last time someone asked when he planned to retire, he answered (tongue firmly planted in cheek), “the day after I die at my desk.”

Of course, Alan is a fictional character, but I would wager that many of our readers have one or more Alans in their firms, and may be wrestling with the challenge of how to accommodate such seasoned professionals who are both able and willing to continue in full-time employment while maintaining upward mobility for more junior staff.

Demographic Trends

An interesting demographic trend over the last decade is the aging of the working population, both in the U.S. and globally.  According to the Pew Research Center, the population of people age 65 and older has been increasing both in numbers, and as a percentage of the total population since 1950, and this trend is projected to continue through 2050. Furthermore, the rate of participation in the workforce of those age 65 and older has been on the rise since 2007.

U.S. Population by Age range – Historical & Projected

Source: Pew Research Center

Source: Pew Research Center

When you combine the aging workforce trend illustrated above with the emergence of the Millennial generation, which is projected to dominate the workforce for the next thirty years, you get some painful pressure points. These can include:

  1. Upward mobility traffic jams:

Boomers postponing retirements AND being unwilling to hand over the reins of management can create real tension in an organization—potentially driving off the top talent below them. The best leaders recognize when it’s time to step back from their senior management roles to create that opportunity for advancement. And the best of the best will do so early enough that their successors will have a sufficient term to achieve their own vision for the firm.

  1. The inability to accurately budget for stock redemption obligations:

If Alan can’t tell us when he plans to retire, how are we supposed to budget for his stock redemption? That kind of financial uncertainty is enough to drive a CFO crazy. The problem can be particularly acute if Alan is still a significant or even a majority shareholder.  In response, we are seeing more firms incorporate mandatory divestment clauses into their governing shareholder agreements. In this way, a valued principal like Alan can continue to be employed, even as his shares are repurchased.

  1. The inability to adequately compensate (and thereby retain) top talent:

There’s no doubt that this is the most competitive marketplace for talent that the A/E industry has witnessed since before the 2008 recession. The best employees expect to be compensated appropriately, and the younger generations have shown themselves to be less patient than earlier generations, and less inclined to “put in their time” or “pay their dues.” Ownership remains one of the most effective ways to retain key staff and provide them with the opportunity to build real wealth for themselves through stock appreciation and profit distributions. But this requires older shareholders to be willing to part with their stock, and at a fair price.

Dealing with these challenges often comes down to the question of price.  Companies that price their stock too conservatively often create a situation where shareholders nearing retirement cannot be compelled to sell because the profit distributions are simply too great, relative to the share price, to give up.  On the other hand, companies that price their stock too high will find it difficult to convince new owners to invest.

The Opportunity

Ultimately, the challenge of the aging boomers (and the up and coming millennials) may also represent an opportunity for firms to rethink roles and responsibilities, and how ownership relates to both. Stock divestment does not have to mean retirement, nor does relinquishing leadership roles, although both are necessary for ensuring the Company’s longevity. At the same time, finding new roles for those boomers that just aren’t ready to retire can be the key to preserving and transferring the wealth of technical knowledge and experience they represent.

2017 ROG Growth & Ownership Strategies Conference

If the subject of generational challenges in the A/E workplace, attracting and retaining top talent, and ownership transition planning are of interest to you, you’ll want to be sure to attend our annual Growth & Ownership Strategies Conference November 8th to 10th at the beautiful Ritz Carlton in Naples, Florida.  This conference is the only one of its kind designed for A/E and environmental consulting firm leaders interested in the creation of real and sustainable value in their organizations.  To learn more go to: conference.rog-partners.com.

Mitigating Taxes While Achieving Your Strategic Ownership Goals

In my experience, the top three reasons why A/E firms implement employee stock ownership plans (ESOPs) are taxes, taxes, and taxes. However, while mitigating taxes is an important element, a good ownership plan should be driven by a firm’s strategic plan and its long-term goals. An ownership plan that is exclusively focused on mitigating or eliminating taxes will rarely help a firm address its strategic goals. Strategic ownership goals might include aligning ownership with leadership, making the investment process affordable to new owners, and ensuring that the stock produces a healthy return on investment for all owners. The tax consequences of an ownership plan should be considered in the context of how they impact the firm’s ability to achieve its strategic ownership goals.

ESOPs have long been considered the panacea of tax efficiency when it comes to ownership transition, but not every firm is a good candidate for ESOP ownership, particularly if it does not address the firm’s strategic ownership goals. A few years ago, I stumbled upon an idea of creating an ownership model that has economic benefits similar to those of an ESOP, but is not as costly as an ESOP (implementation and operating) and does not require ownership to be shared with all employees. This ownership model uses common and synthetic securities with the former being valued at adjusted book value and latter having value that is similar to the goodwill value of the firm. On a combined basis, the value of these two securities will be similar to the fair market value of the company. The tax benefits of this plan can be significant – especially if your firm is very profitable. The key difference is that a shareholder will buy their shares and earn their synthetic equity.

The table below demonstrates four ownership transition scenarios and a comparison of the required cash flow to redeem the same volume shares under each scenario. These are actual metrics of a client. In the example, the company’s book value is $3.94 million, its fair market value is $10.00 million and the assumed tax rate is 40%. We have compared the economic benefit of redeeming $10.00 million of value using a direct ownership model, a 100% ESOP ownership model, a 30% ESOP ownership model, and a SRP (Supplemental Retirement Plan) model, which uses both common and synthetic equity.


The cost of redeeming $10.00 million in stock under the direct ownership model is $16.67 million, because the company has to generate enough profits to pay taxes so that it has $10 million left over to redeem the shares (net income/[1-tax rate]). Under a 100% ESOP model, the company would only have to generate $10 million in profits because at 100% ESOP ownership the company becomes a tax-free entity and is not subject to corporate taxes (the company is a subchapter S corporation). This savings significantly enhances the overall liquidity of the shares because of the tax efficiencies, which is why we have seen so many firms consider a 100% ESOP ownership model.

Under a 30% ESOP model, the company would have to generate $13.89 million in profits, paying taxes of $3.89 million in order to have $10 million remaining to redeem the shares. This explains why many firms adopt the partial ESOP ownership model. While the benefits are not as great as the 100% ESOP, is still represents significant tax savings over the direct ownership model.

Now let’s consider the SRP model. Assuming the shares are redeemed at book value and SRP units are redeemed at the difference between $10 million and $3.94 million ($6.57 million), the total cash flow required is $12.63 million. This is lower than the Direct and 30% ESOP models because the SRP units are tax deductible to the company (this security instrument takes on similar features to a deferred compensation plan). Additionally, the SRP model has some key benefits that go beyond the tax benefits described above. For example, creating an attractive return on investment is now easier because lower cash flow is required to yield greater returns. In this example, the company pays a 15% dividend on its common stock. At book value, the total dividend paid is $591,000. This makes the investment in common equity extremely attractive. Since the SRP component of this model can be a significant portion of the overall value to a shareholder, it is advisable that the SRP units vest over a long-period of time. This encourages long-term commitment on the part of the shareholders.

I will be presenting this ownership model in Los Angeles at a one-day Ownership Transition Strategies Seminar on September 19th and at our Growth & Ownership Conference in Naples this November. If you wish to understand how this SRP model can allow you to mitigate the tax consequences of ownership transition, while helping achieve your firm’s long-term goals, feel free to contact me.

2017 Mid-Year Executive Outlook

Summer is finally here and that means it’s once again time to reflect how industry conditions and firm prospects are unfolding with our Mid-Year Outlook. For this year’s piece we have focused our attention on niche and specialized firms run by first generation founders. Given that 95% of the A/E industry is comprised of firms with less than 50 employees, these owners offer unique insights for their success as well as challenges. They shared with us how their firm’s size is a competitive advantage, advice for those thinking of starting their own firm, and what their summer plans are to unwind.

Jeff Cowan, Principal, Cowan Group Engineering, LLC, Oklahoma City, OK

Tell me about Cowan Group Engineering’s capabilities and markets. How many staff members do you currently have?

Cowan Group Engineering (CGE) is a general civil engineering firm providing professional services for water resources, transportation, contract city engineering services, drainage, land planning/development and land surveying. Our market is located across Oklahoma and our client base includes local and state governments, along with private organizations. Currently, we have 22 staff members and looking to add more in the next two quarters.

How has your performance fared so far in 2017?

We’ve been on track this year, meeting our 2017 revenue goals along with net income results for the first two quarters.

What are the biggest concerns your clients face today?

Our biggest concern is the Oklahoma economy (balanced budget negotiations) which affects all businesses and citizens in Oklahoma. The state government needs to improve the revenue side of the equation while maintaining a favorable business climate for entrepreneurs and attracting new companies here.

How has your firm’s size been a competitive strength?

We are very competitive due to our firm’s size. We are able to serve the smallest to the largest cities throughout the state.

What inspired you to start Cowan Group Engineering? What advice would you offer engineering entrepreneurs today?

The desire to start a company has always been a part of my vision and recently we celebrated our 5 year anniversary. Recently, our firm was notified that we made the 2017 Inc. 5000 list for our 1000% growth over the last five years! My advice to engineers starting a company is to develop a written “business plan” and then work the plan. Next, find a local banker to partner with for the growth.

What are your plans this summer for rest and relaxation?

My wife and I just celebrated our 25th wedding anniversary and enjoyed that time in Cancun!

Michael Kukuk, P.G., President, Blackstone Environmental, Inc., Overland Park, KS

Tell me about Blackstone Environmental’s capabilities and markets. How many staff members do you currently have?

Blackstone employs engineers, geologists and scientists to serve our clients. Our staff size at the current time is 15 and we are very diverse in our capabilities to deliver. Our main market areas are: solid waste engineering and consulting; water resource engineering; general environmental consulting; construction management and oversight; groundwater monitoring and reporting; and air permitting services. We mainly operate in the Central United States.

How has your performance fared so far in 2017?

2017 is turning out to be a very good year for Blackstone. The 1st quarter was fairly flat, which is not atypical for us and we are now into our busy season from an engineering design and construction oversight standpoint. Our utilization remains high and our profits are at or above plan. After a disappointing 2015 due to client budgetary restrictions and market forces, we had an outstanding 2016, and 2017 has followed suit. In 2016 we added 3 engineers, significantly increasing our capabilities. One of these strategic hires was an air permitting and compliance engineer, which added a new service line for our clients. We have added 2 geologists so far in 2017 with more growth planned. All of our growth has been organic.

What are the biggest concerns your clients face today?

Our client’s biggest concerns are associated with the continued uncertainty with the economy, political direction/leadership, and environmental regulations. All of these factors add uncertainty which affects the budgeting process as well as the ability to confidently plan growth for the future. Budgetary demands on our clients tend to dictate the overall feasibility of a project even if the solution will be long term improvement. Some needed projects or improvements don’t get completed due to short term budget restrictions, even if it costs the client more money in the long run. Our clients want to know that our approaches to their issues are sustainable now and into the future, and won’t be significantly altered by political or regulatory forces.

How has your firm’s size been a competitive strength?

The size of our firm, which is relatively small at this time, has generally been an advantage for us. We work for many large corporations. We have had long relationships with many of our clients, even though Blackstone has been in business less than seven years. Many clients transferred their work over to Blackstone when we incorporated in 2010. Our smaller size is not a negative factor with our clients. They hire us because we are very nimble and they know our people and the quality of the product and customer service that we will deliver. Our size also gives us a competitive advantage with our lower overhead multiplier (fees). Being a low-cost provider is not our goal but it does give us the ability to be very competitive when we need to be.

What inspired you to start Blackstone? What advice would you offer environmental and engineering entrepreneurs today?

In 2002 I was one of three co-founders of another environmental, engineering and hydrogeological firm in Kansas City which was very successful at the time. I left that firm in 2010 and founded Blackstone with the desire to surround myself with like-minded people and to create a company where professionals can practice their craft in a collaborative environment. I enjoyed starting and growing (with others) an employee-owned firm the first time and desired to do it again as opposed to taking a leadership position in a larger firm.

My advice to others would be if you fear failure, uncertainty, or a non-guaranteed paycheck, starting a company may not be for you. If you have the confidence (and clients!) that it will work and it can be very rewarding. There will be significant bumps in the road that you did not anticipate and you need to have the personality and fortitude to persevere through the tough times.

What are your plans this summer for rest and relaxation?

For the first time in many years, I don’t have a summer vacation planned with my kids. We did go to Phoenix over spring break to visit Grandpa. I also took a week and vacationed in the Cayman Islands for the first time this May. It was quiet and wonderful!

Karen Jehanian, P.E., President, KMJ Consulting, Inc., Ardmore, PA

Tell me about KMJ Consulting’s capabilities and markets. How many staff members do you currently have?

KMJ Consulting is a 100% Woman-owned business. We are a niche firm whose market is public sector traffic engineering design, planning, and stakeholder involvement. We have clients at the federal, state and local level and are known in the market sector to provide strategic, creative and responsive service for nearly 20 years. KMJ’s team is comprised of 15 members with a variety of skill sets, including traffic engineering, IT, stakeholder involvement and social media.

How has your performance fared so far in 2017?

So far, we have had a very productive year. I project our gross revenue at about $1.5M, an increase of about 10% over 2016. Our comparative utilization is also higher and our backlog is running at about 12-18 months. Managing the backlog, more specifically the peaks and valleys can be challenging. We project workload at the macro and micro level. At the macro level to 12-18 months and at the micro level based upon actual project work anticipated for eight to ten weeks.

What are the biggest concerns your clients face today?

One of our major clients has expressed a series of human resource concerns ranging from their staff able to communicate and run meetings effectively to having enough experienced project managers to handle the volume of capital projects they have funded. As consulting engineers, we need to remember that the public economy affects our business in these ways. From our experience, we have found the most successful projects have had active project management teams on both the consultant and owner sides. In this case, as public-sector folks retire there are two ways that consultants can be effective: 1) by having excellent project managers who work proactively to anticipate and solve problems or 2) hire the public-sector retirees.

How has your firm’s size been a competitive strength?

KMJ currently has about 15 people on staff. This works for us. More important than our size, is the attitude and character of our people. They are great! And, our size offers us the opportunity to interact at a deeper level. We believe in training our staff to understand how to engage the client in a personal way allowing for a more targeted, focused and streamlined approach to their needs. Everything we do is customized. We are not a one-size-fits-all group behind a big company name. I know that our clients (both the owners and the consultants) value the quality of service they receive from KMJ. We communicate clearly, anticipate their needs and act appropriately.

From the position of our staff there are three opportunities: 1) they have direct access to the owner of the firm and share in an active and open dialogue throughout the course of a project and their tenure with KMJ; 2) they have direct access and receive feedback from our clients, and; 3) there is a synergy among our staff and we have the ability to learn from each other. This is something I really appreciate and that I think is very special about KMJ. We have a group of really smart, down to earth people who come to work each day excited to meet the day’s challenges.

What does being a civil engineer mean to you?

In our field, we are given the choice to perform our civic and civil duty. Associating our work to real-life situations makes for a meaningful and fulfilling life. For instance, designing ADA curb ramps – you may not think much of it when you are talking a walk around town, but for those in a wheelchair, this is a vital resource. When you get to the heart of it and understand the ‘Why’ behind these plans and studies, we understand the real benefit to our society. This is very powerful and I keep it at the forefront of our work. It is not just the plans and studies, it is about the impact on humanity and civil society.

What inspired you to start KMJ? What advice would you offer engineering entrepreneurs today?

I truly believe that entrepreneurship is in my DNA! I come from a family that had both engineers and entrepreneurs and I had the spirit from a young age. I started out selling apples before I was allowed to turn the street corner alone (so, I found an older friend to escort me). As a teenager, I joined Junior Achievement and learned how to read financial statements and run a business. When I graduated from Drexel University with my BSCE, I was very intentional about learning how to run an A/E firm and when the opportunity arose to start my firm I seized it. As with most start-ups, it was not easy, but it was exhilarating to start from scratch and nearly 20 years later we are an ever-evolving, but always going concern. I started the firm to offer a unique work and cultural experience for our staff, and specifically to create a friendly and creative environment. By all accounts, this has been accomplished.

My advice to anyone interested in starting a firm or any business is that you really have to want it! If you go it alone, you need to be able to wear three hats: technical, marketing and accounting. Of course, once you get going you can hire these folks, but as a small business, it is always beneficial and useful to have this background.

What’s on your summer reading list?

My summer reading list is either aggressive or aspirational depending upon how you look at it. I always have two or three books that I am reading. This summer’s list includes both fiction and non-fiction, including: A Dog’s Journey by W. Bruce Cameron, Stories of Your Life by Ted Chiang and The Law of Attraction: The Basics of the Teachings of Abraham by Esther and Jerry Hicks. So, my list is eclectic and varied. No engineering or business books per se, but I’m always reading and learning.

Vincent Pedraza, Principal and Executive Vice President, JVP Engineers, P.C., Washington, D.C.

pedrazaTell me about JVP’s capabilities and markets. How many staff members do you currently have?

Established in 1992, JVP Engineers is an award-winning, nationally recognized mechanical, electrical, and plumbing engineering design firm. The firm began as an independent, small, professional corporation located in Washington, D.C., and has grown into a competitive enterprise with a reputation within the engineering community for engineering professionalism.

We specialize in engineering designs ranging from office buildings, airports, embassies, chanceries, and computer facilities to hotels, hospitals, laboratory and research facilities, museums, educational facilities, and military command centers. The firm has designed systems for buildings within the Washington Metropolitan area, across the United States, and internationally, including some of the country’s most beloved historical structures.

How has your performance fared so far in 2017?

Over the years, we have predominantly done a lot of federal work. Given the condition of our federal government and the lack of an approved federal budget, we are seeing a reduction in workload. In contract, we are seeing more higher education and elementary school solicitations coming out. Notwithstanding the above, we have fared well in the performance of our current projects and are optimistic about the future work that will be coming out of the various federal agencies.

What are the biggest concerns your clients face today?

Although each client seems to be facing different issues, the more common ones appear to be: the collection of fees, managing the BIM process with multiple consultants, and the urgency of project schedules which do not appear to be afforded enough time to perform the required coordination and quality control.

How has your firm’s size been a competitive strength?

As a small firm (25-50 people), we feel the competitive advantage we have is providing personalized service by high-level principals and senior engineers. The principals of larger firms tend not to be involved in the day-to-day design activities and we have learned that this is often what our clients are seeking. By offering the involvement of our senior personnel and owners, our clients have a strong sense of trust with respect to the designs we are proposing. Similarly, we are able to offer new interns and younger engineers an in-depth and hands-on experience working alongside veteran senior staff and principals.

You and your father established JVP and have worked together successfully for 25 years. How has that special relationship worked for you and the firm?

My father has been a mentor, business partner, friend, colleague, and confidant throughout these past 25 years. I could not have asked for a better scenario to start a business when I came out of college. The experience has been extremely positive, and we have enjoyed a great deal of success as result of our ability to complement each other’s strengths and weaknesses. I could not have asked for a better partner type relationship. I have benefitted tremendously from his wisdom and guidance and I am thankful to have had the opportunity to work alongside him. His mentorship and tutelage have prepared me for the next 25 years and the future successes that JVP will achieve.

What are your plans this summer for rest and relaxation?

My family enjoys the water so I envision multiple trips to our house in Ocean City, Maryland.

Brandon G. Sprague, Principal, Brightworks Sustainability, San Jose, CA

spragueTell me about Brightworks Sustainability’s capabilities and markets. How many staff members do you currently have?

We are a multi-disciplinary team of 22 consultants serving clients in over 25 industries from offices in Los Angeles, New York, Oakland, and Portland. Founded in 2001, Brightworks’ early consulting practice in corporate sustainability helped organizations audit, assess, and quantify the environmental footprints of their operations and then establish systematic programs for managing, mitigating, and reversing those impacts. During this period, Brightworks facilitated UC Santa Barbara’s first-ever campus sustainability plan, for example.

We are still active in developing and implementing corporate sustainability programs. But the same year that Brightworks was founded, the USGBC launched the LEED program. To meet the resulting interest in green buildings, Brightworks added engineers, architects, and energy experts to its initial team of consultants focused on business operations.

Today, we are active in the following practice areas: Energy, Carbon, Waste, & Water Consulting; Green Building Certification & Consulting; Design Simulation & Modeling; Healthy & Sustainable Materials; Planning & Infrastructure; Corporate Sustainability Programs; and Reporting & Regulatory Compliance.

How has your performance fared so far this year?

We have experienced very strong growth for at least two years. Most interesting to us are the reasons we see for this.

Our clients tend to be in growth industries and have resources to invest. Not only do the jurisdictions where they are based have impressive sustainability regulations; our clients’ appetite to take on voluntary sustainability measures has also increased. The baseline for sustainability performance among these clients has rapidly shifted upward. At the same time, the sustainability laggards have increased their commitments. So we are seeing clients increase their efforts in multiple dimensions – more clients are taking action, and those who have already begun are taking more action.

What are the biggest concerns your clients face today?

Half of our clients are owners, and half are prime contractors, to whom we are sub-contractors (these include program managers, architects, engineers, construction managers, or general contractors). Among the owners, the leaders in sustainability are moving full-steam-ahead and setting ever-more ambitious environmental stewardship targets, especially clients in tech, financial services, and higher education. The sustainability teams within these organizations are managing far more complex sustainability programs, with far greater scrutiny from a wider range of stakeholders than ever before, and value our help. This creates the desire for seamless communication between client and consultant since we are ultimately one team.

By contrast, the prime contractors we work with are primarily concerned with the immediate need to win new business. Directly related to this, they seem most concerned with establishing, defending, and presenting the right mix of differentiating factors for each specific opportunity. This is very hard to do when practice is largely standardized between firms, as it is in architecture and engineering. Points of differentiation become points of parity when competitors generally meet the same standards of practice.

Our A/E clients are increasingly asking us – and presumably other specialty consultants – to help them win new business by involving us heavily in new business pursuits. We recently wrote the sustainability approach for an architect client’s proposal for an LBC project. We learned that the owner selected their team because they were, in their words, “overwhelmed by the thoughtfulness of the sustainable approach.” That’s a true win-win-win — we exceeded the owner’s expectations, we helped a long-time A/E client win an extremely competitive pursuit, and we get to work with an enlightened owner and great design firm on an inspiring project!

How has your firm’s size been a competitive strength?

Brightworks Sustainability can be considered a small firm and a large firm. We are a fairly large firm among sustainability-focused consulting firms. This is a function of our age (over 15 years of business), stage of maturity, client base, and business strategy. Our scale lets us serve large clients with complex needs. It also lets us develop areas of focused expertise in specialty areas of sustainability practice that make us useful resources to both large and small clients.

In addition to size, I would add that independence has been a competitive strength for us. Our clients have told us that they view sustainability practitioners within larger enterprises with skepticism, fearing reduced transparency and accountability and a focus on selling over innovation and project delivery. Being independent, fairly large among sustainability-focused consulting firms, small enough to be nimble, and expert in multiple complementary areas of expertise have helped our competitiveness.

What have been the drivers in your sales and business development philosophy? Is one marketing method more effective than others?

Related to the need for seamless communication with clients described above, we are very focused on maintaining close relationships with our owner clients and keeping them up to date on the many changes that are regularly occurring in sustainability practice. The high level of ferment recently in sustainability has made them eager to learn about new offerings and lessons learned from other projects we are working on. So we schedule regular calls, lunches, presentations, coffees, and happy hours to stay in communication with them. For our A/E and prime contractor clients, we are focused on showing them with our actions that we are doing all we can to help them win new business.

What are your plans this summer for rest and relaxation?

In early August, I will spend a week-and-a-half working out of our New York office before my partner and I fly to Paris for a baptism. We will stay in France for a week and a half, then stop in Amsterdam for four days on our way back to the U.S. West Coast.

Scott Thomas, P.E., PTOE, Principal, Apex Design, PC, Denver, CO

thomasTell me about Apex Design’s capabilities and markets. How many staff members do you currently have?

Apex Design is based in Denver with a staff of 32 really great people. We were founded in 2006 as an Intelligent Transportation Systems consulting firm and expanded into the traditional traffic engineering and transportation planning services. The majority of our work is in Colorado, with some clients in neighboring states. The clients we serve are typically public agencies.

How has your performance fared so far in 2017?

Things are going well. Backlog is healthy and we have some larger “anchor” projects that provide base revenue and allow us to pursue other contracts with more freedom. We are on pace to grow revenue by 15% this year. Like others we’ve talked with, we are seeing a shortage of talented engineers. Luckily, Colorado is a desirable place to live and that helps with recruiting.

What are the biggest concerns your clients face today?

Our clients are inundated with their day-to-day responsibilities and aren’t able to get everything done they wish to achieve. We are seeing more on-call contracts and outsourcing of both technical and management roles.

There are some local infrastructure bond initiatives going to vote this November in Colorado and the State legislature passed a toned down version of the proposed transportation budget last session. Everyone would like to see infrastructure funding increased, and more sustainable.

How has your firm’s size been a competitive strength?

We are a small firm and that allows us to be nimble. This provides us the flexibility to adapt to changing markets and pursue projects of all shapes and sizes; our staff appreciates this. We also focus on our niche and are able to remain specialized and do what we do well.

What inspired you to start Apex Design? What advice would you offer engineering entrepreneurs today?

At the time we founded Apex Design, we were some of the only folks doing Intelligent Transportation Systems consulting work in Colorado and didn’t really see a “home” for us at other firms. First and foremost we were engineers. Being ignorant about running a business really helped us! Had we known what we know now, we may have thought twice about launching. We purchased used computers and furniture, subleased modest office space, and incorporated and insured ourselves. Then we kindly asked clients to give us a try and figured out the rest as we went along. I’ve been constantly amazed by how helpful and eager most people are in our industry to share knowledge and provide advice and mentorship.

The advice I’d offer entrepreneurs extends to everyone: treat people well, do good work, and follow through on your commitments. Your personal reputation is what is important, and that follows you throughout your business endeavors. It really is hard to give advice on starting an engineering business because personal and professional goals vary so much.

What’s on your summer reading list?

I am a voracious reader and always reading something. I am currently reading Memoirs of a Geisha by Arthur Golden. The next three books I have are The Mothers by Brit Bennett, Today Will be Different by Maria Semple and The Underground Railroad by Colson Whitehead.

Ownership Transition Strategies for A/E Firm Leaders: A One-Day Seminar
Tuesday, September 19, 2017
Newport Beach Marriott Hotel & Spa
Newport Beach, California
Click here for more details and to register.

Growth & Ownership Strategies Conference
November 8 – 10, 2017
Ritz-Carlton Golf Resort
Naples, Florida
Click here for more details and to register.

What Really Drives A/E Performance – Culture or Governance?

Among the many complexities of running professional service firms, certain core foundations need to be in place to achieve operational and financial success. When we undertake engagements involving either measuring, enhancing or extracting firm value, we attempt to also look beyond the numbers to understand why an organization performs the way it does. And while the balance sheet and income statement are merely the “report cards” for keeping score, we critically assess both a firm’s daily norms and behaviors as well as recent strategic decisions that serve as indicators to influencing its objectives.

And while no two firms are the same, we’ve found the most important drivers of sustainable A/E performance are: 1) having a positive and productive culture, and 2) a leadership team that consistently makes sound decisions that lead to profitable outcomes. In other words, how a business is governed.

So what exactly is “culture” and “governance”? While both terms are tossed around frequently in understanding the context of A/E organizational and interpersonal dynamics, it may help to revisit both.

We admit that culture can be nebulous, fluid and also shaped by many factors – a firm’s size, ownership, client base, disciplines, and founder’s persona. Many A/E leaders and employees will often describe their culture to us. We hear adjectives that run the gamut from “collegial,” “family,” “controlling,” “independent,” “collaborative” to “work hard, play hard.” All are helpful to appreciate patterns, traditions and policies at a macro-level, but understanding what comprises culture requires something much more elemental.

For help, I turned to our friend Chris McGoff, founder of the strategic and management consulting firm The Clearing in Washington, D.C. Over the course of his career, Chris has worked with countless organizations, including a large number of A/E and professional service firms.

From his upcoming book, Match in the Root Cellar, Chris offers that every firm culture is real, and it’s tangible. It’s a part of the human experience, and there will always be culture around us, in every form. Cultures can be generated that inhibit performance, and cultures can be generated that propel people to perform at their absolute peak.

Chris says that those that live in this kind of culture, a Peak Performance Culture, just “click.” Everything they do, they do as one, seamlessly, so that things go fast, but they go smoothly. Big, complex architecture or engineering projects suddenly seem easy because an entire culture is geared toward the same goal, the same cause, following the same processes, and relying on each other because they know that every other person on their team has the same goal, the same thought and the same mind. That is culture. It is the best kind of culture, and it is the simplest thing in the world to define.

However, his key takeaway is culture is the line that separates the behaviors you will tolerate from those you won’t. Every time you’re with a group of colleagues, this line exists. It’s invisible, but it’s real, and if you step across it, you know it immediately. His chart below captures that essence perfectly.

(c) 2013 The Primes, Inc. All Rights Reserved.

(c) 2013 The Primes, Inc. All Rights Reserved.

And what do we mean by governance? Quite simply, it’s how leaders run the business. CEOs, presidents, principals, boards and other key individuals enact broad policies and specific decisions that they believe will best serve the interests of the firm, their employees and clients. In most cases, these are choices that leaders feel will put their company’s resources to their best use and allocation, maximize profits, minimize risks, while also adhering to specific morals, values and the mission of the organization overall.

Examples of this are: Who makes principal this year? Should we acquire other firms? How do we allocate bonuses in a down year? Is it worth cold starting an office in Florida? Could we raise our billing rates? Should we refresh our website and corporate logo? Is it better to extend our lease or look for new office space? Which clients and projects need more of our attention? Is an ESOP the best option for us?

Now, of course, every organization would love to have the best of both worlds – a strong and cohesive leadership team and a Peak Performance Culture. Unfortunately, in our experience, that dynamic can be somewhat elusive. Let me illustrate with two scenarios:

Excelsior Architects has what many feel is an enviable culture. The 180-person firm recently celebrated 75 years in business and proudly maintains a list of cutting-edge and award-winning projects across a variety of market sectors. Best practices of technical innovation, design acumen, and cultivating younger architects are traced to its origins. There is an unspoken “Excelsior Way” to business development, project delivery and ownership transition, which has led to many satisfied and repeat clients. Excelsior is highly respected by its competitors.

Recently, however, the staff feels that leadership has veered off track. Never fully recovering from the recession, there are whispers the firm’s best days are behind them. Seeking new avenues, the principals made two small acquisitions in the last seven years, neither one of which integrated well, leading to “us vs. them” turf battles. Staff openly feels management has kept on several prominent, yet unproductive principals who barely carry their billing and client weight. Excelsior’s key K-12 market experienced a downturn which caught the leadership team by surprise and led to blaming and further inaction. Two rising stars passed over for promotion left to start a competing interiors firm and management failed to appreciate the impacts on three key clients. Most of the principals are over 55 and aren’t responsive to new tactics for marketing, social media and interacting with a fresh staff of status-hungry millennials.

Or how about the opposite case? Paramount Consulting Engineers is a first generation, 65-person civil engineering firm. The founder and CEO is a charismatic individual who has assembled a hard-working and accountable management team that directly oversees its various offices and divisions. The Paramount leaders promise to “walk the talk” and openly communicate the company values of “Service, Communication, Passion, Courage and Pride.” The firm has increasingly taken market share in its core land development sector and makes strong profit margins year in and year out. Two new branch offices have been successfully started within the last 5 years.

Yet, for all its good fortune something never connects culturally. Paramount has a reputation as a “sweat shop” and turnover rates are abnormally high. Emphasis on profit and office silos has led to an attitude of sharp elbows and lack of trust in sharing resources and opportunities. Staff openly gossip while others make ego-centric promises or detrimental threats in a “sink or swim” environment. Paramount seems to be successful in spite of itself.


The ramifications of understanding culture vs. governance as distinct performance drivers are evident in many situations. With regards to succession planning and ownership transition, should the priority of new leaders and owners be as change agents or stewards of the current culture? With M&A transactions, finding compatible cultures that align is key, but equally important are the seller’s leaders who must work and remain with the combined entity. How does an A/E firm that markets itself with recognizable thought leaders and design personalities help find meaning and purpose for others to achieve self-satisfaction?

Thoughts? Opinions? What are your culture and governance like? Are both driving your firm to sustained and peak performance?