2014 Perspectives

Five Takeaways on 2014 A/E M&A Activity

For the first time since emerging from the Great Recession, both the broader economy and the A/E & environmental consulting industry feel poised to break out from a multi-year malaise. And while A/E firms are still prone to headwinds of market sector unevenness and relentless competition, executives are back to looking at the glass as “half full” which is a most welcome sign. Industry revenues and profits are up, pent-up demand in the public and private sectors is fueling growing backlogs, and the war for talent at all levels of experience is back with a vengeance. Maybe not 2005 exactly, but a sense of normalcy is returning. Happy holidays indeed!

So you can’t blame CEOs in this heady climate for their exuberance and feeling, well, pretty darn confident again. And nothing fuels the M&A markets like executive optimism in addition to cash-laden balance sheets and an itch to start building and buying toward multi-year growth objectives.

And while by our tally the overall number of North American A/E & environmental transactions will likely end the year generally even with 2013, there are a number of intriguing observations and subplots we want to highlight as we wrap-up the year.

1. 2014 was the year of the mega-deal – There were a number of dramatic transactions that will truly change the competitive landscape for A/E firms, and frankly will take years to determine if they were sensible or not. AECOM joining forces with URS, WSP buying Parsons Brinckerhoff, and AMEC combining with Foster Wheeler really illustrate the bold and aggressive mindset of the M&A landscape this year. In addition, there were a number of other deals, albeit smaller, that consolidated major players along service specializations such as GHD-Conestoga Rovers (environmental), POWER Engineers-Burns & Roe (energy) and Hughes Associates-Rolf Jensen & Associates (fire protection/life safety). In fact, many of these combinations have ushered in a wave of trickle down discussions at other smaller and mid-size board rooms, wondering if they too should seek out partners as realignment comes to global A/E participants.

However, the reality is that these mega mergers, in addition to several prominent restructurings of other publicly-traded and large privately held firms, will force a necessary breather. Certain acquisitive participants may be out of the market in the short-term as they turn inward, digesting operations and divesting underperforming divisions. As such, heading into next year, we believe the most active and interesting A/E deals will be led by smaller acquirers, generally with $50-$500MM in revenue.

2. Prominent architecture firms got in the mix – Not to be ignored, there were a number of well-known architecture firms across the country that sold, highlighting both the acquirers’ desire for convergence of disciplines under one roof and eager sellers ready to deal after years of rebuilding from 2009 levels. Arcadis buying Callison, Stantec picking up SHW Group and ADD, Inc., ECADI acquiring Wilson Associates, EYP purchasing WHR Associates, and FreemanWhite joining Haskell were just a few examples of interesting strategic and synergistic intent on both sides. We predict more consolidation for architects in 2015.

3. The future for oil & gas deals today looks much murkier – We’ve noted with both awe and interest the impact of the shale oil energy revolution the last 5 years on engineering and environmental firms’ strategies. While some conventional civil engineering firms in well-positioned locations like Pennsylvania, Texas, Ohio, West Virginia, Colorado, and Western Canada completely revamped their business models to serve the booming energy sector, others simply bought their way into these markets. However, as we’ve all witnessed the last month with plunging oil prices, the booms often lead to busts. Many of the valuations and pro-forma assumptions of these M&A deals were based on energy client needs and forecasts predicated on much higher oil levels to justify activity (not $58/barrel!). So just how these firms perform if and when clients pull back their operations will be a major test the next 12-24 months. In the short-run, we feel engineering firms serving both the midstream and upstream client sectors could prove resilient as cheaper pump prices encourage additional consumption and manufacturers witness lower costs on raw materials.

4. Valuation gaps scuttling deals a reality given economic cycle upturn – Unfortunately, there have been a number of promising deals in 2014 that failed to materialize due to larger-than-expected gaps in buyer and seller expectations. This is all too common in deal-making as the economy and A/E industry moves from recession to recovery cycles. For a good number of sellers, the reality is that their financial performance from 2010-2013 was either lackluster or bumpy, but results and/or forecasts in 2014 have been much rosier. As such, sellers are unwillingly to part with their organizations based on valuations at a lower historical trend line, and buyers are reluctant to offer robust valuations on just a couple of quarters (or promises) of better top-and bottom-lines.

We’ve also seen more sellers who have gone out to market, but either did not find eager suitors or experienced lower-than-expected valuations given the aforementioned cyclical timing. As a result, they are now going back to “Plan B” and considering other transition options (internal sale, ESOP, etc).

5. Aging industry demographics is destiny – Looking ahead, 2015 will mark the year those individuals born in the 1950s will be hitting 55 to 65, the prime years for ownership transition and monetization of equity stakes heading into retirement. For owners and leaders who survived the last few years of recessionary headaches and drama, many feel now is the time to step aside and pass the baton either internally or externally. As we’ve noted in prior issues, we have begun to see more net sellers of stock at A/E and environmental firms (of all shapes and sizes) than net buyer demand, a phenomenon with wide ramifications for future industry competitiveness, strategic planning, capitalization, and leadership succession.

At Rusk O’Brien Gido + 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.

On a final note, Season’s Greetings and a Happy, Healthy and Prosperous New Year from all of us here at ROG+ Partners!

A/E Firm Valuation FAQs Answered

Putting a monetary value on an architecture, engineering or environmental consulting firm can be a tricky business. And yet, as business owners and managers, many situations arise that require us to do just that. Whether it’s establishing your own firm’s value for ownership transition purposes, or valuing a firm you are considering acquiring, at some point money will be changing hands and the question of what the firm is worth must be answered. Below are some frequently asked questions (FAQs) regarding the valuation of A/E firms – and our answers.

What is the difference between book value and fair market value?

Book value, sometimes referred to as shareholders equity, is an accounting term. It refers to that section of the balance sheet that reflects the sum of the capital invested in the company by its shareholders and earnings retained and reinvested in the company over time. It should be equal to the total assets of the company, less its liabilities. Don’t confuse book value with the fair market value of a business. The fair market value can be higher or lower (usually it’s higher). This is because the real value of a business enterprise is not the net value of all the “stuff” it owns, but its ability to generate earnings (or more precisely, cash flow), which it in turn can pay out to its shareholders. The present value of this cash flow stream is often higher (particularly in growing firms with strong profit margins) than the net value of the firm’s assets.

What is goodwill?

In the finance and accounting world, goodwill has a very specific definition. It is defined as the difference between a firm’s fair market value, and its book value (assuming the former is higher than the latter). You typically will not see goodwill on a firm’s balance sheet unless it has made an acquisition of another firm. In that case the buyer would record the difference between what it paid for the firm and the net value of the firm’s assets on its balance sheet as goodwill.

Goodwill is an “intangible” asset. You can think of it as representing the value of all the things beyond tangible assets (computers, software, furniture, accounts receivable, etc) that contribute to a firm’s ability to generate cash flow. Those things include the firm’s workforce, their experience and expertise, the firm’s reputation, its client lists and relationships, etc.

How do you value goodwill?

The simple answer to this question is, “you don’t.” That is, rather than trying to place a value on a firm’s workforce, reputation, client lists, etc., an appraiser will determine the fair market value of the business as a whole (inclusive of all its assets, both tangible and intangible). Since all the components of goodwill, together with the firm’s tangible assets contribute to its fair market value, the goodwill is already “baked in” to the firm’s fair market value. Simply deduct the book value of the company from its fair market value, and the result is the value of its goodwill. Allocating that goodwill value between its various components is another challenge altogether—one we won’t tackle here.

What are valuation multiples?

Valuation multiples are used by appraisers in market-based approaches to valuation. Market-based approaches to valuation attempt to establish a firm’s fair market value by looking at transactions of similar firms. These can be transactions of shares of publicly traded companies, or mergers and acquisitions of whole companies (publicly traded or privately held). This approach is analogous to the comparable sales approach used by real estate appraisers. To apply data from these transactions, the appraiser develops ratios of the price paid for the comparable company, and various aspects of the company (such as its revenue, earnings, book value, etc). Since no two firms are exactly alike, the appraiser will usually develop valuation multiples using a group of comparable firms, rather than a single one.

Below is a sample of valuation multiples from our own 2014 A/E Business Valuation and M&A Transactions Study. The 2014 study includes data from over 200 transactions of stock in the A/E and environmental consulting industries. These include internal ownership transition sales, ESOP transactions, and mergers & acquisitions. The study also examines pricing data from publicly traded firms. Valuation multiples are presented for a variety of firm types, and distinguished between minority interest transactions, controlling interest transactions, and ESOP transactions. It also examines how M&A transactions are structured.


Source: 2014 A/E Business Valuation and M&A Transactions Study (www.rog-partners.com/aestudy)

Why do appraisers use marketability and minority interest discounts?

A lot of confusion could be avoided if the appraisal community simply substituted the word “adjustment” for “discount.” The term discount suggests there is a “full” price, the appraiser is arbitrarily reducing. In fact, adjustments are necessary to present an estimate of value on the appropriate basis (e.g. minority interest or controlling interest) when using market pricing data from a variety of sources. For example, using valuation multiples derived from mergers & acquisitions of whole companies, if left unadjusted, will produce a valuation that also reflects a controlling interest. Therefore, if the goal is to determine the value of a minority interest (e.g. a 3% ownership stake), the appraiser must apply a minority interest discount. Similarly, when valuing a privately held company, if an appraiser uses data from publicly traded firms, the results must be adjusted to reflect the much lower level of liquidity of privately held stock. To quantify these adjustments, appraisers look to a variety of studies conducted by practitioners and academics. As an example, a number of studies have been conducted to quantify the value of marketability/liquidity using data from initial public offerings (IPOs) and restricted stock.

Where can I get reliable valuation data for firms in the A/E and environmental consulting industries?

OK, I admit that this question is a self-served softball. But if you are looking for a source of reliable business valuation data compiled, analyzed and interpreted by accredited business appraisers with decades of experience within the A/E industry, we invite you to check out the aforementioned A/E Business Valuation and M&A Transactions Study. Better yet, if you participate in the confidential on-line survey, you’ll receive a $200 discount on the 2015 edition of this publication (to be released in January of 2015). To participate in the survey, simply follow this link www.rog-partners.com/aestudy.

An “Accountable” CEO is an Effective CEO

“Accountability” may be an overused term these days in business management circles, but in terms of corporate governance and the role of a president & CEO, there may be no more important concept. A corporate governance structure where the CEO is supported and assisted by a strong and qualified board of directors while also being held accountable by that board, is the best recipe for effective leadership and long-term success.

Understandably, the concept of accountability can also be threatening to owners (often founders) accustomed to exercising complete control. This can be a particularly vexing problem when the company is seeking to transition ownership to the next generation. The more ownership transition engagements we perform for architecture, engineering and environmental consulting firms, the more we encounter business owners who insist on retaining a controlling ownership interest until they are ready to fully retire—often out of a fear that their ability to effectively manage the company will be diminished if and when they lose voting control.

I’d submit that this is a fallacy. To begin with, in our experience working with hundreds of A/E firms of all shapes and sizes, we’ve found that some of the most effective and influential leaders are in fact minority interest stakeholders–often holding ownership interests of 10% or less. Furthermore, the moment minority interest shareholders are first brought in as investors is when a formal corporate governance structure—one that provides the CEO with guidance and oversight, should be established. This structure should be established well before the point in the ownership transition where the founder / CEO’s stake falls below a controlling interest level.

Let’s back up for a moment and define the concept of “corporate governance.” Corporate governance refers to the policies and processes by which a company is directed and controlled. Good corporate governance policies create accountability at ALL levels of the organization. Directors are accountable to the shareholders who elect them. Officers are accountable to the directors who appointed them. And the staff is accountable to the officers and managers.

The composition of your board of directors is one of the most important aspects of your corporate governance system. The addition of one or more outside directors—individuals who are not among the shareholder or employee group, and therefore bring less personal conflicts of interest to the table, can help ensure the board conducts its oversight duties appropriately and fairly.

As an example, Mike Matthews, CEO of H&A Architects and Engineers located in Glen Allen, VA will tell you that having an outside advisor on their board has been a tremendous benefit to the firm. Since adding the outside advisor, the other directors have benefited from the outside perspective, and now look at the company more critically. They are also more likely to question or challenge the CEO and other officers on matters of policy and strategy. As Mike puts it, “I need to be on my ‘A game’ at board meetings.

H&A’s by-laws limit ownership to no more than 50% and prohibits the CEO from serving on the board of directors. Because of its strong corporate governance and high level of accountability, H&A’s CEO has been given even greater autonomy with respect to day-to-day operations of the company, and Mike is not afraid to remind the board of the separation of roles and responsibilities between the directors and the management team.

Under a strong corporate governance system, the CEO serves at the pleasure of the board of directors and may be removed and replaced by the board if such a change is deemed to be in the best interest of the company. While such board actions are extremely rare, this structure means that the CEO’s power and influence must stem from his or her competence and ability, rather than the amount of stock owned.

Laney Bisbee is the CEO of Structural Integrity Associates located in San Jose, CA. Structural Integrity provides integrated and innovative analysis, control, and prevention of structural failures of nuclear, fossil fuel, pipeline, and other industrial companies. The company’s by-laws limit ownership by any individual to no more than 5%. However, this ownership limitation has not impacted Laney’s influence as CEO. Every year, during our annual ESOP valuation meetings, I ask Laney about his long term personal plans. His response is always, “I plan to continue working as long as the board will let me.”

Finally, in terms of facilitating ownership transition, an effective corporate governance system that holds the company’s CEO and other officers accountable can often encourage investment by new shareholders. Individuals will usually feel more comfortable investing in a firm with strong corporate governance, than investing in a firm lead by a President/CEO with complete control, no matter how competent that leader is.

If you’d like to learn more about the strategies of some of the industry’s most successful executives, we invite you to join us at the fourth annual Growth & Ownership Strategies Conference in Naples, Florida on November 1214th.

Exclusive A/E Mid-Year Outlook


With July already upon us, that means the first half of the year is in the books and we’re heading into the homestretch of a very dynamic 2014! Taking a different tack to this summer’s outlook, we caught up with several rising young executives to assess their firm’s recent performance and growth prospects.  In addition, each offered insights on their own unique leadership approach as well as the fundamental challenges with managing people and processes.


Andy Bajorat, CHMM, COO/Principal, BBJ Group, Chicago, IL

How has BBJ Group’s performance fared so far in 2014?

The year got off to a slow start, but should turn out well overall.  We have significant backlog relative to past years, and have some additional opportunities that, if they pan out, should result in an optimistic outlook for 2015 and beyond.  The silver lining to the recession is that we had to increase our focus on operational efficiency, reducing ARs, and expanding marketing efforts.  We’re much more visible in the marketplace now, and can be more cost-efficient when we win new opportunities.

In what market or service areas are you seeing promising opportunities for growth?

Due diligence and remediation have been traditional strong-suits for us, but compliance and natural resource-related work have really come to the fore over the last few years.  With respect to compliance, we’ve seen an increased interest in outsourcing EH&S activities as a cost-saving measure for clients.

Also, vapor intrusion projects are prominent for us right now.  We have had appreciable experience with vapor intrusion projects in states which were “early adopters” with respect to vapor intrusion regulations (e.g., California, New York, and New Jersey).  Now that Midwest and southern states, in particular, have adopted similar regulations, we are well-positioned to help clients nationally with vapor intrusion issues because of this prior experience.

How do you describe your leadership style?

Generally, I try to be more of a facilitator than a “top-down” manager.  We have great people at BBJ Group, and it’s more efficient and beneficial to give them the space they need to do their job than to micromanage.  These are folks with strong skill sets, so from a scientific perspective, they often have a better technical understanding than I do anyway.  Consequently, the most important things I can do are to help make connections and provide perspective.

In my role, I have the advantage of seeing the organization from a higher elevation.  Consequently, I can help connect our professionals to other BBJers that will have a good approach to a given issue or point them toward past projects where we have encountered a similar issue.  On many projects, working with our project managers to consider multiple paths, and then identifying the one that fits best with the client’s overall strategy is my primary contribution.

What have you learned about attracting and retaining talent?

People want to feel like they are an important part of an organization’s future, and that they have some input into shaping that future.  As such we’ve developed training programs that include a focus on “why we do things” in addition to “how to do things.”  For growing professionals, it’s profoundly necessary to quickly develop an understanding of “why,” so that they can make better decisions and recommendations.

Also, we have implemented an “Initiatives Program” in which our professionals form teams to tackle a project of their own choosing of importance to them.  In some cases these are inwardly focused operations-type undertakings, but in other cases they are outwardly focused philanthropic or business development activities.

What’s your biggest challenge as a leader?

Day-to-day activities can distract me more than I’d like in focusing on the urgent rather than the important.  Important long-term activities, like talent development, have to be kept at the forefront, otherwise they can get overrun by the daily routine.

Fundamentally, people are the biggest asset any professional service firm has.  At BBJ Group, I feel that identifying young professionals that fit well in our consulting approach is a true competency of the firm.  Everyone needs to grow in their career, but those who are starting out require particular guidance and opportunity.  Keeping their needs top-of-mind is critical, and prioritizing those needs ahead of other more visible but less important matters is always a challenge.

What are your plans this summer for rest and relaxation?

I’m a big Chicago White Sox fan, so my family and I will be going to Cooperstown to see Frank Thomas inducted into the Baseball Hall of Fame.  I also recently finished an MBA at Northwestern University’s Kellogg School of Management, and I’m looking forward to spending my newly rediscovered free time with my kids doing things they like to do.


Pete Heald, President, Cumming, San Diego, CA

How has Cumming’s performance fared so far in 2014?

We are in growth mode with both top and bottom line growing in the lower double digits.  We have made a focused effort on strategic expansion in the Mid Atlantic and North East over the last few years and the results are better than we planned.

In what market or service areas are you seeing promising opportunities for growth?

We are seeing significant growth and opportunity in the private sector.  Our education and public focused efforts are stalled in 2014, but we see improvements in 2015 and beyond.  With private work we see a tremendous amount of projects in Northern California, the Mid Atlantic, and the North East.  This includes hospitality, multifamily, corporate expansion, manufacturing, and critical facilities.

How do you describe your leadership style?

I am open, direct, and inclusive.  We have a lot of talented and smart people here and I always value their input.

What have you learned about attracting and retaining talent?

Culture is everything!  You cannot hire and retain the best talent in a service organization without a clear, differentiating culture.  This includes a clear vision, core values, and leadership that walks the walk.  Without it, the only way to attract and retain people is through their wallets and that breaks down because there is no commonality or glue that keeps the team working toward a common goal in a common way.

What’s your biggest challenge as a leader?

Hiring and retaining great people that fit our culture.  I spend a lot of time recruiting and communicating our vision.  As a service organization the most important job I have is finding the best and brightest talent to support our clients and our growth.

What are your plans this summer for rest and relaxation?

I just spent a week visiting some state parks in Utah and Arizona with my family.  It was beautiful and we enjoyed hiking, horseback riding, and canyoneering.  We are fortunate to live in such a great country with so much beauty!


Jason Jesso, PMP, Chief Operating Officer, The Gateway EngineersPittsburgh, PA

How has Gateway Engineers’ performance fared so far in 2014?

As we turn the page to the second half of the year, our performance has been very similar to 2013.  Bookings, billings and revenue are all either flat or trending slightly above last year’s pace.  We continue to focus on the efficient selling and executing of projects.  We believe if we can do these two things proficiently while continuing to strengthen existing relationships and strategically expand our network, we will log another successful year.

In what market or service areas are you seeing promising opportunities for growth?

Our pipeline of new work looks very promising!  We are anticipating a strong second half of 2014.  Specifically, three of our market segments excite me: municipal, developer and energy.  Our municipal segments continue to build momentum through a number of strategic pursuits.  We have been focused on increasing our service footprint which has provided us ample new opportunities.  This, along with federally mandated sewer projects, the trend of using stormwater as a utility to fund needed sewer upgrades, leveraging our GIS-based solutions to manage municipal assets, and the addition of new amenities (parks, pools, fields, etc.) for growing municipalities makes local governments a hot market.

Our developer market segment is also on a tear. Multi and single family, mixed-use, hospitality, and the office market show no signs of slowing in our region.  Furthermore, our energy market segments continue to impress me.  As we are headquartered in the heart of the Marcellus and Utica Shale plays, infrastructure is still the focus as producers need the necessary conduit to take their goods to market.  This will continue to provide many opportunities in our midstream segment while larger upstream clients continue to optimize their operations and plan for aggressive future drilling schedules.

How do you describe your leadership style?

In one word, amoebic.  I try to be very flexible in my leadership style.  Listen first, assess the situation, and then act accordingly.  In my experience, there’s no cookie-cutter approach that works.  Every employee is unique.   I like to be more supportive and less controlling.  In general, I prefer to set our employees up for success through the proper coaching and supply them with the right tools to do their jobs.

What have you learned about attracting and retaining talent?

We try to have our potential and existing employees’ best interest in mind.  We make every effort to convey as much as we can about the type of organization we are; what our expectations are and what it is like to work at Gateway Engineers.  We are not for everyone.  We reward performance.  We have a great track record of attracting and retaining those employees who fit our company culture.

What’s your biggest challenge as a leader?

In an industry that prizes innovation more than tradition, staying focused on the things that have the most impact to the company is always challenging.  Ensuring the proper balance between working on strategic versus operational goals/initiatives is paramount.  Spending my time and company resources on what is necessary to be successful today while also safeguarding the future can be somewhat of a juggling act if not properly planned.

What’s on your summer reading list? 

I’m a huge fan of Malcolm Gladwell’s work and recently read David and Goliath: Underdogs, Misfits, and the Art of Battling Giants.  I’m currently reading Daniel Kahneman’s new book, Thinking, Fast and Slow.  On deck is Term Limits by Vince Flynn.


Joe Macrina, P.E., Chief Operating Officer, Wolverton & AssociatesDuluth, GA

How has Wolverton’s performance fared so far in 2014? 

In preparation for 2014, we spent a lot of time setting realistic goals and targets for our financial performance for the year.  We are currently tracking slightly ahead of our forecast, a sign that our markets are strong and that we are successfully executing our business development plan.  We are currently 6% ahead of 2013 net revenues, an improvement that can be attributed to our focus on market diversification and building new client relationships.

In what market or service are you seeing promising opportunities for growth?  

All of our public and private sector markets are strong right now.  The most promising growth opportunities we see are in the energy sector.  Because of the ongoing investment in upgrading transmission and distribution facilities by our energy clients, there have been a lot of opportunities in this market, and we foresee a steady and continued growth with our energy sector clients as they meet future demands and look to improve their existing facilities.  We also see the transportation sector heating back up, with more work being made available and more focus on getting projects built and open to the public quickly.  The higher education market is also building momentum with more and more colleges and universities investing in their campuses and facilities as a way to compete for students.  The commercial/retail markets are also showing signs of improvement over the next 12 months.

How do you describe your leadership style? 

The leadership of our firm is very focused on building people to achieve our cultural goals of ownership and responsibility.  I try to balance being hands-off and hands-on based on the person and the task at hand.  To be successful, I have to expect a lot of myself and my staff.  I spend time discussing their performance goals, developing and growing their talents and focus on adjusting my approach at the individual level, based on their needs.  I view my direct reports as part of a team and engage them in problem-solving and brainstorming on project and corporate challenges.

What have you learned about attracting and retaining talent? 

There has been a significant shift in the candidate pool for our industry.  In terms of attracting engineers, managers and leaders, I see a need for more – more awareness of the opportunities in engineering, more engineers graduating from college and more engineers being groomed for management and leadership roles.  For retention, we are seeing a shift from “one size fits all” programs to individualized programs to keep employees engaged and happy.

Employees want growth potential and awareness of their individual needs. We are doing assessments, like DiSC, that help us to understand each person’s perspective, what their individual needs are and what skills they offer and then use that understanding to build rewards programs, individualized growth plans and really focus on the growth of each person.  We have changed our performance review process this year to be less formal and more focused on the soft skills and the needs of each person in the organization.

What’s your biggest challenge as a leader? 

My biggest leadership challenge is building the next level of leadership.  We have a strong foundation of excellent people but each person has different levels of experience, different backgrounds and different interests.  My current focus is on working to align these leaders based on the company’s needs and to grow them into the right positions, whether it’s at the department or corporate level, in order to build a balanced team.

What are your plans this summer for rest and relaxation? 

My wife, two kids and I will be headed to Cape Cod, to visit with friends and family.


Terry Squyres, AIA, LEED AP, Principal, GWWO, Inc./ArchitectsBaltimore, MD

How has GWWO’s performance fared so far in 2014?

GWWO is currently on track for a record-breaking year.  The economic recovery has positively impacted work availability in our markets, although we continue to see steadily increasing competition from firms with recession-induced interest in entering these markets.  The persistent shift from quality-based to price-based selection has forced fees downward, compounded by firms compensating for lack of market-specific experience with low price.  In response to these marketplace pressures, we are committed to the fundamentals of client retention and profitability – consummate client service paired with production efficiency.   Our investments in customization of our production technology and new management software have been central to this effort.  We’ve found that our technology developments have enabled us to create leading-edge products for our clients while streamlining our internal productivity.

In what market or service areas are you seeing promising opportunities for growth?

Aside from the market’s economic recovery, the most exciting opportunity I see is for architects to embrace an expanded role in placemaking – as not just designers, but more comprehensively as strategic partners with clients and communities.  On both large and small scales, we’ve seen examples of architects crossing over from pure architectural work into tangential professional services, such as communications, project enrichment and even research into community and cultural issues and solutions.   It’s intriguing to think that our profession could, in some modern and strategic ways, recapture some of the essence of the “master builder” role that architects once had.

In our public sector work, some of our clients are still affected by the impact of the economic downturn’s staff cuts and hiring freezes, as their labor budgets are not necessarily rebounding to pre-recession levels.  Internal staff resources are no longer available to take care of services that their facilities departments once handled.  Architects and engineers are well-suited to support these deficiencies.

How do you describe your leadership style?

With the astounding team of talent we currently have in our office, I see my role as one of the coaches.  Lee Iacocca said, “If you want to make good use of your time, you’ve got to know what’s most important and then give it all you’ve got.”  I see it as critical to work to identify “what’s most important” with our team, and then to ensure that our strategic approach is on that target.  To that end, my goals include identifying alignments between personal staff goals and our company’s needs and objectives, focusing individual talents in directions that are complementary to others, and providing effective educational resources to enhance our capabilities.

What have you learned about attracting and retaining talent?

GWWO is the beneficiary of a staff who has demonstrated remarkable loyalty – our employee retention rate averaged 97% over the last three years.  Nurturing our office culture is our top priority, and we continually monitor our staff’s response to the total office environment through frequent individual meetings.  One of our proudest moments came in December, 2013 when we were named a Top Workplace in the region, and were also ranked first in Employee Appreciation, as a result of an anonymous employee survey by The Baltimore Sun.

Our staff tells us that our office culture is the top reason that they not only stay with us, but also refer their friends and colleagues to us for potential new hires.  The most common feedback we hear is that our staff enjoys their ability to make a meaningful personal contribution to the firm’s work, regardless of their seniority level.  Readily-available access to mentoring and professional educational development has also played an essential role in maintaining a high level of staff commitment to the firm.

What’s your biggest challenge as a leader?

Despite the fact that we are still a relatively small firm, GWWO is experiencing an unprecedented period of growth – we’ve doubled in size in recent years.  With growth comes unavoidable change, which can be both exciting and unsettling to an office culture.  We’re focused on preserving the distinctive aspects of our culture that brought us to this point, however, this often requires a new solution to achieve the historical result.  Proactively moderating the effects of rapid growth, and anticipating the necessary adaptations, is a terrifically engaging and rewarding challenge.  Personally, I find inspiration in a rapidly-moving environment and new ideas, though in this context, change needs to be managed so that its effects are constructive.

What’s on your summer reading list?

I’m fascinated by the current business and design climate and what advances and trends might inform our work, so I usually have a large stack of news, business and design-focused periodicals to catch up on.  One of my favorites is Fast Company magazine, a fantastic source for fresh perspectives and stories about innovation.  I’m often struck by the commonalities among the concerns of vastly different businesses – issues related to productivity, inspiration and motivation, resource investment vs. profits and of course, the all-important topic of culture.  I recently saw a talk given by Tony Hsieh, CEO of Zappos, which put his book Delivering Happiness (belatedly) at the top of my list.   Presentations are a critical element during every phase of our work, so I also plan to study Nancy Duarte’s book Resonate: Present Visual Stories that Transform Audiences.


Brad Williams, AIA, Principal / COO, Perkowitz+Ruth Architects, Long Beach, CA

How has Perkowitz + Ruth’s performance fared so far in 2014?

In general the A/E market continues to improve in the first half of 2014 and we feel that we’re well-positioned to capitalize on that incremental growth.  2013 was an incredibly transformative year at P+R and without question the strategic rebuilding initiatives we implemented last year are paying dividends in 2014.  One of our most challenging initiatives has been the implementation of new financial and project management software.  We implemented this change on January 1 and it has really brought our project managers a new and very clear understanding of project performance.  If you can bring people closer to useful project data you can get meaningful results and that is exactly what we have found this year – so far we’re in a good place in 2014.

In what market or service areas are you seeing promising opportunities for growth?

We certainly see continued improvement in developer-driven retail, mixed-use, office and hospitality projects.  Fully half of the activity we’re seeing is in the revitalization of projects that haven’t had a meaningful facelift in decades and are well past their prime.  The other half is ground-up projects that have solid financial backing and that bring much needed services and upgrades to underserved markets.  We’re seeing excellent growth on both coasts as well as in our Shanghai office and we think the trend will continue through 2015.

How do you describe your leadership style?

I don’t know that I can buy in to ascribing a style to one’s own leadership but, if anything, I would describe it as leading from the bottom.  My singular focus is on making systems, processes, reporting and work, in general, easier for my staff so they can focus on what they do best: creating world-class buildings and spaces that we can be proud of as a firm.  Any process or management requirement that presents an obstacle to our architectural goals goes out the window immediately and with extreme prejudice.  I firmly believe that if my PM’s aren’t succeeding then I’m failing as a leader!

What have you learned about attracting and retaining talent?

I’ve learned that getting your hands on the right people is incredibly difficult and that keeping them is even more difficult.  Getting the right people into the right roles is completely fundamental to the success of our firm and it’s something that we constantly strive to improve.

What’s your biggest challenge as a leader?

Without a doubt it’s prioritization.  When I see something in my firm that’s even slightly out of whack I want to attack it and make it right – my biggest challenge is tempering my enthusiasm for righting wrongs and instead getting those issues on to a realistically prioritized list.

What’s on your summer reading list?

I always have one business and one fiction book going at the same time to ensure that my brain doesn’t get completely lost to either.  To satisfy the sc-fi/ fantasy nerd in me I am re-reading The Name of the Wind by Patrick Rothfuss.

In the business genre I am reading The Brand Gap by Marty Neumeier – a really terrific little book about crafting a more charismatic brand for your business.  This book is packed with excellent insight and focuses on the concept of bringing strategic thinking and design together to create a more cohesive and thoughtful brand.  It’s a great book and I would definitely recommend it to anyone struggling with the idea of elevating their firm’s brand in the marketplace.

Your Shareholders May Be the Greatest Risk to Your Stock Value

Managing risk is essential to maximizing the value of your firm.  As a result, business leaders are challenged to mitigate risk by staying on top of all aspects of company operations. However, firms are often overlooking the age demographics of their shareholders.  Far too many firms are not incorporating ownership planning into their strategic plans and this is increasing the risk of NOT achieving your strategic plan.

Appaisers assess business risk by relying on historical financial performance to derive their understanding of the operating risks.  If profits are too high they may question the sustainability of the current profit margins. If revenues (and hopefully) earnings are growing faster than the overall economy, they will assess the sustainability of the current growth rates.  As such, a business appraiser will assign a discount rate to reflect the risk the future cash flows based on current performance.

Liquidity risk of a stock in a closely-held company is more difficult to assess because the factors that impact the discount for lack of marketability are more intangible in nature.  When comparing the stock value of a closely-held company to a publicly traded company with similar services and risks, an investor can reasonably expect a discount for lack of marketability ranging from 20% to 45% on the value of the closely-held company.  An investor is able to dispose of his investment in a publicly traded company at any time so long as there is a market for that stock.  But closely-held firms do not have a public market for their shares and usually have restrictions on who can own the shares (usually employees of the company).  In fact, most shareholders typically hold onto their investment until they terminate their employment with the company.  That inability to dispose of their investment in a timely manner increases the investment risk.  Factors that impact the discount for lack of marketability include the attractiveness of the industry, volatility of cash flow, future prospects for the company within the industry it serves, and quality of the management team.

However, another factor that we are seeing more frequently as a risk to liquidity is the age demographic of shareholders.  We are currently seeing increasing repurchase obligation risks among our clients as more Baby Boomers begin to retire.  As a result, the supply of shares is exceeding the demand and this is having an impact on a firms’ future available cash flow.

There are five forces competing for that available cash flow that leaders must manage efficiently.

  1. Working Capital – Firms must “invest” cash until a client pays its invoice.  The longer it takes to collect on its accounts receivable, the more cash that is required to be invested in the company.  The most common working capital accounts demanding cash are accounts receivable and work in progress, or WIP.
  1. Debt Obligations – Many firms will finance some or all of their capital investments in order to limit current uses of cash.  Sometimes the demand for cash is so strong that companies are forced to borrow in order to meet those demands.  Most common sources of creditor financing are lines of credits, term loans for capital investments, and shareholder seller notes.  The latter usually occurs when companies redeem shares from a shareholder.
  1. Capital Expenditures – The most common types of capital investments made by an A/E firm is often represented by computers, office furniture, field equipment, vehicles, and software (Auto-Cad ® and ERP systems).  In high growth A/E firms, it is also not unusual to see significant investments in leasehold improvements as firms acquire more space for its employees.  Many firms will exercise greater discretion in deferring capital expenditure when cash flow is weak.  In professional services firms, the risk of deferring capital investment is much lower than a company that is asset intensive, such as a manufacturing firm or a real estate company because the key underlying assets of professional services are the people – labor.
  1. Incentive Compensation – Many firms, in order to attract, retain, and motivate their employees, offer benefits above and beyond their base salaries.  While most incentive compensation plans are often tied to company and individual performance, employees of many A/E firms have become accustomed to seeing incentive compensation as part of their overall compensation package that it has become, for better or for worse, a standard benefit plan.  
  1. Return on Investment – Critical to ensuring liquidity of common stock in a closely-held company is the ability to make available current returns on investment – dividend payments.  An A/E firm is likely to generate most of its return requirement on current returns rather than long term returns (stock appreciation).  As a result, many shareholders of closely-held companies have come to expect an annual distribution of profits based on their pro rata interest in the company.

In the event that the future repurchase obligations consume increasing portions of your firm’s future available cash flow, will your firm be able to adequately fund the five sources of demand for cash? We have seen an increasing number of firms trying to meet their repurchase obligations by deferring capital expenditures, reducing incentive compensation and reducing profit distributions. Deferring capital expenditures for an extended period of time can limit your firm’s ability to compete in an already tight competitive environment – especially if you haven’t been making significant investments in technology. Reducing incentive compensation so you can allocate your profits to former employees to satisfy the shareholder notes can leave your employees disillusioned – especially if the company is performing well.  Reducing profits allocated to shareholders, reduces the dividend pay-out which in turns reduces the liquidity of the shares.

I have been conducting business valuations for 25 years and never have I witnessed more A/E firms either implementing or considering ESOPs than today. As a result of firm leaders incorporating ownership planning into their strategic plans, more A/E firms are finding that ESOPs can be the vehicle that increases the available cash flow to meet the needs of the five sources of demand.  Plus there are great tax incentives that can increase the liquidity of your shares.and companies that sponsor an ESOP, for the most part, enjoy lower discounts for lack of marketability than non-sponsoring firms. It is important to note, however, that ESOPs should not be considered the solution to all of your shareholder liquidity issues

Ownership planning must be closely tied into your strategic plan. Understanding your repurchase obligation will allow you to see if your future growth objective is even feasible given the availability of cash for future growth.  If this is a concern of yours, you’re not alone, at Rusk O’Brien Gido + Partners, we find that the two biggest challenges facing companies today are sustaining growth and repurchasing shares of retiring employees. Give us a call if you think we can help your firm.

If your stock is becoming too expensive…

It’s an increasingly common refrain that we hear. As firms experience growth in revenue and earnings, their stock value naturally increases. This might be great for the existing shareholders, but from the vantage point of ownership transition planning it can be problematic if new investors decide that they can no longer afford to buy in. Some firms choose to address this issue by artificially depressing their share price, or heavily discounting it for new investors. But this can create a host of other problems. A potential solution to this issue is a leveraged recapitalization.

A leveraged recapitalization can provide liquidity to existing owners and/or future growth by borrowing against the company’s future earnings while also allowing the shareholders to maintain their ownership and control of the company. Additionally (and most importantly) a leveraged recapitalization, can temporarily reduce the company’s share price, making it easier for new shareholders to invest in the firm.

In broad terms, there are two types of leveraged recapitalization. The first is known as a leveraged cash-out, in which the company gives its owners a special dividend financed by debt. Because of this dividend’s issuance, the market value of the company’s shares will decrease, thereby allowing new shareholders to buy-in at a lower cost. The second type is known as a leveraged share repurchase, which is where the company repurchases a large block of shares, again, financed by debt. To illustrate the benefits mentioned above, this article focuses on the former of the two types of recapitalization.

To illustrate this, let’s first look at an example of a typical scenario of a growing firm selling stock to new investors. Let’s assume in Example A that the enterprise value (EV) of your firm was $2.0 million on January 1, 2014, that there were no outstanding debt obligations, and that the firm had $100,000 in cash. This would represent an equity value of $2.1 million. Let’s also assume that there were 30,000 shares issued and outstanding – this would represent a price per share of $70.00. Your firm sells 2,500 shares at $70.00 and collects $175,000 from the sale of these new shares. One year later, the enterprise value of the company and its cash balance (including the cash received from the sale of new shares) have both increased by 10% due to growth in revenue and earnings, so when we calculate the updated equity value, the result is $2,502,500, or $77.00 per share—an increase of 10%, as would be expected.

Example A


Here is where the affordability issue can surface. If the growth illustrated above continues at the same rate, the Company’s share price would double every seven years (approximately). Unless the pool of new investors is growing at the same rate, this will be problematic for your ownership transition plan.

So let’s look at how a leveraged recapitalization might improve this scenario. In Example B, we assume that the company has borrowed $400,000 and used the proceeds to fund a special dividend to the existing shareholders. As in Example A, we have assumed the company decides to sell 2,500 shares – but now, due to the impact of the new debt on the company’s equity value, the price is reduced to $56.67 per share—making the stock much more affordable for new shareholders.

Using the same assumption of 10% growth in enterprise value and cash, including the $141,667 ($56.67 x 2,500) raised from the sale of new shares, and the impact on cash and debt balances from debt service payments, the resulting stock value one year later is $62.95.

 Example B


So to summarize, in the leveraged recapitalization scenario above, existing shareholders are paid a special dividend of $400,000, funded by debt. The new debt immediately lowers the per share price for new investors by 19%, making the stock more affordable and a more attractive investment. Assuming 10% growth in revenue and earnings over the next year, the existing shareholders still realize a positive annual return of 9% (the decrease in their stock value being offset by the $400,000 dividend they received), which is only slightly less than in Example A. Finally, the new shareholders see an 11.1% appreciation in their initial investment.

The scenario illustrated above is what makes the argument for a leveraged recapitalization so compelling – current owners are able to enjoy a one-time dividend payment while making the investment more affordable for new shareholders.

Companies that are best-suited for this type of ownership planning are those that have strong and consistent cash flows and are not highly leveraged to begin with. If yours is such a firm, and you feel that there is a chasm between the financial constraints of potential owners and the financial expectations of current owners, a leveraged recapitalization may be worth considering. If you’d like to learn more about this and other strategies for ownership transition, please feel free to contact us.

Rusk O’Brien Gido + Partners provides financial advisory services for the architecture, engineering and environmental consulting industries. We are accredited business appraisers with decades of experience in providing valuations, mergers & acquisition advisory services and ownership transition planning.

Tackling the Human Behavior Side of Ownership Transition Planning

When A/E business owners begin to think about ownership transition planning, the focus tends to be on what I would refer to as the “mechanical” side. By mechanical, I mean the legal and financial elements, such as how to value the firm’s stock, how to finance stock redemptions, or how to structure the shareholders agreement. And I must admit that as a business appraiser and financial consultant, this is often the angle from which I first approach transition planning.

While these mechanical aspects must be dealt with in any ownership transition plan, the larger challenge is often non-mechanical — the human behavior side. Even with the best plan in place, if the next generation of owners is ill-prepared to lead, or unwilling to take on the risks (financial and otherwise) of ownership, there will be little to no chance of success.

Tackling the human behavior side of transition planning requires an understanding of generational differences.  Many people will rightly argue that you can’t paint all members of a particular generations with the same brush, whether its Baby Boomers, Generation X, Generation Y or Echo Boomers.  However, the truth is that each generation has shared characteristics and values shaped by the environment in which it came of age.  Understanding these common characteristics, particularly the differences in professional work habits, motivations, and leadership styles is a critical aspect of attracting, retaining and developing the next generation of leaders, thereby laying the groundwork for a smooth transition.

My friend Bob Kelleher of the Employee Engagement Group has spent the better part of his career examining workplace cultures within some of the world’s largest A/E and environmental consulting firms, and building an understanding of these generational differences.  He eschews the notion that millennials, as they are commonly referred to, lack motivation, or work ethic (a common refrain from older generations). He states,

“Millenials are willing to work every bit as hard as the generations that preceded them, they just work differently, and they’re not necessarily motivated by the same things.  This often creates a disconnect inside A/E firms. The vast majority of company cultures are derived from founders and principals who come from older generations – generations whose motivations are vastly different than the millennials who are entering the workplace. This disconnect needs to be addressed because millennials will make up the largest population in the workplace as early as 2015!”

 Creating a workplace culture that allows your firm to attract and retain the best of the millenials, and allows them to grow and thrive is every bit as important as the mechanical aspects of your ownership transition plan, not to mention all the other benefits, such as reduced employee turnover and better financial performance.

If you’re interested in exploring the topic of ownership transition planning from a more holistic level, we’re pleased to be co-hosting a one-day workshop together with the Employee Engagement Group.  Titled Solving the Cultural and Financial Challenges of Ownership Transition, this workshop will be led by Bob Kelleher and me (Ian Rusk), and will cover the following topics:

  • An overview of the A/E industry and the unique challenges of transition planning
  • The cultural and workforce dynamics at play in today’s post recessionary times (Do you know– “who’s sinking your boat?”)
  • The vastly different motivational drivers of Baby Boomers, Generation X and Generation Y (the millennials)
  • How to identify and engage your future leaders and owners
  • Strategies for getting your future leaders to think like owners
  • Identifying the perfect ownership model for your firm
  • Making your company’s stock the best investment in your portfolio
  • Succession planning best practices – so you can turn over leadership and ownership with confidence
  • The role of mergers & acquisitions in building a leadership pipeline

All this and more will be covered on one day; Tuesday, June 17th 2014 at the Westin Waltham, just outside Boston. You can learn more and register by visiting www.rog-partners.com/generation-seminar or if you have questions, email us at Events@ROG-Partners.com.

2014 M&A Outlook – Where are the Future A/E Leaders?

febquoteA number of years ago, we represented a mid-sized, highly regarded environmental consulting firm.  Despite the full impact of the recession at the time, the company was growing, profitable, and had a surging backlog of new opportunities.  The group had a great culture and a clearly defined program for transferring shares internally.  In fact, the ratio of shareholders to employees was an extensive 1:3.  Why did they sell?

No one was willing to step up from a leadership perspective.

The president sighed as he admitted to me that while his passionate younger staff loved the scientific challenges of solving complex environmental and water issues, not one of them had either the acumen or the passion to assume an executive role.  No one was interested in reading a balance sheet, dealing with mundane yet critical administrative matters, working with a bank or insurance agency, or setting the organization’s course for the next 10+ years.  A sober, yet revealing scenario.

Over the past few months alone, I have heard the following statements from A/E leaders of various disciplines and sizes:

“We have great project managers and technical staff, but as I look around here no one really has that fire in the belly to take over my spot.”

“I was hoping to retire next year, but am going to have to extend that indefinitely until we see if Tim is up to the task. If not, we’ll be looking to sell.”

“After I couldn’t convince Tracy to take the President spot, I may have to consider an outsider, which is something we’ve never tried before.” 

Sound familiar?  Over the last few years, this has become a growing refrain from presidents and principals seeking a firm merger or sale.  Traditionally it’s the ownership transition dilemma: the difficulty in effectively moving blocks of stock from one generation to the next, that forces owners into the arms of a larger suitor.  Only a small firm problem you say?  Nope.  You’d be surprised at the scarcity of future leadership talent at some ENR 500 firms, many of which are reliant (to the point of paralysis!) on the decisions of one or two senior people for making the organization function.

That being said, please know we are fully aware that our industry has tens of thousands of smart, ambitious, and influential young people and future leaders who will be moving A/E firms into the 21st century.  We interact with them on client engagements and at industry events, and always come away very impressed.  Many firms today have mentoring and coaching programs in place to nurture their junior team members, and while it’s convenient to make generational stereotypes with challenges like this, the good news is that more organizations are becoming pro-active in identifying and cultivating their leadership ranks.

The basic predicament for the industry, however, is the dual problem of leadership quantity and quality.

We should all be familiar with the quantity dilemma by now.  In short, there are too many A/E firms led by too many baby boomer partners and owners (born between 1946 and 1964) and not enough Generation X staffers (born between 1965 and 1983) coming behind them.  To make matters worse, the internet boom of the 1990s convinced many engineering majors to instead pursue IT career paths, similar to how the recent building bust has discouraged thousands from studying architecture today.  So while the intent to pass the torch internally might be there, oftentimes the math is difficult to make work.  A/E firms a generation ago could select from 8 to 10 eager “up and comers” for the top slot; now many only have 1 or 2 choices, if any.

The other issue is one of quality, or at least perceptions of it.  It’s common that today’s A/E leaders, often first generation owners in particular, can be quick to offer a list of limiting factors (lack of work ethic, appetite for risk, or the desire to lead) as to why no one individual is ready to lead their firm.  Maybe those reasons are legitimate and maybe not, but for founders there could also be underlying issues of control, ego, enjoyment of work/purpose, or a general fear of implementing change, that need to be confronted.  Too often a response from young professionals is that they indeed have the aspirations and talents to lead, if only those above them would train, develop, and groom them.  It’s a double-edged sword argument we hear all too often.

So, in the long-run, how will the potential lack of effective leadership succession influence future M&A activity and tactics?  Three thoughts:

  1. It could accelerate it. Simply add this challenge to the growing list of reasons A/E owners are deciding to sell (for purposes such as maximizing shareholder value, removing professional and personal liabilities, diversifying financial holdings, as well as concerns over health and personal/family reasons, or an increasing higher tax and regulatory climate, etc.).  Time to take the firm out to market.
  2. It could soften it.  Unless it’s a “body shop” transaction, buyers typically want an organization with some number of promising individuals who can motivate others, sell work, participate at the strategic level, and contribute to the long-term direction of their firm.  Candidly, they don’t necessarily want all “top-heavy” aged leaders whose best days are behind them.  Lack of bench strength in any type of professional services firm, big or small, can turn off suitors.
  3. In the context of cutting a deal, key owners without budding leaders may have to accept lower valuations, lengthier or more stringent employment agreements, carve-out deal proceeds to key non-owners, or allow junior members to participate in earnout arrangements.


After a lethargic year of industry deal making in 2013, we remain cautiously optimistic for a better 2014.  Design and construction activity are steadily rebounding – evidenced by an improved AIA billings index, E&C stock prices, and overall construction spending (at a 5-year high!).  Anecdotally, our recent discussions with a wide number of U.S. and international leaders of all disciplines have most gearing up for growth and eager to accelerate their presence and scale through M&A (see AMEC’s recent announcement to acquire Foster Wheeler for $3.2 billion which could portend more large scale, “transformational” combinations).  Private equity firms continue to express interest in our sector, either with “platform” opportunities or bolt-on deals.  As with any transaction, careful planning, managing expectations, and focused execution are more than half the battle!

At Rusk O’Brien Gido + 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.

New Study Reveals What People REALLY Pay for A/E Firm Stock

If you were interested in buying a house, and the seller told you it was worth $1 million, would you take their word for it and write them a check. I certainly hope not. Ideally, you’d want to see an appraisal. At the very least you’d want to do some research to see what similar homes had actually sold for—what appraisers refer to as “comparable sales.”

Transacting stock in a privately held A/E or environmental consulting firm should be no different. As business appraisers and financial advisers, we make our living helping owners establish the value of their businesses, and transact stock either internally (to other employee-managers) or externally (through a strategic merger or acquisition). But we also realize that not every situation requires a full independent business appraisal. Sometimes all a business owner or a potential investor needs is some independent data on “comparable sales.”

While there are surveys of how firms in the industry value themselves and the formulas they use to do so, there has never been an in-depth study of actual transactions of stock between willing buyers and willing sellers in the A/E industry, UNTIL NOW.

Over the last six months we have been conducting a confidential survey of firms in the architecture, engineering and environmental consulting industry, as well as researching stock transactions in the public realm. The result is the 2014 A/E Business Valuation and M&A Transactions Study.

What makes this study unique is that we have incorporated ONLY data from actual transactions where consideration (cash, notes, earn-outs, etc.) has changed hands between willing buyers and willing sellers. The study examined data from over 200 distinct stock transactions collected via a confidential online survey. We have supplemented this with data collected from publicly available sources. All data was analyzed and compiled by accredited business appraisers with decades of experience valuing privately held A/E firms. The result is the most comprehensive and reliable study on business valuation ever published for the A/E and environmental consulting industries.

Among other information, the study provides statistical data on the following valuation ratios or “multiples.”

  • Enterprise Value / Gross Revenue
  • Enterprise Value / Net Service Revenue
  • Enterprise Value / Pre-bonus EBIT (earnings before interest & taxes)
  • Enterprise Value / Pre-Owners’ Bonus EBIT
  • Enterprise Value / Pre-bonus EBITDA (earnings before interest, taxes, depreciation & amortization)
  • Enterprise Value / Pre-Owners’ Bonus EBITDA
  • Enterprise Value / Number of Employees (full-time equivalent)
  • Equity Value / Pre-Tax, Pre-Bonus Profit
  • Equity Value / Pre-Tax, Pre-Owners’ Bonus Profit
  • Equity Value / Book Value

Unlike any other surveys on the subject, this study examines the differences in valuation multiples between controlling and minority interest transactions, the difference in value between marketable stock (stock of publicly traded firms) and non-marketable stock (stock in privately held firms), and the valuation of stock in ESOP (employee stock ownership plan) transactions. Also provided is a statistical analysis of merger and acquisition deals—including how the transactions were structured, and the forms of consideration paid.

Data from this study begins to quantify concepts like the premium paid for controlling interests in A/E firms. For example, the survey, which includes statistics on 40 controlling interest M&A transactions revealed that earnings multiples in controlling interest transactions were 48% to 80% higher than corresponding earnings multiples in minority interest transactions.


As a bonus, the collection of detailed income statement and balance sheet data from survey participants afforded the opportunity to calculate a wide variety of key financial performance metrics—19 in all. These financial metrics are also detailed in the study and include: net service revenue growth rates, various measures of profitability, staff utilization rates, labor multiplier rates, overhead rates, return on assets and return on equity, various balance sheet and leverage ratios, and more.

This study is available for a limited time for only $349. Click here to purchase.

Does the valuation of your company’s stock reflect ALL of its risk?

Whether a business valuation is done for purposes of transferring ownership internally from one employee to another, or for meeting the regulatory requirements of sponsoring an employee stock ownership plan, the risk associated with such an investment is a critical element in determining its value.

So, what is risk?  Oftentimes, an appraiser will look at risk from a business operating point of view.  When valuing a closely held firm operating in the A/E industry, we look for risk in areas such as key personnel, customer concentrations, markets served, and geographic concentrations – just to name a few.  Aside from these, another area of risk to which we’ve been paying much closer attention lately is stock redemption obligation risk. This risk is often accounted for in the discount for lack of marketability.

If your firm receives an annual valuation of its common shares from an accredited business appraiser, then you will be familiar with the discount for lack of marketability.  This is the discount rate that is applied to the underlying security being valued to account for its illiquidity.  In a closely held company, the transfer of shares is often restricted by the terms of a shareholders’ agreement. Often, shareholders in such firms may only sell their stock under certain circumstances and only to certain buyers– typically other employees and/ or the company.  The discount that is applied to account for this illiquidity is determined by many factors, but the most common factors that are considered include; company characteristics such as size, performance, and operating risk; restrictive transfer provisions; dividend payments; rights to sell shares back to the company (“put rights”); information access and reliability; and attractiveness of the industry or company to investors. But because of recent trends in the industry, these factors alone may no longer fully account for illiquidity.

Since the recession, many A/E and environmental consulting firms have postponed their ownership transition plans because their values have fallen, and retiring shareholders have been unwilling to sell at a depressed value. The resulting delay in transitioning ownership has increased the shareholder repurchase obligation risk at many firms because there are more people closer to retirement today than there were in 2008.  Most shareholder agreements stipulate that either the company or its remaining shareholders will repurchase the shares of retiring shareholders. Either way, the company must make available adequate cash flow to fund these obligations.  Competing for this cash flow is the need to reinvest in working capital and fixed assets as the firm grows.  The potential strain on cash flow has the potential to impair the liquidity of the company’s stock, and must be carefully examined by the appraiser and management alike.

Below are the key forces that compete for a firm’s cash flow, and therefore impact its value:

  • Working Capital – most often the biggest working capital requirements of a firm in the A/E industry is accounts receivable.  The slower you collect your A/R, the more cash you’re required to invest in your company.
  • Capital Investment – new equipment, tools, office expansion, and training and development for new employees requires cash.  Will your firm be able to adequately train and equip new employees to deliver the services that your customers demand?
  • Redemption Obligations – on average, 10,000 people a day are reaching retirement age (65) and there is a much smaller group of younger employees available to purchase the shares of retiring employees.  In order to manage their cash flow, many A/E firms will issue promissory notes to ensure that they have adequate cash flow to fund this obligation.  This approach increases financial leverage risk however, and firms should be cautious not to take on too much debt. During the recession, the biggest factor that distinguished surviving firms from failed firms was their ability to service their debt obligation with lower revenue and earnings.
  • Incentive Compensation – for many firms, incentive compensation has not returned to its former levels.  In fact, there are still many firms that have yet to reinstate their 401(k) matching programs.  Will your firm have adequate cash flow to keep your talented employees?  If too much annual cash flow is required to service the debt obligation of repurchased shares at the expense of incentive compensation, you could have difficultly retaining your key employees.
  • Return on Investment – a key factor to creating demand for ownership in a closely held company is the annual profit distribution to shareholders.  Typically, shareholders are paid “last” (i.e. after employees, vendors, debt holders, etc), but have the highest reward potential.  If your firm is unable to make meaningful profit distributions to shareholders, this could have a significant impact on share liquidity as many buyers depend on the return to help fund the cost of their investment.

Over the past two years, we have seen more firms shift their cash flow allocation to improving shareholder liquidity, but this has come at the expense of allocating cash flow to incentive compensation.  The valuation of your company must consider not only  the liquidity risk of the shares, but the risk of not being able to invest in growth because of increasing cash flow demand for shareholder repurchase obligations.  Reviewing your shareholder and employee demographics should be considered when understanding the risk of owning stock in your company.

maysemboilerIf you are interested in learning more,  we will be conducting a one-day seminar on ownership transition strategies at the San Diego Bayfront Hilton on Thursday, May 15th.  Come join Steve Gido and me as we present options that address your ownership transition challenges while managing your valuation risk.