2016 Perspectives

Five Takeaways on 2016 A/E M&A Activity

Well, you can’t say that 2016 has been dull. In a year that produced memorable comebacks, upsets and surprises across a spectrum of institutions, whether it was geopolitical (Trump victory, Brexit referendum), financial (Dow 19,000), sports (Cubs and Cavaliers’ wins, Villanova’s buzzer-beater) or cultural (alas, Brad and Angelina), the country is due for a much needed breather after these wild 365 days!

Given this setting, A/E executives pulled back and took a measured, “wait & see” approach to deal making this year. By our tabulations, the number of 2016 North American A/E and environmental consulting transactions will be down about 8% from 2015 levels. Overall we’re rather impressed at the resiliency and interests of both buyers and sellers in an otherwise turbulent period. When you consider the nonstop melodrama and uncertainty of the election, depressed oil prices, growing number of CEO successions, and a “stop & start” A/E industry defined by persistent unevenness, the fact that as many exciting combinations came together is a testament to the core M&A motivations of an ever-consolidating industry.

In fact, recent conversations with A/E executives and corporate development teams indicate a general relief that the election and rhetoric is over. Furthermore, many feel a promising (and overdue) renewal of American infrastructure, energy, building and environmental investments may be on the horizon. As a result, leadership teams are assessing the “where’s and how’s” of their 2017 planning exercises and it’s clear that acquisitions are a critical part of that effort and execution.

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

  1. A solid year for mid-sized deals – With the exception of the Stantec-MWH Global merger, 2016 failed to produce other large-scale, transformational combinations. However, underneath that level, there were a number of intriguing deals among ENR 500 mid-sized firms, most notably in architecture and facility engineering, such as: NV5 acquiring both JBA Consulting Engineers and Sebesta; Day & Zimmerman – Hankins & Anderson; DLR – Westlake Reed Leskosky; and Stantec – VOA Associates. And while publicly traded firms were somewhat quiet with the active exceptions of Stantec, NV5 and KBR, private equity backed A/E and environmental firms continued to recapitalize, acquire new platforms, and add niche targets to existing portfolio companies. Companies here include ATC, Jensen Hughes, Trinity Consultants, Cumming, RES, Surveying & Mapping, and Environments for Health Architecture.
  2. The Sunbelt is where it’s at. While a sizable number of industry transactions are motivated by fortifying local or regional footprints, M&A goals for geographic diversification continue to be dominated by pursuits to the South. Admittedly, this has been going on for many years and not a huge surprise given national trends in population migration, immigration, household formations, new industry clusters (energy, industrial, manufacturing, tourism), and their direct correlations in design and building activity. However, the Sunbelt deal trend is most certainly accelerating. Active engagements as well as talks with Presidents and Principals on desired target criteria profess a continued appetite for A/E and environmental consulting firms from Virginia through Florida, across the Gulf Coast into Texas, and westward through Southern California.
  3. A tough hiring climate tilts the “buy vs. build” calculus. The one clear takeaway from our recent Growth & Ownership Strategies Conference in Naples, as well as our conversations with industry recruiters and human resources managers, is that quality architecture, engineering and environmental professionals are simply in high demand. There is a consensus lament of being unable to consistently find (let alone hire!) people at practically all levels and disciplines (incidentally, this is also problematic with construction firms everywhere). As a result, signing bonuses, multiple bidding wars, and escalating offers are back in vogue as candidates ponder their career options compared to the uneasy environment of just five years ago. Given that tighter labor pools are a constrictor to growth and project delivery, the economics and efficiencies of acquiring talent through M&A as opposed to incremental organic methods is increasingly appealing.
  4. On the one hand, future infrastructure spending looks bright. It’s increasingly likely that U.S. infrastructure spending could be a major policy, economic and jobs driver for the Trump administration. In fact, E&C stocks have rallied since the election in anticipation that their companies will be direct beneficiaries of major investments in new roads, bridges, pipelines, dams, ports and tunnels. Obviously, the amount, timing and composition of such a massive legislative package will have to be negotiated as well as how it will ultimately all be funded given budgetary pressures elsewhere. At the state level, voters approved major transportation and education construction-related initiatives in Colorado, Texas, California and North Carolina with a combined value in excess of $135 billion. Engineering firms with dedicated expertise in civil and transportation/transit are well positioned and promising acquisition targets.
  5. But are we reaching the top of the industry cycle? Although both the macroeconomic and A/E recoveries have been relatively slow and sluggish since 2010, they haven’t been outright recessionary. The U.S will enter 2017 in its third-longest recovery without a recession since the Great Depression, so an argument can be made (as some prominent banks and economists have done) that the likelihood of a recession will rise. Interest rates are heading higher, inflationary forces may accelerate, and there is always the possibility of a systematic or event-driven risk that policymakers can’t predict. We saw this in 2007. We’ve spoken with A/E executives who privately express their firm’s growth and profitability levels are topping out while here at ROG we’ve mused if the A/E industry can truly reaccelerate its growth. In the long-run, M&A is a confidence game on outlook and convictions, so time will tell.

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!

2016 Mid-Year CEO Outlook

What a strange and unsettled year 2016 has turned out to be! The A/E industry marches along resiliently despite mixed economic signals, uneven growth and global headwinds, and restless political uncertainty. To help us make sense of it all, we’ve assembled our biggest and broadest Mid-Year CEO Outlook ever. We touched base with 7 prominent A/E leaders from across the country to gauge how their years are shaping up, where they see promising opportunities for growth, what are their client’s top concerns, and their post-election hopes for our industry and nation. 

Jack Bedessem, P.E., President & CEO, TriHydro, Laramie, WY

BedessemHow has Trihydro’s performance fared so far in 2016?

At the beginning of FY 2016, we established conservatively optimistic financial performance goals. These goals were less than our standard target range because of the economic challenges in the energy markets. Trihydro’s top-line performance has been flat, but our bottom-line performance has been strong through the first three-quarters of FY 2016. In general, our growth trend has flattened somewhat this year following more than ten years managed increases on the order of 14% annually.

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

Focused and managed diversification has been extremely important to our success, particularly during the great recession and more recently with the uncertainties facing the mining, oil and gas industries. All of our business units are realizing solid prospects for growth, but we anticipate our technology, water, air and ecological services will be more in demand over this coming year. Last year we opened a new office in Alaska, which created growth opportunities for staff, as well as new avenues to expand our environmental and engineering services.

What are the biggest concerns your clients face today?

Trihydro is fortunate to have an extensive long-standing client base, including many directly associated with the energy industry. Most clients, both private and government, are dealing with the same challenges and issues that our engineering and environmental consulting industry is facing. Planning for any type of major project or development becomes very difficult, if not impossible, during times of volatile markets. Uncertainty slows business decisions and undertakings to almost a halt, except for essential activities. Second, the price of oil, gas and commodities has caused many companies, as well as some local and state government entities to cut budgets, refrain from hiring, lay off employees and defer capital projects. Continued low prices appear to be having some impacts on other sectors in many areas and an underlining root for concern about the frailness of the overall economy. Lastly, there seems to be at least some concern about how to overcome the loss of experienced managers, as numerous baby boomers retire within the next five years.

Have you had to change your style of leadership over the last few years due to the uncertain and tepid economy?

I would say the messaging has had to change, but not necessarily style. The issues dominating news headlines over this past year have the potential to create subtle distractions and feelings of gloom and despair. We have been reinforcing information about the company’s health and our expectations for top-quality and responsive services, along with encouragement to work proactively with clients in solving their problems. It is also important to remember that the bearing of global and economic issues can be less evident, yet have very serious effects on field employees and subcontractors. As such, leadership actions and communications have emphasized the importance of working safely, so every employee gets home safe and healthy every night.

Regardless of the outcomes this fall, what are your hopes coming out of this election cycle?

There is really only so much that an individual, group or industry can do to influence the mega issues going on around us. It is important to track and understand those issues that can directly impact us, in order to sustain and grow our businesses, and safeguard our employees and clients. As far as hope beyond the elections, it would be nice to see less drama, more cooperation and forward-thinking real efforts that actually result in solving many of our national and global problems.

What are your plans this summer for rest and relaxation?

This summer has been busy and will continue that way. My wife and I are planning a couple of long weekends at our cabin, as well as a week-long camping trip to celebrate our 30th anniversary. Our daughters and their friends are also planning to visit and take in some western entertainment during Cheyenne Frontier Days. There is no better way for rest and relaxation, than spending time with family and casting for rising trout.

Kumar Buvanendaran, P.E., President & CEO, Prime AE Group, Baltimore, MD

BuvanendaranHow has PRIME’s performance fared so far in 2016?

PRIME has been extremely successful so far in 2016. We have been strategically aligning our projections for growth with our year-end goals. We have pursued and won large, complex projects with new clients; hired top talented professionals to enhance our geographic and strategic footprint; and broadened and strengthened our service areas to provide comprehensive professional A/E and technology services. PRIME started the beginning of 2016 with just over 300 professionals and by mid-year, we are at almost 360 and on target to exceed our revenue and staff-count projections. Our success can be directly attributed to the hardworking professionals who make up this company! At the end of the day, all you have are the relationships you fostered with your clients, and our success speaks to these valued relationships.

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

PRIME is seeing tremendous growth opportunities in the water/wastewater markets on a national level. With the federal government mandating consent decrees on local governments, we are seeing aggressive and ambitious project schedules within the capital programs of our targeted clients. Because of this, we have positioned ourselves with qualified key staff who will align with the projects administered through our current and prospective clients.

What are the biggest concerns your clients face today?

Our clients today are typically facing great pressure to “do more with less” in a faster timeframe. Budgetary demands tend to dictate the overall feasibility of a project but not the overall functionality that is still required. We see in our meetings the number of non-negotiables mandated within a project scope yet the flexibility to increase the budget to meet these items is unwavering. Our clients want to know the solution to their problem will not only be improved, but maintained and sustained for any unforeseeable future impacts.

You have acquired numerous firms as part of PRIME AE’s growth strategy. What do you typically look for in target firms and owners?

Strategic acquisitions have become an integral aspect for PRIME’s growth. I typically look for firms that can either supplement or complement a service we provide in-house, services that showcase a niche area expertise, and/or firms that expand our geographic footprint. I consider those to be my three most important considerations.

Regardless of the outcomes this fall, what are your hopes coming out of this election cycle?

I never thought I would be as politically invested in the election cycle for this year, but as PRIME continues to grow, I have to follow the platforms that will continue to endorse the importance of infrastructure improvement projects as well as the advancement of technological efficiencies. Every election year, I find myself more engaged with each political platform and how it relates to the A/E/C and technology industries. No matter who wins the election, I hope the emphasis on funding for transportation, healthcare, technology, and education improvements remain top priority.

Mark Israel, P.E., President, Universal Engineering Sciences, Orlando, FL

IsraelHow has Universal Engineering Sciences’ performance fared so far in 2016?

Our performance this year has been well above last year and well above plan. Revenues are above plan and up 29% year over year. Profits are 30% above plan and 168% above last year. Last year was a very good year for Universal. This year has been exceptional.

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

We see opportunities in the larger design build and P3 projects. We began focusing on these projects several years ago and we are seeing the benefits of that effort. The pursuit effort for design build is significant, the time frame to win is longer, and the win ratio is generally lower, but the projects are much larger and can be very profitable.

What are the biggest concerns your clients face today?

The biggest concerns include uncertainty in the private sector markets. We have land development and homebuilder clients that are always concerned about economic issues that will affect home builders. Our larger construction clients are most concerned with labor and material availability. Some sectors are becoming super heated and prices are escalating quickly.

Florida has bounced back in a big way from the depths of the recession. How have you responded to hiring and retaining talent in a more competitive market for staff?

Our staff levels are almost where they were at our peak in 2006. Our biggest challenge has been hiring certified field inspectors. We have retained a staffing firm to recruit candidates for interviews. Additionally, we have increased our in-house HR team to help with on-boarding, training and retaining our existing staff.

Regardless of the outcomes this fall, what are your hopes coming out of this election cycle?

My wish for the coming election is that it would come sooner, so we can get it over with. This process is awful and reflects poorly on the United States. We are better than this.

What are your plans this summer for rest and relaxation?

We just returned from Italy with the family. Next, my wife and I will be travelling in California and then biking in the Canadian Rockies.

John Lee, P.E., President & CEO, Barr, Minneapolis, MN

LeeHow has Barr’s performance fared so far in 2016?

2016 has been a challenging year for us. We are focused on providing environmental and engineering services to the power, mining, fuels, and public market sectors. Prolonged low commodity prices have stifled investment by many of our mining and fuels clients, which has in turn negatively impacted our fees with those clients. Fortunately, we have seen continued strength in the power and public sectors. We have also benefited from our long-term strong relationships with several fuels and mining clients—while their total spend is down significantly, we are increasing our wallet share.

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

We are still optimistic about the long-term prospects in our focus market sectors.  Early this year we opened an office in Salt Lake City to solidify our relationships with mining clients in the region and to expand our client base in the refineries and pipeline companies in the Rocky Mountain region. We continue to see our combination of environmental expertise and full-service engineering capabilities being valued by our clients.

What are the biggest concerns your clients face today?

Our clients struggle most with the continued uncertainty in today’s business climate associated with the economy, politics, and environmental regulations. While the general US economy is in recovery, many industrial sectors are lagging due to the lack of a robust recovery in their global markets. We need to help them navigate through the uncertainty, being aware of their fiscal constraints, but keeping an eye on the opportunities the future still provides.

You became Barr’s CEO in 2013. How has your leadership or communication style changed over the last few years?

It is interesting you mentioned leadership and communication together. Since I became CEO, the biggest change for me has been the need to focus on clear, consistent, and continuous communication. I’ve come to see that communicating openly about our intent and direction to our clients, our staff, and other external stakeholders is one of the most important things I do.

Regardless of the outcomes this fall, what are your hopes coming out of this election cycle?

I hope for less rancor and more bipartisanship to help eliminate the gridlock and uncertainty we have been seeing at both the federal and state levels. I do not expect a sea change, but perhaps incremental improvement is possible.

What are your plans this summer for rest and relaxation?

As a civil engineer, I find building things relaxing and therapeutic. I have been spending my free time this summer working on long-neglected projects at my home and lake cabin. Funny, but the two tons of flagstone I laid with my kids this past weekend seemed to reset me for another week at work. There are plenty more of those types of activities to carry me into the fall when my kids head back to college.

Ryan McLean, PLS, President & CEO, Psomas, Los Angeles, CA

McLeanHow has Psomas’ performance fared so far in 2016?

We’re on target in 2016 for a solid year with projected growth of 4.4%, after finishing 2015 with an unprecedented 14.7% growth – all organic. Following a year like 2015, where the firm was at a record high for utilization and profitability, 2016 feels slow, but we are really operating at more “normal” utilization rates and are still quite profitable. The firm’s trajectory from 2015 to 2016 may be unique to Psomas since there aren’t any substantive economic factors or market changes that have slowed our growth. Rather, several large dove-tailing projects moving through multiple teams at Psomas in 2015 have recently been completed or slowed. Our present backlog is now at more of a traditional historic pace.

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

Of the firm’s four major services, engineering, surveying, construction management, and environmental, we are expecting the largest percentage growth to come out of our environmental services in the next few years. Psomas acquired an environmental firm in 2013 with extensive experience in the NEPA/CEQA space and there has been much synergy with our clients. Our environmental services are primarily Southern California based and the goal is to move this expertise throughout our western U.S. footprint.

While, the Land Development market has been generally slow in recovery coming out of the recession, there are still major needs for housing in the west and especially California. Apartments are hot right now, and traditional single family housing is gaining traction.

What are the biggest concerns your clients face today?

Coincidently, in preparation of Psomas’ 2021 five year Strategic Plan, we recently interviewed over 100 of our clients to better understand their future and how they see the trends in our space. Three concerns were brought up by nearly all of the interviewees: staffing challenges, unreliable federal and state funding streams, and election uncertainties. The staffing challenges focused on the continued war on talent, resulting in high turnover and also the difficulty engaging and keeping Millennials in their workforce. Election uncertainties and funding issues were definitely related. Our clients didn’t have an answer as to which administration would be best for our industry and friendlier towards the country’s infrastructure needs. The next greatest area of concern, with about 60% of the respondents commenting, was related to government regulation. One of the client quotes explains “government regulations will continue to drive up the costs and reduce the number of projects/programs that can be completed and owners can afford.”

You have acquired numerous firms as part of Psomas’ growth strategy. What do you typically look for in target firms and owners?

In addition to our geographic strategy which includes adjacencies or connectivity to existing locations rather than leap-frogging across the country, we do hope to add specialty skills and leadership to strengthen our core businesses. Significantly, before beginning any real negotiation, and continuing through the due diligence phase of the acquisition process, we spend quite a bit of time assessing cultural fit. We also hope that the owners and leaders of a target firm would want to continue with the combined entity for 3 to 4 years.

Regardless of the outcomes this fall, what are your hopes coming out of this election cycle?

That the Congress and the President will develop a strategic plan together for the country to solve our many problems and that this economy doesn’t fall back into a recession.

What are your plans this summer for rest and relaxation?

Friends have been encouraging my wife and I for years to take an Alaskan cruise and we’re finally going to do just that. Everyone who has cruised Alaska has raved to us about the great time and fantastic scenery so we are really looking forward to that time away from the action.

Ozzie Nelson, Jr., Chairman & CEO, NELSON, Philadelphia, PA

NelsonHow has Nelson’s performance fared so far in 2016?

It’s been a really strong year for us so far. For the first half of the year, we actually took a “strategic pause” in terms of additional merger activity to: a) make sure the integration of the 5 firms which we acquired over the past two years was progressing on schedule, and b) evaluate our internal infrastructure to support future growth.  Organic growth will surpass 10% and we will be ready to get back to strong acquisition pace by the end of the year. We’re looking at an annual revenue run rate of close to $100 million dollars with over 700 employees by the end of 2016.

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

It would probably be easier to identify markets and service that are not busy. We’ve been actively looking to add Teammates to almost all markets and service lines over the past few months. We’re also getting ready to launch our TAMI practice – a team of thought leaders and design talent dedicated to the Technology, Advertising & Media, and Information business sector.

What are the biggest concerns your clients face today?

The business world continues to evolve at an unprecedented pace. Move too cautiously and you will get left behind. Move too aggressively and you might make commitments that cannot withstand significant changes in the market. We are hearing requests for solutions that minimize exposure and maximize flexibility.

You have acquired numerous firms as part of Nelson’s growth strategy. What do you typically look for in target firms and owners? 

Yes, 30 acquisitions to date! Cultural fit and the alignment of strategic objectives are currently the most important early indicators for firms which we consider acquiring. Under those broad topics, commitment to the employee experience, to customer satisfaction, profitability, design capability and brand – those are usually the important subsets.

Regardless of the outcomes this fall, what are your hopes coming out of this election cycle? 

That we are able to gain bipartisan support for the reduction of U.S. debt.  That unfortunately is not just a math exercise, it is a matter of the general population recognizing the economic tsunami that continues to pick up steam as it gets kicked down the road.  With that understanding and strong leadership, we would then need to embrace a plan of shared sacrifice in order to spare future generations grave economic hardship.

What’s on your summer reading list? 

No one significant book this summer – instead I am embracing a broad range of inspirational and spiritual readings.  One I would recommend is The Seven Spiritual Laws of Success by Deepak Chopra.

Joseph Tortorella P.E., President, Silman, New York, NY

TortorellaHow has Silman’s performance fared so far in 2016?

This has been a very steady year for us. While the first three months were all record breakers, the next three stalled a bit and balanced off the year. We expect about 10% growth over last year with profits similar as well to last years. We are confident that we will finish the year off very strong as we have an excellent backlog and some really large projects about to start.

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

We continue to see the affordable housing market increase. While this is not a profit center for us, it serves our social consciences. We have also seen growth in the museum sector with many RFP’s still coming into the office. Universities and colleges are spending again and this has remained steady from last year. Lastly, our healthcare division continues to see strong growth.

What are the biggest concerns your clients face today?

I will spin this to voice my concerns on how their demands are affecting public safety and quality. To us, they seem to be mostly concerned about schedules. We see clients getting overly aggressive on this front to a point where we have reached our limits on what we can successfully do. It has to take a set time to complete a project. Despite technology, you cannot keep cutting schedules (and fees). At some point, something has to give and they are putting quality control at a great risk. Everyone needs to slow down a bit and rethink what’s best for the industry.

How have you responded to hiring and retaining talent in a competitive New York City market for engineers?

We have had a successful hiring season, adding about 20 new engineers and several Revit drafters this spring season. Retention has never been a problem for us, although this past year saw several leaving either the profession or the NY market as they were tired of the constant push on their time. In exit interviews, they all struck the same chord…not enough time to do what they consider a quality project and owners are pushing too hard for faster results. We fear this is heading down a dangerous path. We strive for work-life balance and when we fail, we feel the results.

Regardless of the outcomes this fall, what are your hopes coming out of this election cycle?

We are always confident that the strength of our country’s economy and workforce will pull us through almost anything. Having never had a layoff, even after the 2008 recession, we believe we can endure no matter who leads this nation. If there is a hope, it would be that sane heads prevail and finally put money into our aging infrastructure. While we are not horizontal engineers, we believe money invested into infrastructure will reap benefits in the vertical market. Look at New York City’s High Line project and what it did for the neighborhoods surrounding it.

What are your plans this summer for rest and relaxation?

I like to play golf and find that is my “meditation”. Being outside and relaxing for four hours with friends is always a great escape for me. My eldest daughter just got engaged so relaxing this summer in anticipation of the wedding next year will not be easy!

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Is the End Near for Traditional Management/Ownership Structures?

There’s no doubt about it. Attitudes regarding ownership, particularly among younger generations, are changing. Why own a car when, with the touch of your iPhone, you can summon an Uber or Lyft driver to take you where you want to go? Why own a house or condo, when you can rent?

As these generations progress in their professional careers, I wonder what impact this cultural shift will have on the ownership and capitalization structures of architecture, engineering and environmental-consulting firms.

Employee owners have traditionally been the primary source of capital for firms in the industry. More specifically, senior managers and firm leaders have provided the lion’s share of equity capital, with a typical ratio of owners to total staff during the last 10 years of approximately one to 10.

Use of debt capital in the industry generally has been light for a variety of reasons. To begin with, A/E firms are limited in terms of collateral to borrow against (accounts receivable typically being the largest single asset on a firm’s balance sheet). Furthermore, owners of smaller, younger firms often are required to personally guarantee debt, and they’re loath to heavily leverage their companies as a result. Finally, the project-based nature of the industry makes revenue and earnings streams more volatile, and high fixed-debt obligations together with volatile earnings streams are not a good recipe. As a result, the typical ratio of market value of debt to market value of equity has been between one to four and one to six, according to our latest survey.[1]

Using some general industry parameters derived from our latest surveys, let’s try to put this in terms of real dollars. Suppose a hypothetical 100-person A/E firm has an equity value of $6.5 million (the total value of all outstanding stock). If there are 10 shareholders (a one to 10 ratio), the average equity investment per shareholder would be $650,000. However, as indicated in the chart below from our latest survey on ownership transition, the top three shareholders, on average, hold 70 percent of the stock, so each of the three largest shareholders in this “typical” A/E firm likely would have an investment of $1.5 million.

What is the ownership interest of each of the largest owners? Largest owner 2nd largest owner 3rd largest owner Sum of three largest
Minimum 5% 3% 1% 11%
Bottom Quartile 20% 11% 7% 51%
Mean 41% 23% 11% 70%
Median 33% 20% 10% 75%
Top Quartile 51% 33% 15% 100%
Maximum 100% 50% 26% 100%

Source: 2015 A/E Ownership Transition Study

If you subscribe to the notion that a fundamental change in attitudes regarding ownership is afoot, then it stands to reason that traditional ownership models must adapt accordingly. One change we’re already witnessing is in the ratio of owners to staff. Our latest survey shows the number of owners to staff increasing in recent years, and the most-recent ratio is one owner for every eight employees. Increasing the number of shareholders, all other things being equal, reduces the required equity investment of each individual owner. We believe this trend is likely to continue.

In the same vein, another trend is toward increased utilization of employee stock ownership plans (ESOPs) as well as an increase in the ownership stakes held by such plans. According to the National Center for Employee Ownership (NCEO), although the number of overall plans in the United States is down slightly (according to IRS form 5500 filings), this reflects a crackdown on fraudulent S-corporation ESOP shell companies, and the actual number of individual employees participating in ESOP plans has been increasing steadily during the same period.[2]

Anecdotally, we’ve observed ESOP ownership stakes on the rise, as plans are used to manage the peaking stock-redemption liabilities associated with Baby-Boomer owners. At its most extreme, this includes moving to 100 percent ESOP ownership, usually followed by a subchapter S election, thereby taking full advantage of ESOP tax benefits. If there’s an ownership and capital structure that best reflects the so-called “sharing economy,” this would be it.

The bottom line: whether necessitated to accomplish ownership transition or a deliberate and strategic effort, we expect ownership and capitalization of A/E firms to trend toward more broad-based/widely distributed structures.

[1] 2016 A/E Business Valuation and M&A Transactions Study, Rusk O’Brien Gido + Partners LLC (Maynard, MA)
2015 A/E Ownership Transition Study, Rusk O’Brien Gido + Partners LLC (Maynard, MA) and Practice Lab Inc. (Boston, MA)

[2] “A Statistical Profile of Employee Ownership,” National Center for Employee Ownership (December 2015), http://www.nceo.org/articles/statistical-profile-employee-ownership


Can the A/E Industry Re-accelerate Its Growth?

Ten years ago, 2006, was arguably the A/E and environmental consulting industry’s peak of financial performance and achievement. Architects and engineers everywhere took advantage of unprecedented gains in commercial and residential building while surging tax receipts and a post-9/11 world provided steady demand for new federal, municipal and security infrastructure. Institutional, educational, energy and telecommunication markets all flourished. Companies of all disciplines and sizes were inundated with profitable opportunities to choose from, and successful (and perhaps overconfident) owners enjoyed record levels of compensation and returns on investment. The rising tide lifted all boats.

We all know what happened next.

Fast forward to today and we’re now six full years into our industry’s recovery cycle. Here at ROG, we characterize the environment as optimistic, yet uneven (at best). Yes, we have observed many great organizations and leadership teams having record-breaking years and “bucking the trend.” However, we also continue to observe firms that persistently struggle to break out.

At a macro level we remain encouraged that overall construction spending is back to 2007 levels, the AIA billings index is consistent and resilient, and the ACEC Engineering Business indices are solid. Yet many presidents and principals will confess to a new era of client stops and starts, diminished risk taking, and an uncertain feeling of where and how this current cycle will run. Several admit the “long shadows” of those dark days in 2008 and 2009 still linger to some degree and continue to impact strategic planning and growth pursuits.

New Normal

Janus’ Bill Gross, the famed bond king and investor, years ago referred to this new and confusing global landscape as the “New Normal.” In fairness to A/E leaders, the overall U.S. economy has been tepid as well and we can debate endlessly whether those problems are structural, cyclical, generational, global, political or financial (likely all of the above).

For design professionals who enjoyed 20-plus years of consistent growth and exceeding U.S. GDP performance, the last five years witnessed a stark and uncomfortable reversion. Property development, federal government spending, global building and energy infrastructure – all of which have taken their respective turns driving our industry’s success the last two decades – to some degree now appear peaked and/or with lingering headwinds and murky outlooks.

To illustrate my point, this year’s ENR 500 provides evidence of an industry still trying to get fully back on track. While skewed toward mid-size and large A/E firms, the rankings do serve as a useful annual benchmark for overall industry health and direction. For 2015, the top 500 firms generated total revenue (includes domestic and international projects) that was 0.5% below 2014 results. Unfortunately, the overall 2014 numbers were lower than 2013. In fact, only now in 2015 did our industry finally surpass the ENR 500 domestic design revenue dollars that were generated back in 2008!

The following chart highlights the ENR 500 domestic and international growth rates and U.S. real GDP over the last five years:

Year ENR 500 U.S. Growth ENR 500 Total Growth* U.S. Real GDP
2015 4.4% -0.5% 2.4%
2014 2.2% -0.4% 2.4%
2013 3.7% 2.7% 1.5%
2012 5.5% 6.1% 2.2%
2011 1.6% 6.6% 1.6%

*Source: Engineering News Record; Includes revenue from both domestic and international projects


The key long-term question arises: Is this as good as it gets?

From our consulting engagements as well as countless discussions and interviews with A/E and environmental consulting leaders and board members, the ramifications of a slow-growth industry have resulted in the following:

  • It’s simply been more difficult to make money – As many firms have meandered with low to mid-single-digit growth rates, either due to the inability to consistently raise rates or from intense competition for project opportunities, bottom-line contributions have increasingly come from operational efficiencies. Effectively this has meant a focus on higher staff utilization, using flexible employees/staff, leveraging technology, closing underperforming offices, simplifying organizational charts and an overall “doing more with less” mindset.
  • Growing performance gaps by market sectors and regions – Generally speaking, A/E firms that have generated the most prominent growth have been in one of two categories: those that have: 1) focused on oil & gas, pipeline and power/energy infrastructure as well as in the manufacturing and industrial sectors (until recently!) or 2) been located in states that experienced substantial economic declines (Nevada, Michigan, Arizona, Florida, etc.) but have snapped back. Firms with specialty niches also have thrived.
  • Expansion through M&A is here to stay – As organizations seek to accelerate growth, either by penetrating new geographies, service lines or market sectors, it’s increasingly more productive to achieve that through acquisitions rather than organic means. Admittedly, we recognize that with more than 1,000 North American A/E and environmental deals this decade, some pan out and some don’t. However, with the high costs of cold-starting branch offices and a younger workforce lukewarm on relocating for work/family reasons, the reality is that the “buy vs. build” calculus has steadily shifted to M&A as the more impactful pursuit.
  • New leaders are confronting a different world – Baby boomer owners and executives are continuing to retire and practically every week we read about a new leadership succession announcement. Today’s incoming presidents and principals are starting their leadership positions in a much different climate than their predecessors did 25 years ago. Executives are not only dealing with growth challenges, but also facing myriad 21st century issues including a changing workforce driven by Gen Xers and Millennials’ different priorities; the growing impact of technology; social media and branding; new project-delivery methods; and increases in small-business taxes and regulations.
  • Fewer new A/E businesses have started – Historically, poor economic conditions led fired or disgruntled architects or engineers to start their own practices. Tiny design firms that started in the stagflation of the 1970s or during deep recessions in the early 1980s or 1990s now constitute companies throughout the ENR 500. Unfortunately, we haven’t seen the entrepreneurial drive and start-up numbers like those prior cycles. Perhaps it’s just because there are simply fewer Gen Xers in their mid-30s to mid-40s or that Baby Boomers themselves showed greater tendencies toward new business formations. In addition, many A/E firms that started this decade seem content to just run as smaller “shingle” practices for lifestyle and self-employment rather than with larger ambitions to grow into multi-million dollar design or consulting organizations. Who needs the headaches?
  • Paradoxically, it’s a never-ending war for talent – CEOs, human resource directors and industry recruiters everywhere tell us the same message: “we’re hiring!” Perhaps that’s always true in any human-capital industry and one with specialized skills such as A/E and environmental consulting, but firms can only grow with new clients and projects. Thus, winning and managing complex and inspirational projects means getting and developing the best and brightest talent. Our industry’s next generation of leaders is being hired today.


Given our reflections and postulations, please know that the intent of this column is not to come across as overly pessimistic or cautious. All economies and industries have cycles and, in a diverse sector such as ours, there will always be firms that over and underperform.

The upside potential is that there’s no shortage of building, environmental and infrastructure demands in our country, from the massive need for new and affordable single-family housing, major upgrades to transportation and water infrastructure, safer and cleaner air, and revolutionary investments as traditional and renewable power sources intersect. A/E firms and leaders throughout history have shown an amazing ability to adapt and endure and we have no doubt they will continue to do so.

Frequently Asked Questions about A/E Ownership Transitions

Of the wide-ranging internal-ownership inquiries my firm receives, most can be distilled into just a few ideas that ultimately answer the same question: “How can my firm make an internal transition process work?” So I thought I’d reflect on the most commonly asked questions, and offer guidance and advice on ways that will help strengthen your firm’s approach to internal ownership transition.

Q: “My partners and I have an idea as to when we’d each like to start pulling back a little, but it’s still years away. What should we do in the meantime?”

The first question I ask in response: “What exactly is ‘years away’?” To some, five years is a long ways off; to others, it might be 10 or 15 years. Knowing the timeframe will dictate which matters should be addressed first, but the following are a few key items that should be on the checklist:

  1. Do you have a shareholder’s agreement or at least a buy-sell agreement? Nearly every firm that’s been through at least one ownership transition will answer yes to this, but for those firms who have never gone through such a process, many more would answer no. Whether a shareholder is announcing his or her abrupt departure or in the event of an unexpected passing or even a disagreement that has arisen about how shares should be made available to a key potential hire, how the firm proceeds should be determined. Call your firm’s counsel, and take care of this immediately.
  1. Have you established criteria for ownership? Owners often will instinctively identify employees who seem to be ownership material. This time-tested approach works well, but the absence of formal criteria will lead to missed opportunities. It’s easy to identify the skills and values you find important in yourself and your partners, but without putting pen to paper and discussing what the current leadership deems important in a new/future partner, you may be inclined to only look as far as the mirror when seeking out new owners.
  1. Who have you slated to be your successor or, better yet, your future version 2.0? Identifying this person or people will help ensure your firm’s longevity as well as position it for a smoother internal transition. This goes for your partners as well—keep in mind that it may not be just one person who can assume your role, especially in a growing organization. It’s not uncommon to see one or more employees expand their own strengths while dividing your responsibilities in a way best suited for the firm. As a rule of thumb, this process of fostering your successor(s) should begin approximately five to seven years prior to your departure, which doesn’t take into account the time spent identifying the proper people.

Q: “I’ve been too busy running my business to think about how I’m going to get out, but I know I’d like to do something soon. It’s not too late, is it?”

Whenever I’m asked about narrow timing (never an ideal position), the following proverb pops into my mind: “The best time to plant a tree was 20 years ago. The second best time is now.” Although 20 years may be too long to start planning, it’s a far better option than what lies on the opposite end of the spectrum. The reality is that even if you’ve only given yourself a couple of years to get a plan in place, you still can control the process. Owners lose that control when they decide they should’ve started scaling back “yesterday” and can end up weakening the likelihood of efficiently maximizing their return on investment.

Q: “Nobody here has expressed any interest in becoming an owner. What gives?”

Even for those who understand and are enticed by the idea of becoming an owner, broaching the subject can be difficult. There is, however, a much larger class of employees who may not realize the potential upsides of ownership. It’s easy for them to see the dedication, effort and sacrifices shared by their firm’s owners, but what’s rarely on display is the reward of ownership.

Frankly, it’s the responsibility of the firm’s leadership to initiate the following: present what ownership means, explain how it can be achieved, and discuss the risks/rewards associated with it. Nearly every owner who has asked me this question lacked the same thing: communication. It’s great when an employee leads the charge of inquiring about ownership, but it shouldn’t be a requirement to their path to ownership.

Through hundreds of due-diligence interviews, one common theme expressed by non-owners emerged more now than ever: caution about where they should invest their money. In particular, the astronomical increase of education and housing costs are cited as concerns more than anything else.

The positive takeaway is that ownership in one’s own firm will ostensibly present a very attractive investment opportunity, one by which the fears of non-owners would not only diminish, but even reverse course. Lack of proper communication typically is the largest obstacle to creating interest in ownership.

Q: “I want to sell my shares, and I’ve got a number in mind, but my employees are balking at the price. How can I make them come around?”

We’re sometimes asked to put together a transition plan that’s based on a number that isn’t derived from a formalized method, be it a proper valuation or even a valuation formula. The most important step at this point would be to conduct a valuation of the firm or valuation review of management’s method. This lets us know if the firm is being undervalued or overvalued, and how the firm might be able to remedy such an issue.

Having an appropriate valuation that takes into account the realities of industry performance norms will serve as the backbone to moving past cost issues. As much as we enjoy each unique challenge presented by our A/E and environmental-consulting clients, our firm abstains from creating plans that aren’t based on a grounded valuation.

A final thought: Ownership transitions should be a win-win for all parties involved. If your firm is having difficulty putting a plan in action or progressing through its current plan, take some time with your partners to understand what the sticking points are. Although timing, personnel and valuation can influence the direction of ownership transition goals, remember that a firm’s principal asset is its people.