AEC Mergers, Acquisitions & Strategic Investment: Finding the Right Long-Term Partnership
When I was serving as the CFO of a civil engineering firm, our audit partner told me a joke one day that went something like this: “Do you know the difference between an accountant and an engineer?” After a few failed guesses, he said, “The accountant knows he’s not an engineer!” Of course, that joke alludes to the idea that many AEC firm owners started their firms on a shoestring budget, often taking on roles that had nothing to do with architecture or engineering to save costs along the way.
Architects and engineers are highly educated and adept at analyzing situations and issues, so it’s not surprising that many have learned to rely heavily on their capabilities when tackling business matters. While this approach may suffice as a startup entity, it can become challenging as the firm grows in complexity. As a provider of mergers & acquisitions services to AEC firms, I’m surprised how often I run into firm leaders who are attempting to save themselves into prosperity.
The Importance of a Long-Term Partner
Whether you are engaging in M&A or private equity investment in AEC, a significant investment of resources and reliance on external expertise is required. By partnering with a broker well-versed in the intricacies of AEC firms—from initial valuation and integration to long-term growth strategies and exit planning—investors and acquirers can ensure a smooth transaction, reduce risk, maximize value, and position their firms for sustained success in a competitive market.
Most firms understand the value of a strong broker at the time of a transaction, but what happens after the deal is completed? How do you continue to create value? Based on our deep experience and understanding of the AEC market, we’ve identified six key areas where having the right long-term partner can make the difference between a successful transaction and, well, a less-than-profitable result.
The Deal Itself
Only a few firm owners have experience as a seller. Generally, most go through the sell-side once in their career. Selling your firm is the single greatest opportunity to extract value from the sacrifices you’ve made over the years. Why practice on your baby?
As a selling owner, you get one shot at doing this right. And many times, those who don’t get it right don’t even know. By including an intermediary experienced in M&A in the AEC industry, you will reap value in excess of the costs of those services. It’s also important to continue operating your firm and managing its financial success throughout the sales process to achieve optimum value. Do you really want to be distracted from the day-to-day management while you’re trying to master M&A concepts you may not fully understand?
As a buyer, it’s essential to keep your eye on the ultimate objective of an acquisition, which is to obtain talented employees and maintain client relationships. It’s imperative that you invest your time and resources in those activities that best support this objective. The deal itself is merely the mechanism for adding talent and clients; it’s the communications and integrations that ultimately achieve the objective. The most successful acquirors focus upon these aspects first while leaving the deal-making to attorneys and M&A consultants.
As a strategic investor in AEC, especially if you are new to the industry, it is critical to understand the technical complexities and pitfalls of this industry. Serial acquirors, private equity holding companies, and their platform businesses need a strategic partner who facilitates transactions and anticipates the unique challenges and opportunities that arise at each stage of an AE firm’s evolution. This enables your investment to continue to grow well beyond the initial deal.
Financial, Tax & Assurance Implications
Whether you’re a potential buyer or seller, there are financial and tax considerations that should be addressed to avoid pitfalls and unnecessary burdens. As a buyer, in addition to assessing the value of the target firm you’re seeking to acquire and developing the appropriate deal structure to manage your cash flow and maximize your return on investment, you must also assess the financial and tax positions of the target. There are various levels of due diligence to be assessed in every deal, but there may also be special considerations, such as FAR implications, potential loss of special designations (e.g., SBE, MBE, etc.), or state-by-state considerations. By having a knowledgeable M&A advisor involved early on, you can avoid any post-closing surprises.
Strategic Expansion
Many transactions result in changes to entity structures and geography that have far-reaching implications for tax requirements, licensing, and certifications. For example, if an AEC firm changes its name or expands into new states through a merger, it may put professional licensing or other certifications at risk. This places a significant responsibility on firm leaders to understand the legal and tax obligations for conducting business in the states and municipalities they are expanding into. We recently had one buyer come to us for support after having acquired a firm in another state and failing to establish the appropriate legal structure to qualify the buyer to conduct business in that state. As a result, all the acquired projects were forced to stop until the buyer could rectify the matter, leading to internal frustrations, reduced client satisfaction, and lost revenue.
Technology Considerations
As a buyer, you inherit the technology infrastructure and cybersecurity risks of the firm you’re acquiring, regardless of the deal structure. During due diligence, it’s important to conduct a thorough assessment of the IT systems, including hardware and software, to identify potential issues and to develop a Day 1 integration strategy. Data migrations, system integrations, and ERP conversions typically follow any significant deal.
Scaling for Growth
To extract the maximum value of any transaction, you must have sufficient infrastructure in place to support the growth of your firm. By being intentional in preparing your firm for growth, you can maximize the likelihood of long-term success with your M&A endeavors. In my first podcast episode, Dan Huntington at IMEG acknowledged that IMEG developed a team of six dedicated to M&A in their first year of acquisitions. Just like IMEG, most serial buyers in the AEC industry have team members dedicated to identifying and realizing M&A synergies and to planning and executing integration of the acquired firms. The first year or two is often a time-sensitive window in which growth is critical; making sure that marketing and business development align well to deliver on that promise is central to the success of your strategy.
People & Culture
The often-repeated statement that “people are your firm’s most important assets” is never truer than it is in the AE industry. Both buyers and sellers have a responsibility to ensure that a business combination is good for the people. This usually entails assessing the firms’ cultures and HR practices to identify any potential hurdles so they can be incorporated into the integration and communications plans. It’s also important to conduct comparative compensation benchmarking analysis to understand the impact on the selling firm’s employees.
Introducing SN’s Upcoming Value Creation Webinar Series
Because we recognize the need for AEC business owners and investors to find the right long-term partner to help navigate these considerations and complexities, SN has developed a webinar series to introduce you to our advisors, who will dive more deeply into these topics and share their industry insight. Join us for this upcoming Value Creation webinar series dedicated to uncovering value before, during, and after a transaction. Whether you’re a buyer, seller, private equity investor, platform company, or just interested in learning more about M&A, we’d love to have you join us for this webinar series. Register today for the first webinar in our series AE Growth: Financial & Tax Strategies for Buyers & Investors.
