A common obstacle in assessing the fair value of an architecture and engineering (A&E) firm is getting buyers and sellers to agree on what the business is worth. Sellers who understand how their business is valued are in a better position to make sure they are not leaving money on the table.
Merger and acquisition (M&A) activity is up in the A&E market for a mix of important reasons:
- New federal infrastructure funding coupled with pent-up client demand coming out of the coronavirus pandemic continues to drive backlog.
- Private equity interest in the A&E sector combined with rising demand for services is pushing firm valuations upward.
- An aging owner community has firms thinking more seriously about succession planning, exit strategies, and how to position their businesses for sustainable growth.
These trends, among others, are attracting more A&E suitors into the merger and acquisition marketplace, which further reinforces today’s increasing valuations. Understanding the value of your firm is crucial not only for making a fairly priced exit, but also for incentivizing top talent to stick around, and protecting future success by transitioning younger cohorts into ownership.
What determines the value of an A&E firm?
The best assessment method for your firm will vary depending on the way you manage client acquisition, fixed and variable costs, and metrics like average billing days (a key factor impacting cash flow). There are many formula variations, but setting the individual nuances aside for now, valuation methods tend to fall into one of two broad categories.
- Multiplier on EBITDA: This method applies a multiple (norms range from 4x to 6x) to total earnings before interest, taxes, depreciation, and amortization. As with the book value method, determinations will depend in part on whether accounting is done on a cash or accrual basis.
- Multiplier on book value: This method can be useful to validate other valuation models. Although applied more often to non-service businesses with high asset values, book value is useful for A&E firms in today’s environment that are seeing a stable increase in backlog and receivables.
How can owners influence the value of an A&E firm?
While they may have other visionary reasons to acquire your firm, seeing the quickest return on investment is going to be top of mind for most buyers. Time-to-money is a term that many private equity evaluators use, but the goal is the same. They are looking for evidence (not opinions) that the firm is going to remain profitable and deliver growth opportunities.
Factors like these tend to paint a more favorable long-term profit picture:
- Clear dominance in a defined market sector or geographical region
- Substantial repeat business with marquee clients and project types
- High retention rate of key employees, especially in discipline leadership ranks
- A relatable, differentiated firm identity and brand that carries industry goodwill
- Financial statements that show suitors a trustworthy path to future profits
Continue the Conversation
Contact us to discuss the valuation basics we’ve touched on here as well as succession planning, employee incentive plans, and the overall financial health of your A&E firm.