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Architecture & Engineering Firms

A&E Ownership Trends to Watch

Posted on May 12, 2022 by

Kevin Johns

Kevin Johns

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We continue our A&E trend discussion with trusted Clayton & McKervey partner and Zweig Group principal Jamie Claire Kiser. In this installment, we discuss critical ownership trends to keep in mind. 

One of the biggest trends is the significant uptick in private equity participation and what this means for firm owners. Jamie Claire noted that over 30% of the deals she’s observed in the past year are private equity based, and this activity is increasing, both in terms of the pace of activity and the volume of deals. This, in turn, is attracting more suitors to the merger and acquisition arena. 

There is a tendency among some owners to view M&A as a failure, rather than as the valuable transition tool it can be. Family-owned firms had a 30-to-40-year outlook and were often influenced by a sense of loyalty to employees who they viewed as a kind of extended family. However, this new wave of A&E owners has a different outlook. According to Jamie, the private equity influence is driving a shorter window for these kinds of transactions. The model is bending toward a ‘grow it and spin it off’ approach. Our transaction services team agrees.  

The generational factor underlying these trends is something worth considering. Even with the increase in M&A activity, the industry is still way behind in owner activity. “80% of firm equity is held by those 50 and older,” says Jamie Claire, according to data from Zweig Group’s recent Principals, Partners, and Ownership research. This has become a staffing issue across the board, not just in the ownership ranks. Generational cohorts get noticeably smaller as you move down the organization chart. To stay competitive long term, firms are going to have to get creative about moving ownership lower into the organization. Top performing firms are making strides in this direction with innovative incentive programs and ESOP expansion. 

Jamie and I discussed how too few firm owners are leveraging lines of credit to their advantage. There’s a significant opportunity cost as an appropriate cash infusion at the right time can support investment in new technology, regional expansion, or staffing growth. Related to this observation is a lack of selectivity on new business. During the brief lull at the beginning of the COVID-19 pandemic, there was a rush to go after any revenue source without considering the supply-side costs of long-term contracts which led to a big increase in average collection period metrics. Business owners had to decide if they should take the new project or get the invoice out.  

Overall, now that backlogs are increasing, it’s time for owners to ask themselves if they can take a more selective approach to growth. It’s important to look closely at what the competition is doing and get ahead of advances in construction and project delivery technology. Private equity, strategic partnerships, and wise use of lines of credit can make a big difference in a firm’s competitive outlook in the next one to five years. 

Continue the Conversation

Our A&E practice group advises firms on succession planning, concentration of ownership, employee incentive programs, and M&A considerations. Contact us to discuss the trends we’ve covered here as well as tax strategy, business valuation, and the overall financial health of your firm. 

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Kevin Johns

Shareholder, Architecture & Engineering

Kevin leads the firm's architecture & engineering group, helping entrepreneurial owners build a better blueprint for growth.

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