Architecture & Engineering Firms

Navigating the M&A Revolution in A&E Firms

Posted on January 3, 2022 by

Ben Smith

Ben Smith

Kevin Johns

Kevin Johns

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The challenges from the pandemic drove many businesses to work together to solve those problems through merger or acquisition partnerships. By consolidating operations with allied companies or expanding their consumer base through strategic mergers, many businesses were able to survive the pandemic. As businesses attempt to return to “normal” it’s important for sellers to prove the staying power of their company and be prepared for higher scrutiny into their valuations.

Mergers and Acquisitions News

Looking at the architecture & engineering sector as an example, mergers and acquisitions have doubled since 2017 and hit a record-breaking six-month run in 2021. Acquisitions taking place across state lines accounted for an unbelievable 69% of business transactions. This can be attributed to the digital advancements that have removed physical barriers of having to operate in person. Attracting global buyers is also easier with well-established remote communications.

Take Advantage of Government Incentives

Buyers may seek companies ready to break ground on a project so they can take advantage of any government incentives. Firms offering core services like engineering, plumbing, electrical, mechanics, highway resurfacing, and bridge inspection are attractive because they are not as impacted by economic downturns.

M&A Trend: Larger Companies Buying Smaller Companies

The size dynamic between buyer and seller saw a recent decline in seller size to $3.1 million in revenue with buyer size increasing to $93.3 million. This directs buyers to where the most successful deals occur and highlights the trend of larger companies buying smaller ones that need support.

Most industries suffered during economic shutdowns even if demand was still up for essentials like housing. Architecture and construction firms have faced unrelenting demand for building homes or expanding them as people need more space to work from home, but have also had skyrocketing costs of materials like lumber cutting into profits. Buyers looking to acquire a business in architecture or engineering will need to investigate whether factors cutting into revenues are temporary or if that inflation will endure.

Remote Work Implications

Extending working remotely decreases the demand for building commercial office space which negatively affects the profitability of A/E/C firms. It also makes it difficult to integrate firms after a merger if there is no plan to combine offices. Firms in these industries should anticipate scenarios where they virtually welcome their new partners since communication will still be key.

Post-Pandemic B2B Merger and Acquisition Activity

Recent B2B merger and acquisition activity reflects and even addresses much of the anxieties resulting from the pandemic. For example, Norconsult acquired the Track & Railway Technology Team from Projektengagemang in July 2021 following President Biden’s official announcement regarding his infrastructure plan. Previously, Norconsult has operated as a multidisciplinary firm, but a more targeted focus will allow them to take advantage of the potential infrastructure spending which is necessary while other sectors like office buildings continue to suffer.

Similarly, architectural design firm River Valley Architects merged with SDS Architects where their specialty is K-12 design as well as higher education structures. This strategic merger addresses the lack of adequate classroom space to allow for social distancing during this ongoing pandemic. Firms like these are using mergers and acquisitions to strengthen their offerings based on the evolving market.

Without being able to operate normally due to shutdowns or broken supply chains, these firms will likely struggle to present contract backlogs that can accurately predict future earnings which is a crucial step before merging or acquiring a company. Sellers should anticipate higher scrutiny into their valuations and be ready to prove to buyers the staying value of their company. Ultimately, any business that has survived the pandemic this long is going to be attractive to buyers.

Continue the Conversation

Clayton & McKervey supports closely-held architecture and engineering firms with taxes, accounting, transactions and data-driven decision making. If you would like support preparing for a future merger or acquisition or determining the value of your A&E firm, we can help. Contact us today to learn more.

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Ben Smith

Shareholder, Consulting

Ben leads the firm’s consulting group, helping middle-market clients optimize results through transaction services and digital advisory support.

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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