Know what your A&E firm is worth (and how to add value) to navigate M&A

Mergers and acquisitions (M&A) have doubled in the architecture and engineering (A&E) sector since 2017 and hit a record-breaking six-month run in 2021.

Before you entertain any deals, know what your A&E firm is worth. A valuation can help you plan a fairly priced exit and incentivize top talent to stick around through the transaction.

Why is M&A increasing in A&E?

M&A activity is rising in the A&E market for a mix of reasons: 

1. New federal infrastructure funding is driving backlog along with pent-up demand. Buyers are looking for companies that are ready to break ground on projects so they can take advantage of government incentives. And, because of the work-from-home trend, A&E and construction firms have faced unrelenting demand for building and expanding homes.
2. Interest from private equity firms is pushing valuations upward. Engineering, plumbing, electrical, mechanical, highway resurfacing and bridge inspection services are more resistant to economic downturns. Add resilience to strong demand, and suddenly A&E firms have investors’ attention.
3. The aging owner community is seriously thinking about succession planning, exit strategies and how to position their businesses for sustainable growth. Larger companies, in particular, have been buying up smaller A&E firms to enter new markets or strengthen their portfolios.

Regardless of their motivation, buyers and sellers have to agree on what a business is worth to make a deal. Sellers who understand how their business is valued are in a better position to prove the staying power of their company and respond to sellers’ scrutiny.

What determines the value of an A&E firm? 

The best way to determine an A&E firm’s value depends on how you manage client acquisitions, fixed and variable costs and other metrics that impact cash flow, like average billing days. There are many formula variations and nuances, but valuation methods tend to fall into one of two broad categories: 

1. Multiplier on EBITDA: This method applies a multiple to total earnings before interest, taxes, depreciation and amortization (EBITDA). For the multiplier on EBIDTA method, norms range from 4x to 6x.  
2. Multiplier on book value: This method is often applied to non-service businesses with high asset values (or to validate other valuation models). Book value is useful for A&E firms in today’s environment, where there’s a stable increase in backlog and receivables. 

With both methods, it can make a material difference whether accounting is done on a cash or accrual basis.

How to add value to your A&E firm 

Quick ROI or “time-to-money” is top of mind for most buyers. They are looking for evidence (not opinions) that the firm is going to remain profitable and deliver growth opportunities after the transaction. 

Five factors tend to paint a more favorable long-term profit picture: 

1. Clear dominance in a defined market sector or geographical region 
2. Substantial repeat business with marquee clients and project types 
3. High retention rate of employees, especially those in key disciplines and leadership roles
4. A strong and distinct brand that carries industry goodwill 
5. Financial statements that show a trustworthy path to future profits

Don’t leave money on the table. Take actions to increase value — and build strong documentation for your strengths.

How Wipfli can help

To get the most value from your M&A transactions, you need the right team. Wipfli supports A&E firms with end-to-end transaction advisory services. We dig deep to help you achieve sustainable growth, financial health and competitive advantages. Contact us today to learn more.

Related reading:

• Don’t let successor liability catch you by surprise
• Good data integration may make or break an M&A
• Understanding calculation versus valuation engagements