What I have learned about M&As in the past year
2016 was quite a year for the AEC industry and for Zweig Group as well. Merger and acquisition activity, and interest in the subject, has never been higher than it is right now. Our firm was involved in many transactions this year, and I was personally involved in most of them. Here’s some of what I learned this year about M&A in our field:
- Auctions are coming. We have seen several in the last year. Some of the letters we have seen are amazing in that they are so brazen. “We will be reviewing all offers made by such-and-such date (about 10-14 days from date of letter). All interested parties must have (specific financial criteria listed).” Pretty crazy stuff! We had one client who made an offer under these circumstances and did actually end up acquiring a significant firm. We had another client that lost a firm they were in discussions with when their advisor turned it into an auction. With the number of qualified buyers out there in the market I think we’ll be seeing more of this.
- Many sellers have completely unrealistic ideas of what they are worth. There are shady investment bankers and business brokers who put on seminars (who says there is no such thing as a free lunch?) where they talk about things such as “unlocking the equity in your ____________ firm.” Their entire goal is to get wannabe sellers to list their firms with them and for so much money per month for a period of six months or a year they will prepare a “pitch book” and market the sellers to potential buyers. Along the way, they inflate the sellers’ expectations to where they think they are worth two or three times revenue, which of course they are not, but sellers don’t know any better (some, at least) and sign up with these firms for a year to see what happens. Nothing usually happens other than their bank accounts get tapped every month!
- Sellers should be more concerned about tying down key people post-transaction. When someone buys an AEC firm, they are, to a great extent, buying the staff. The staff needs to be there for them to pay off the acquisition. Most smart buyers hold back a certain amount of money for a certain amount of time, in part, to be sure the key people stay on board. Sellers need to protect the buyers and their own interests and keep these people committed to the firm. That is where retention bonuses come into play. Stay so long and you get so much money. Some, if not all of this money, typically comes from the sellers themselves.
- Terms may be more important than the price. How much cash you get up front or in a note may be more valuable to you than a deal with a higher total value but where half of the total consideration paid is based on meeting certain performance metrics.
- There are less purely financially-driven buyers and sellers, and much more concern about future plans and compatibility. This is because there are so many more buyers out there in the market place – firms already in the business. They are smart and understand the reasons for doing an acquisition and the factors that lead to success or failure in this industry because they themselves are in it. I see this as a good thing!
- People who move quickly are more successful in their merger and acquisition efforts. Foot-draggers, people who can’t make a decision, people who need to hold board meetings to review minor changes to an LOI, etc., will fail at the business of M&A – whether they are buyers or sellers. Firms that know what they are doing can move quickly and be responsive and flexible. It is essential today because there are so many buyers and sellers in the marketplace and everyone has other options!
- Firms are doing well because the market is doing well, not necessarily because they are doing the right thing to run their businesses successfully. This is contributing to a false sense of well-being on the part of many sellers who may find that during the next recession their firm’s performance will falter and their value and desirability to an outside buyer may fall as well.
2016 was an amazing year, filled with lots of success as well as great learning opportunities for me and the rest of our M&A folks at Zweig Group. Our prediction is a 100 percent increase in volume of M&A work in 2017. The market has never been better!
Mark Zweig is Zweig Group’s founder and CEO. Contact him at email@example.com.