What characteristics are highly desirable to buyers in the AEC industry right now?
Your expectations in terms of buyer interest should vary based on several factors having to do with your firm’s composition. Things such as employee count, verticals serviced, and geographic locations all play a huge role in how big the pool of interested buyers will be if you choose to go to market today. In this article, I’ll briefly discuss some of the firm characteristics that are attracting the largest pool of buyers at the moment, and consequently, are typically trading at the highest multiples.
- Public infrastructure. Everyone in our industry knows there’s an upcoming $1.2 trillion infrastructure bill, and buyers are willing to pay generous multiples to add to their labor force and enhance their ability to capitalize on the anticipated influx of municipal and federal contracts. Specifically, the new spending includes $240 billion worth of funding toward transportation related infrastructure alone. Breakdowns below:
- Roads and bridges: $110 billion
- Railroads: $66 billion
- Public transit: $39 billion
- Airports: $25 billion
- If your firm services any of the verticals listed above, you’ve almost definitely received an inquiry from an interested suitor in the past several months. Any firms with capabilities related to the power grid ($65 billion), water infrastructure ($55 billion), and environmental health and safety ($21 billion), are also in high demand with increasing multiples, according to the U.S. Senate Committee on Environment and Public Works.
- Geographies. Florida, Texas, California, and Pennsylvania are the most active states in terms of M&A closings as of February 2022. Interestingly enough, all of these states are also receiving the largest amount of assistance from the infrastructure bill, according to a fact sheet from the White House:
- California: $45 billion
- Texas: $35 billion
- New York: $27 billion
- Florida: $19 billion
- Pennsylvania: $18 billion
- Of these states, we are seeing the highest multiples in Texas and Pennsylvania. This is likely because these states have metros that are growing rapidly and there’s an increasing demand for engineering services that is much greater than the labor force available to do the work. (High demand and low supply equates to an expensive product or service.) California and Florida, however, are flush with engineering firms, lead primarily by baby boomers who are looking to retire. These markets are experiencing more consolidation than growth, causing the multiples to stay more or less steady.
- Firm size. The market as a whole is relatively agnostic to firm size at the moment. Almost any firm located in one of the previously listed areas or servicing one of the previously listed verticals can easily find a buyer that’s willing to pay a strong multiple. However, the type of buyer that you’ll be dealing with will likely differ depending on the size of your firm. For the sake of simplicity, we’ll discuss firm size by way of adjusted EBITDA.
- If your firm has an EBITDA of less than $5 million, you’ll likely be dealing with a pool of buyers that consists of mainly strategic architecture and engineering operating companies that are looking to grow their labor force or expand into a promising vertical or metro. Once you get above $5 million adjusted EBITDA, you’ll start to attract financial buyers that may be able to fit you into their portfolio in one of several different ways. If your firm is above $10 million EBITDA, you may be a prime candidate to operate as a platform company. If you’re less than $10 million in EBITDA, it’s more likely that you’ll fit into the portfolio as a bolt-on acquisition that fits the strategic growth goals of the platform. Note that these values definitely vary based on the situation, but these are good “ballpark figures” to use for the sake of discussion and edification. Taking a deeper dive into those two acquisition types will likely require an entire article of its own. Soon to come.
Andy Chavez, CM&AA is a senior analyst within Zweig Group’s advisory services group. Contact him at achavez@zweiggroup.com.
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