Why you should be open to M&A

Whether you’re an M&A enthusiast, first-time buyer, or an apprehensive seller, it would be naive to disregard these opportunities without understanding the dynamics of the M&A environment.

As we all start to catch our breath after a year full of uncertainty and a record number of other buzzwords, AEC firms can finally start to plan for the future with some confidence. While some businesses – especially those in certain disciplines or with a focus on specific markets that were impacted significantly by the pandemic – are still waiting for things to come back around, there are many others that have rebounded and project a strong outlook for this year and beyond (if they even struggled financially during the pandemic to begin with). This trend will only continue moving forward as more Americans become vaccinated and more states lift their various restrictions.

Zweig Group founder Mark Zweig wrote an article just a few weeks ago titled “Get Ready for a Big Boom” to discuss the growth that the AEC industry should be expecting. America’s infrastructure needs are mounting and becoming more and more prevalent. The catastrophic winter storm that devastated Texas this year, the deterioration of the Pacific Highway, and America’s broken housing system are all prime examples of why engineers, architects, and other design professionals are so vital to our society. These shortcomings are highlighted in America’s recent C- score given by the American Society of Civil Engineers in their quadrennial infrastructure report card. With a $3 trillion infrastructure bill in the works under the current administration, it appears evident that AEC firms will be experiencing growth, perhaps rapid and at an unprecedented pace, over the course of the next 10 years.

This will present huge opportunities within essentially every single firm in our industry as various trends begin to materialize. AEC firms have found organic growth to be a constant uphill battle the last 15 years, and a growing number of firm owners are opening their eyes to the benefits of mergers and acquisitions. This and several other key factors are contributing to the surge in M&A activity that we are seeing amongst AEC firms, and I believe we may only be scratching the surface. This activity is leading to increased interest, and ultimately value, as deals shake out. Whether you are a sophisticated M&A enthusiast, first-time buyer, or an apprehensive seller, it would be naive for any firm leader to disregard those opportunities without first fully understanding the dynamics of the M&A environment. Here are a few reasons you (and every AEC firm) should be willing to consider M&A if the right opportunity presents itself:

1. There are many high-integrity and value-driven buyers and sellers in the market. We work in an amazing industry surrounded by some of the brightest and most genuine individuals in the world. So many of the individuals I get to work with entered this profession due to their desire to have a positive impact on the world around them, whether that is from a perspective of mental health, sustainability, or breathtaking beauty. Not all buyers are the big conglomerates looking for a takeover, and there are many active mid-size buyers that put their largest priority on culture and taking care of their people. In professional services businesses like these, the people are often the most important aspect of the deal, so many buyers put an emphasis on making sure the employees of the seller are positioned for success.
2. The current administration’s new infrastructure bill. While there is still uncertainty around the details of the bill, it is clear that our government understands the need for investment in America’s infrastructure. It should not be overlooked that the largest investment in infrastructure in America’s history was one of the first items on President Biden’s agenda. It is only a matter of time until money is poured into these projects across the U.S.
3. Private equity interest in AEC firms. Private equity groups have traditionally avoided professional services firms, specifically architecture and engineering, due to their inability to provide immediate returns in a quarterly profit-driven environment. However, the promising outlook and consistent returns of many AEC firms has driven PEGs to become more active in our space over the last 10 years, and the trend is only going to continue. More qualified buyers and buyout options will only create greater opportunities in this industry.
4. “Baby boomer” bubble. Ninety-two percent of non-tech companies are owned by baby boomers (ages 57-72). These firm owners will inevitably need to identify a transition plan and do not always have an internal plan in place. Even if they do, M&A can offer many benefits for these retiring owners and their employees.
5. This is a very fragmented industry made up of many small companies. More than 90 percent of professional service businesses have fewer than 10 employees. There are many opportunities for synergies, efficiencies of scale, and consolidation through M&A.
6. Labor market struggles. As I noted above and as we are all well aware, it can be difficult, time consuming, and expensive to find the key talent you need to grow organically. With my experience as an advisor within Zweig Group’s executive search and M&A teams, I can assure you that M&A can oftentimes allow you to acquire a like-minded firm with great people, and integrate them into your organization, in a shorter time period than you’d spend looking for one key hire.
7. Provide development and growth opportunities for staff and principals. Whether it is the ability to design bigger and better spaces, work in more diverse market sectors and geographies, or have a higher career ceiling, M&A can provide immense benefits to the staff of a seller at all levels of the organization if you focus on culture fit and properly vet out the other side of the deal.

John Bray, CM&AA is an advisor with Zweig Group’s M&A and executive search teams. Contact him at jbray@zweiggroup.com.