If you’re still standing in the A/E business, the vast majority of you endured the shock, denial, adjustments, and reframing of what success looks like in the wake of the Great Recession. Congratulations. You survived to this point.

But now it’s time to think beyond living day to day. The game is changing so much that you need to look ahead, regardless of how blurry the future might appear. Depending on your firm’s situation, your priorities for the future will vary. Here are a few scenarios to consider:

ENR Top 100 Firm with Aggressive Growth Goals
Your big ship has weathered the storm, but now is not the time to take a breather. Though consolidation has slowed a bit, you wouldn’t know it because top competitors keep making game- changing deals. What will it take to stay competitive in the big leagues?

Here’s what to do:
Grab hold of the big picture

Explore the key macro trends that will drive your business in the next ten years. Whether it’s shifts in the global balance of power, government’s increasing influence in the business environment, or rapid shifts in technology, you need to anticipate what opportunities these trends will present. What you find may cause you to reframe your markets, alter your merger & acquisition strategy, or transform the way work gets done across your entire organization.

150-Person Firm that had 400 Staff Two Years Ago
You’ve taken your lumps and managed to stabilize the firm, but it’s stuck in neutral. You face enormous pressure from larger firms moving in on your turf and micro-firms undercutting your fee structure. You need to return to stronger profitability to put steam back in the firm’s stride.

Here’s what to do:
Develop strategies to target, win, and perform

• Target relationships, not projects. Take a tireless approach to increasing visibility in your communities—break into the circles where decisions are made, and increase your firm’s influence.
• To win, brush the stiffness out of your entire marketing approach (and team, if necessary). Wow potential clients with a fresh approach for communicating why your firm is the right choice. Scrap every bit of boiler plate that exists in your firm—start with a clean, fresh sheet of paper.
• Then perform—make good on your promises again and again. Your goal is not just to simply meet your clients’ needs, but to blow them away with out-of-this-world customer service and results.

24-Person Firm Trying to Ride It Out
Your firm may be the most vulnerable during this delicate recovery. You don’t have the critical mass to withstand a prolonged slump. You need to get bigger and stronger to stick around.

Here’s what to do:
Build a brand that defies your size

Consistent marketing campaigns used to be impossible for smaller firms to execute because of the high costs associated with producing mass materials. But with the ultra-cheap, yet highly efficient and effective marketing tools available today, there is no excuse for being invisible. Leverage e-marketing, social networking, and Internet branding—and position yourself as an expert in your chosen market sectors. You have expertise, knowledge, and talent. Share it on a consistent basis and build a brand that defies your size.

The business environment might not get much better for quite a while. So look past today and figure out how you are going to thrive in this new era.

- MARK GOODALE
  Principal

The recent economic turbulence, now approaching three years, created seismic shifts in the A/E industry. Several are so obvious they require no cites to formal studies or other data. The industry-wide go-go- growth is long-gone. The high valuations ascribed to nearly any equity security, public or private, have slammed downward and are more in line with reality than values predicated upon an economy fueled by never-ending speculative growth. While business activity nearly seized up, the merger and acquisition market has recovered to reasonable activity at rational pricing. Buyers that were forced to the sidelines for their inability to justify transaction pricing have now been able to take the field and complete deals; lower valuation multiples coupled with lower seller financial performance has led to price levels that rational-minded buyers can validate. They can find their return from projected profits and cash flow, and not simply speculative hyper-growth.

Yet new challenges to completing M&A deals are emerging as the A/E business landscape continues to transform. One of the greatest challenges is dealing with perceptions; for example, on one hand are sellers who may be wed to a pre-cash valuation or some informal offer while on the other hand are buyers who find it difficult to gauge a target’s true potential because they strongly suspect the markets will never recover. In both cases, the challenge is to find a way to bridge the gap between competing perceptions of fair value. While a formal valuation can be used to fortress either side’s position, the “right” price isn’t necessarily the valuation-proven “correct” price; right is where both sides can find common ground and agree that it is fair and equitable. It also requires the right mix of cash, stock, and earn-out to properly balance the uncertainties of the future.

Here are a few thoughts on how to deal with both buyers and sellers who have perceptions seemingly etched in stone:

The seller who clings to the past
This could be a seller who received an informal pre-crash offer (more likely a verbal expression of interest) and believes that number must still be “right”, or a seller relying upon a valuation that is several years old. While sellers who are wed to a figure without logic are often almost impossible to approach with reason, you have a good chance of reaching sellers who are simply relying on a pre-cash value figure. In the latter instance, instead of battling over valuation philosophies, accept the future growth assumptions in that past valuation model and simply compare the seller’s actual results to the projections. In one recent case, a seller believed $15 million was the right price but the buyer was firmly seated at $10 million. Simply updating the seller’s 2007 valuation model and showing the projected growth did not materialize was sufficient to convince the seller the value was actually closer to $9.5 million.

The buyer who sees nothing but doom and gloom
Some buyers simply cannot accept a seller’s projections for growth and EBITDA recovery. While the conservative buyer’s model may point to a value in the mid $7 million range, using the seller’s projected figures might point to a value in the low $9 million range. To bring the two sides closer, consider incorporating an earn-up to protect the buyer in case the projections do not materialize, and to protect the seller by assuring additional funds subject to reaching projected financial goals. Obviously, the mix of cash, notes and earn-outs / earn-ups is more critical than ever. Where the past creativity of mixing these ingredients was to reach a seller’s necessary price point, it is now used to ensure no one overpays, or conversely, leaves money on the table.

While conventional valuation theory may produce a “correct price”, in times when valuations have changed so drastically from just a few years ago it often fails to produce a merger or acquisition. Getting a deal done today where both parties can be content long-term requires a more rational approach that promotes practical logic over theory and focuses on economics—not simply accepted market multiples. -

- David Rabinovitz
  Financial Analyst