Word on the Street: Issue 290

From True Believers to Deal Signers

Of the ENR Top 500 U.S. design firms, 396 are currently employee- or ESOP-owned—a cohort that has been shrinking steadily since 2016. Among the ENR Top 100 alone, the number of employee-owned firms has contracted from 75 in 2016 to just 61 today. At that rate of attrition, employee-owned and ESOP designers among the Top 100 carry a half-life of roughly 32 years—meaning that, absent a change in trajectory, the cohort could be half its current size before most of today’s leaders have fully retired. 

The numbers behind this decline are striking: Since the start of 2021, 121 ENR-ranked firms have sold. Of those, 96 were employee-owned. Eighty-four sold to private equity, PE-backed, or publicly traded buyers. Just 12 (10%) merged with or sold to other employee-owned firms. That works out to an average of 18 ENR Top 500-ranked employee-owned firms selling every single year—a pace that is shrinking the cohort by roughly 5% annually—faster than the annual closure rate of shopping malls around the country. 

But there’s more. The median employee-owned seller generates $80 million in net revenue. At a conservative revenue multiple of 1.5x, these 18 annual sales represent approximately $2.2 billion in annual deal value—a massive transfer of wealth from employee ownership to private equity. 

In our experience working with AE firms across the country, the CEOs and boards of employee-owned firms exist on a spectrum. At one end are the true evangelists—leaders for whom employee ownership is not just a capital structure but a calling—a commitment, an obligation, a passion even. They have built their firms’ cultures around it. They talk about it at all-hands meetings, reference it in recruiting conversations, and represent it as a competitive advantage in client pitches. For these leaders, even entertaining a conversation about a recapitalization by private equity can feel like a betrayal of the firm’s founding DNA. A sale to PE? That’s not a strategic option. That’s heresy.

At the other end of the spectrum—let’s call it “the about-to-be-recapped-by-PE” pole—sits a CEO and board who have quietly retained an investment bank, completed a management presentation, and are a few weeks away from a signed purchase and sale agreement with a private equity group.

Here’s what makes this so interesting: The CEO at the PE end of the spectrum almost always started out at the evangelist end. The journey from one pole to the other is rarely sudden. It is, instead, a slow accumulation of pressure, disappointment, and hard-nosed arithmetic—punctuated by a few pivotal moments that shift the calculus. It is a journey that deserves to be understood with both clarity and compassion because the leaders taking it are navigating genuinely difficult terrain.

This trend begs two questions. First, why are 18 CEOs and their boards making this choice every year? And second—perhaps more fascinating and more human—how does a leader who once viewed private equity as a failure end up signing “on the line that is dotted?” (Credit, of course, to David Mamet). Here are three reasons why…

Reason #1: Inability to fund departing shareholder buyouts due to financial underperformance

Employee ownership is a beautiful model—until the math stops working. The internal stock repurchase obligation is the beating heart of an ESOP or employee-owned firm. As long as the firm is growing, profitable, and generating sufficient cash flow, that obligation is manageable. Shares are repurchased at fair value, departing shareholders are made whole, and incoming employee-owners see their stakes appreciate over time. The model is self-reinforcing.

But when the firm underperforms—whether due to a softening market, a loss of key clients, margin compression, or simply the difficulty of managing a design firm through economic cycles—the model can become a source of acute financial stress. (To see which metrics high-performing firms are achieving so as to avoid such stress, check out last week’s article, “The Perfect AE Firm?”) Share values that were set in more profitable years must still be honored and purchased at those prices. Departing principals and senior staff expect to be bought out at or near peak valuations. And when cash flow cannot support those buyouts, firms face an uncomfortable set of options: take on debt, delay buyouts, reduce distributions, or restructure the program entirely.

Any of these paths can erode morale, damage trust with senior staff, and accelerate the departures of the very people whose buyout obligations are already straining the balance sheet. A CEO who finds herself in this position—watching the firm’s share repurchase liability grow while profitability stagnates—begins, often for the first time, to see private equity not as an adversary but as a potential exit ramp. A transaction doesn’t just deliver liquidity to the departing generation of owners. It solves, in a single stroke, an accumulating structural problem that internal resources simply cannot address.

It is worth noting that financial underperformance is not always a crisis. Sometimes it is simply a plateau—years of flat revenue, modest profitability, and a gradual realization that the firm is not growing its way out of the problem. For many CEOs, that quiet reckoning is more consequential than any dramatic moment of financial distress.

Reason #2: Inability to transition leadership

Leadership succession is the great unfinished business of the employee-owned AE firm. Firms are frequently founded or led by strong, visionary individuals who have spent decades building client relationships, shaping culture, and driving growth. The firm, in many meaningful ways, is an extension of its founders. And when the time comes to transition leadership to the next generation, the gap between who the founder is and who the firm needs next can be enormous. Two-thirds of design firms never successfully transition past their founders. And those stats get worse with every subsequent leadership transition. There are not a lot of 100-year-old design firms knocking about. 

Many employee-owned firms simply do not have an obvious successor. The pipeline of senior talent may be thin. Promising candidates may have departed for competitors or to set up their own shops. Others may be technically strong but lack the business development instincts, financial acumen, or organizational leadership skills that a CEO role demands. And the founders themselves, for all their virtues, are not always objective evaluators of the next generation’s readiness. (The overly loyal, rose-tinted glasses syndrome.) 

When leadership transition fails—or when it becomes clear that it is likely to fail—the existential question surfaces quickly. If the firm cannot sustain its culture, its client relationships, and its performance through a leadership change, what exactly is being preserved by maintaining the employee-ownership model? A CEO confronting this question honestly, and without a clear answer, finds herself in a very different conversation than she was having five years earlier.

Private equity, paradoxically, can look like a solution to a succession problem. A transaction brings in professional management infrastructure, creates new leadership incentives, and—at least in theory—reduces the firm’s dependence on any single individual. Whether those promises are consistently delivered is a separate question. But for a CEO who has spent years worrying about what comes next, a PE partner offering a clear path forward can be genuinely compelling. And the right PE partner can provide an excellent financial return for shareholders—especially in the current M&A environment—with the potential of a second bite of the apple (or cherry, or whatever other fruit is being used these days).

Reason #3: Inability or unwillingness to fund the necessary investments in technology or acquisitions to remain viable

In case you hadn’t noticed, the AE industry is undergoing a period of competitive disruption that is unlike anything most of today’s leaders have experienced in their careers. Technology investment—in AI-enabled design tools, digital delivery platforms, data analytics, and project management infrastructure—is no longer a nice-to-have. It is increasingly a prerequisite for competing effectively for the most desirable clients and projects. At the same time, geographic and service-line diversification through acquisitions has become a primary growth strategy, particularly for firms looking to access new markets or build capabilities they cannot organically develop at pace.

For many employee-owned firms, funding these investments at the scale required is genuinely difficult. Capital that might otherwise be deployed into technology or acquisitions is consumed by shareholder buyouts, debt service, and the normal capital requirements of running a professional services business. Boards that are appropriately cautious about taking on new debt—particularly after years of modest performance—can find themselves unable to approve the investment levels needed to keep pace with PE-backed competitors that are writing large checks with speed and confidence.

This creates a compounding disadvantage. As PE-backed platforms invest aggressively and grow through acquisition, the competitive gap widens. Clients notice. Talent notices. And the CEO of the employee-owned firm—watching competitors expand into new geographies and service lines while her own firm stays largely static—begins to wonder whether the constraints of the ownership model are limiting the firm’s long-term potential in ways that cannot be fixed from within.

There is also a subtler dynamic at work. Some boards of employee-owned firms are simply unwilling—not merely unable—to approve significant capital deployment. The culture of conservatism that often characterizes long-standing employee-owned firms, while admirable in many respects, can calcify into an institutional reluctance to take the kinds of risks that growth requires. A CEO who has made the case for a transformative acquisition or a major technology investment, only to watch it voted down by a board that prioritizes financial caution over strategic ambition, may quietly begin exploring other options.

The journey, not the destination

It would be a mistake to read this as a story about failure or to view the CEOs making these decisions as leaders who simply lost faith in a model they once believed in. The reality is considerably more nuanced. Most of these leaders spent years—often decades—working hard to make employee ownership succeed. They invested in the model, defended it, and built something meaningful within its constraints.

What changed, in most cases, was not their values. It was the math—and the competitive environment in which that math plays out. The financial pressures, succession challenges, and capital constraints that drive firms toward a transaction are real, and the leaders navigating them deserve to be met with respect, not judgment.

What the data tell us is that the AE industry is at an inflection point for employee ownership. At 18 transactions per year, the cohort of employee-owned ENR-ranked firms is shrinking in ways that will reshape the industry’s ownership landscape over the next decade. The firms that will remain employee-owned—and thrive—will be those whose leaders address these three pressures proactively: building financial strength that can sustain the buyout obligation through economic cycles, developing deep leadership pipelines that don’t depend on any single individual, and creating capital strategies that allow for bold investment without sacrificing the firm’s ownership culture.

For those firms, employee ownership will remain not just a viable model but a powerful competitive advantage. For the others, the journey across the spectrum will continue—one signed LOI at a time.

You can reach Mick Morrissey at [email protected].

Strategic Planning’s Unfinished Business

Most strategic planning efforts in the AE industry focus on growth. That’s appropriate. Firms invest significant time and money in planning because they want to grow revenue, expand into new markets, strengthen service offerings, recruit talent, improve profitability, or position themselves for ownership transition. Growth is usually the reason everyone is gathered in the first place.

At some point during the planning process, however, somebody inevitably raises an important point:

“We also need to decide what we’re not going to do.” The room nods in agreement and the conversation moves on.

Nobody disagrees with the idea. In fact, most leadership teams recognize that deciding what not to do may be just as important as deciding what to pursue. The problem is that the strategic planning session itself is rarely the right place to tackle those issues.

Imagine a planning session with 15-20 people in the room, including business unit leaders, market leaders, office leaders, and ownership representatives. The group is trying to think about the future of the firm, identify opportunities, and build alignment around a common direction.

That is a poor setting for deciding whether an office should be consolidated, whether a service line should be scaled back, whether a market sector is no longer worth pursuing, or whether a long-standing investment has failed to deliver what was expected. The information required to make those decisions is usually incomplete, the people affected by the decisions are often sitting in the room, and once one of those discussions begins, it can consume the entire meeting. As a result, most firms postpone the conversation—but never get back to addressing it. And that’s because most firms are better at starting things than stopping them. 

Over time, nearly every successful AE firm accumulates commitments.

• A service line is launched because an important client requests it.
• An office is opened to support a geographic expansion effort.
• A market sector is established because leadership sees opportunity.
• An internal initiative is created to solve a specific problem.
• An acquisition brings new capabilities into the organization.

Each decision makes sense at the time, and most are made with good intentions and sound reasoning. Years later, however, leadership often discovers that some of those commitments never fully achieved what was expected.

• The service line never reached critical mass.
• The office remains dependent on work from another location.
• The market sector generates occasional projects but never develops into a meaningful business.

The initiative continues because nobody wants to be the person who officially ends it, and meanwhile, new priorities continue to be added.

The result is an organization carrying more commitments than it can effectively support. Resources become spread thinner, leadership attention becomes fragmented, and decision-making becomes more difficult. Growth initiatives compete with legacy activities for the same time, money, and talent.

Many firms spend years trying to solve these symptoms without addressing the underlying cause.

What the planning session should actually do

The planning session should not be responsible for making these decisions, but it should be responsible for identifying where deeper review is needed.

That distinction matters. Rather than asking a planning team whether a business unit should be shut down or whether an office should be consolidated, a better question is, “What parts of the firm deserve a closer look over the next 6 to 12 months?”

The objective is to create a list of issues that warrant further examination, not make decisions. That list might include:

• Service lines that have struggled to gain traction
• Offices that have not achieved expected performance
• Market sectors with uncertain long-term prospects
• Internal initiatives consuming resources without clear results
• Investments that may no longer align with the firm’s direction
• Businesses acquired years ago that have not met expectations

The planning team’s role is simply to identify areas that deserve additional scrutiny. Once that list exists, leadership can evaluate each issue through a separate process that is better suited to the task.

Establish a business review process

Many firms conduct regular financial reviews, project reviews, and business development reviews. Far fewer conduct systematic reviews of the businesses, services, offices, and investments that make up the firm.

But they should. Twice a year is usually sufficient.

The participants should be limited to a small group that can evaluate the facts objectively and make decisions. Typically, that group includes the following:

• The CEO
• The COO
• The CFO
• Selected operational leaders
• Occasionally, an outside board member or advisor

The purpose is straightforward: determine whether the firm’s resources are being invested in the right places.

Gather facts before opinions

One reason these conversations become emotional is that firms often start with opinions instead of information. Before any significant decision is considered, somebody should be tasked with gathering facts.

For example, if a market sector is under review, gather the following:

• Revenue trends
• Profitability
• Backlog
• Win rates
• Key client relationships
• Competitive position
• Future market outlook

If an office is under review, gather the following:

• Financial performance
• Staffing levels
• Client concentration
• Growth prospects
• Strategic importance

If a service line is under review, gather the following:

• Utilization
• Margins
• Client demand
• Recruiting challenges
• Cross-selling value
• Competitive differentiation

The objective is to understand reality. Many businesses perform better than people assume and others perform worse. Your leadership should know the difference before making decisions.

Separate performance from potential

One of the biggest mistakes firms make is evaluating every business solely on current financial performance. A business can be underperforming and still deserve investment while another can be profitable and still deserve scrutiny.

For example, an emerging service line may currently produce modest revenue but provide access to important clients or future growth opportunities. Conversely, a mature business may generate acceptable profits while offering little long-term strategic value.

Good decisions require looking at both current performance and future potential. The question is not simply whether something is making money today, but whether it strengthens the firm the leadership team is trying to build.

Four decisions every firm should be willing to make

After reviewing the facts, most businesses, services, offices, or initiatives fall into one of four categories.

Invest: The opportunity is attractive, and the firm should commit additional resources.

Improve: The opportunity remains worthwhile, but performance needs to improve within a defined period.

Maintain: The business is stable and valuable but does not require significant additional investment.

Exit: The business no longer justifies the resources, attention, or capital required to support it.

Most firms are comfortable discussing the first three, but the fourth is where many struggle. Yet avoiding exit decisions does not eliminate the consequences—it simply delays them. The resources tied up in underperforming activities remain unavailable for higher-value opportunities.

Make decisions on a schedule

Another reason these issues linger is that they are discussed only when frustrations become impossible to ignore. A better approach is to establish a regular cadence.

When leadership knows that every major business, office, service line, and initiative will be reviewed periodically, decisions become less personal and more routine. The discussion shifts from “Should we have this uncomfortable conversation?” to “This item is due for review.”

That may seem like a small distinction, but it dramatically changes how organizations make decisions.

Strategic planning doesn’t end when the session ends

Many firms treat the strategic planning session as the main event. In reality, it should be the beginning of a series of decisions. The planning session identifies where the firm wants to go, but what often receives less attention is determining whether everything currently inside the organization deserves to make the trip.

The healthiest firms I’ve observed do both. They pursue growth aggressively while periodically examining the businesses, services, offices, and initiatives they already have. They recognize that every commitment consumes resources and leadership attention, and they understand that saying “yes” to something new often requires saying “no” to something old.

Most importantly, they create a process for making those decisions deliberately rather than waiting for circumstances to dictate what stays and what goes.

Market Snapshot: Data Center Construction

Weekly market intelligence for AE and environmental industry leaders.

Beyond powering the artificial intelligence revolution, data centers have also propelled nonresidential construction spending over the past year.

While nonresidential construction barely increased by 0.3% between April 2025 and April 2026, MarketWatch reported last week that data center construction soared by 28% over the same time frame to a seasonally adjusted annual rate of $50.7 billion. That level of construction spending nearly matches that on sewage and waste disposal projects and is twice as high as lodging construction spending, according to the U.S. Census Bureau.

According to a Wall Street Journal article last week, capital expenditures by Microsoft, Alphabet, Meta Platforms, and Amazon totaled $410 billion in 2025 and are expected to surpass a staggering $670 billion this year.

The newspaper also reported, however, that data center projects are falling far behind schedule due to supply-chain bottlenecks, community opposition, permitting hurdles, and power supply availability. With grid operators and power companies increasingly raising concerns at connecting data centers to their systems, project owners are turning to developing their own power generation sources—including on-site gas generation and even nuclear power. 

A JPMorgan analysis from May reported that construction on 60% of data center capacity scheduled for completion in 2027 has yet to begun and another 7% is delayed. So far, the timeline-stretching hasn’t impacted the spending bonanza, but it bears watching for firms working in the sector.

For more insights on industry backlogs or questions about our market intelligence and research services, contact Rafael Barbosa.

Weekly M&A Round Up

24 deals power a high‑energy week for global M&A activity: M&A activity surged last week, with 24 total transactions spanning both U.S. and international markets. Domestically, 12 deals took place across NY, PA, TX, OH, CA, ME, CO, ID, and AL. Internationally, momentum remained strong with 12 transactions across Canada, Denmark, Belgium, South Africa, France, Ireland, Germany, Finland, and the UK. Check out all of the week’s M&A news here.