300

300

300. An awesome, visually stunning (if factually challenged) 2006 movie about the Battle of Thermopylae? Yes! A fault line along which the AE industry is fracturing? Sure! Wait, what? 

For those of us of a certain vintage, it’s hard to believe it was over 18 years ago that we sat in packed movie theaters (no streaming services for us!) to immerse ourselves in the groundbreaking, green-screened, CGI-ed magic that was the torso-filled story of the three-day epic stand of 300 Spartans against the overwhelming forces of the Persian army of Xerxes in 480 B.C.

And in some ways, it’s even harder to believe how much the influence of acquirers with revenues of $300 million or more has grown with respect to industry consolidation over the past five years. It’s almost as if $300 million has become a line of demarcation between those firms that are taking the leading role in consolidating the industry and those that are being consolidated. 

(Editorial note: Dear reader, for ease of navigation of this article, I’m choosing to replace the phrase “acquirers with revenues of $300 million or more” with “the Spartans.” Trust me, it reads easier and is a little more fun. Thank you.)

1. In the blink of an eye: Over the past five years, we’ve seen the Spartans quickly move to become a dominant driver of industry consolidation. Consider this, in 2020, they made 20 acquisitions, accounting for just 6% of all acquisitions. Fast forward to 2024, and the Spartans made 163 acquisitions, well over one-third of all domestic deals. In the space of just five years, their acquisition activity has grown eight-fold.

Spartan Group acquisitions by year (2020 to 2024)

2. Why? Well, one reason is that the number of design firms with more than $300 million in revenue has itself increased over the past five years. Using the ENR 500 as a rough proxy for the industry, the number of firms reporting revenues of $300 million or more increased from 54 in 2020 to 89 last year—a 64% increase. So, it’s not surprising that the population of Spartans has also grown—from just 17 in 2020 to 68 in 2024—a four-fold increase. Effectively, as the population of larger firms in the industry has grown, it has yielded an elite group of highly accomplished acquirers—the Spartans.

3. What makes a Spartan? First, each of these firms has a combination of (a) an ambitious vision, (b) a motivated/competent leadership team, and (c) a successful operation throwing off better-than-average profits. Each firm is driven to, and capable of, pursuing superior returns for their shareholders through organic and inorganic growth. The Spartans have also made significant investments in their corporate development infrastructures. As a result, they are able to source and close more transactions per year than non-Spartans.

4. An industry oracle? The Spartans themselves reflect the evolving capitalization nature of the industry. Diving deeper into the acquisition activity of this group reveals a lot about how the industry has been recapitalizing over the past few years and where it may be headed. Of the 438 transactions completed by the Spartans since 2020, 30.1% involved a publicly traded buyer, 31.7% an employee/partner/ESOP-owned buyer, and 38.1% a private equity (PE)-backed buyer or a PE-recap. However, when you put the microscope on Spartan deals in 2024, the percentages tell a somewhat different story. The share of deals by publicly traded acquirers declined to just 22.7%, while the share by employee/partner-owned or ESOP buyers increased to 35.0%, and that of PE-backed acquirers or PE recaps jumped to 42.3%. The publicly traded backed Spartans have lost ground to their peers over the past five years. 

5. The 10% rule (somewhat) holds: For decades, it’s been an old chestnut that the typical design firm transaction involves a 10-to-1 ratio in size between buyer and seller. In other words, the buyer is around 10 times larger than the seller. And this pretty much holds true for the Spartans, although the ratio skews a tad higher than one would expect. Over the past five years, the average size of firms acquired by the Spartans has been $27 million in revenue. That ranges from a high of $48.5 million for the publicly traded Spartans to $10.7 million for employee-/ESOP/partner-owned ones. 

6. Who? The population of Spartans has morphed over the years as some firms have grown into the “$300 million club” and some have departed from it—by either being acquired themselves (a common occurrence) or shrinking below $300 million (less common). The table below shows the 11 most prolific acquirers in this elite group in 2024.

Looking forward: As the industry recapitalizes and consolidates, we can expect to see an even greater number of acquisitions by these $300 million-plus acquirers as they continue to pursue their visions for growth. As in every endeavor, fortune favors the brave. Επιστρέψον με την ασπίδα σου – ή επάνω της.

Contact Mick at [email protected] or 508-380-1868.