How much is your AEC business worth? And how did you arrive at that value? In helping hundreds of AEC industry owners answer these questions, Morrissey Goodale’s engineering, environmental consulting, and architectural firm valuation experts analyze both internal factors — such as balance sheets, management teams, and market position — and external forces — such as macroeconomic conditions, the cost and availability of capital, public stock market returns, and investors’ appetite for risk.
When we consider how to value an engineering firm or an architecture firm, there’s no one definitive approach to follow. Morrissey Goodale’s AEC firm valuation specialists typically rely on these three primary methods for determining how much an architecture, engineering, or environmental consulting firm is worth:
· Asset-based Approach
· Income Approach
· Market Approach
No one approach is applicable in all AEC company valuations. While all three approaches should be considered, an expert in engineering, environmental consulting, and architectural firm valuations will select one or possibly two methods that are best suited to a company’s unique circumstances and characteristics.
3 Common Approaches for an AEC Firm Valuation
1. Asset-Based Approach
With an asset-based approach, an AEC firm valuation is based on the value of the company’s assets net of liabilities. The two main asset-based approaches are the book value method and the adjusted net asset method.
When using the book value method, valuators subtract the book value of a firm’s liabilities from the book value of its assets as they appear on balance sheets. The adjusted net asset method relies on fair market value rather than book value and is calculated by subtracting the estimated fair market value of outstanding liabilities from the estimated fair market value of assets.
While an asset-based approach has the advantage of being relatively straightforward and easy to understand, the downside of using it with an engineering, environmental consulting, or architectural firm valuation is that the worth of an AE business is based on intangible assets — such as people, expertise, reputation, and organization — rather than on physical assets, such as vehicles and computers.
The asset-based approach is better suited for capital-intensive businesses, such as equipment rental companies or hotels, in which assets are fundamental to income production. Business valuation professionals who rely heavily on an asset-based approach likely have little AEC industry knowledge.
The income and market approaches, in which value is based on earnings capacity or transactions of similar companies, are much better methods to employ when determining how to value an engineering firm or an architecture firm.
2. Income Approach
When utilizing the income approach, value is based directly on a firm’s ability to generate future profits and cash flows by estimating the present value of those profits and cash flows. It is best suited for valuing established, profitable firms.
The discounted cash flow (DCF) method is the most frequently used analysis under the income approach. The DCF method applies a discount to a company’s projected future cash flow streams, with amounts further in the future subject to a greater discount. The DCF method projects future debt-free cash flows over multiple periods, such as five or six years, and is widely used, especially when future expected cash flows and growth rates are expected to vary over time. Future cash flow estimates rely on assumptions regarding net revenue, labor and benefits costs, operating expenses, pre-tax, and pre-bonus profits among other factors. Multiple models can be constructed based on how conservative a buyer may or may not be.
An alternative is the capitalization of earnings method, which relies on future benefits represented in a single period. It is less rigorous and better suited for mature, well-established companies with little variation in earnings and growth.
An advantage of the income approach with architecture, engineering, and environmental consulting firms is that it considers the economic benefit stream generated by a business, which most directly measures its true worth. The downside, however, is that it requires significant analysis to estimate and quantify and is based on future projections and assumptions that are inherently uncertain.
3. Market Approach
When a market approach is utilized, an engineering, environmental consulting, or architectural firm valuation is based upon the sales of comparable companies. Since it is based on how similar businesses have been priced in the market in the recent past, it is the most direct approach for determining a firm’s market value.
A market approach requires the calculation of appropriate pricing multiples, such as price-to-revenue or price-to-earnings ratios. Since the AEC industry has so few publicly traded companies, business valuation professionals who employ a market approach will require both industry experience and access to a robust database of transactions.
At Morrissey Goodale, our proprietary database of AEC industry deals provides real-time reporting of industry M&A multiples, and by having our pulse on industry merger and acquisition activity, we can provide accurate AEC firm valuations, no matter the ups and downs of the market.
The advantage of the market approach is that it’s readily accessible and easy to understand as the market provides a direct indication of how to value an engineering, environmental consulting, or architecture firm. The disadvantages are as follows:
- Without AEC industry expertise and knowledge it can be difficult to identify comparable firms that have been involved in recent transactions.
- Reliable data may be hard to obtain without significant investment as transaction data are typically not disclosed to the public.
- The approach essentially assumes that every firm is average and does not account for firm-specific circumstances and prospects.
What Is Your AE Firm Worth? Let Morrissey Goodale Help.
Whether preparing for retirement in the short term or planning for the long-term viability of your company, shareholders of architecture, engineering, and environmental consulting firms have too much at risk to not adequately prepare for their financial future. And with decades of AEC industry specialization, Morrissey Goodale’s certified business valuation experts understand precisely how to calculate architecture and engineering firm valuations and advise you on which internal and external ownership transition plans are right for your firm.
Morrissey Goodale’s business valuation services range from simple assessments of a firm’s worth to detailed, full-narrative valuation reports for tax, transaction, litigation, and ESOP purposes. Our consultants have helped hundreds of AEC industry owners successfully navigate the complex process of AEC company valuation and ownership transition.
Based on our extensive AEC industry experience, Morrissey Goodale’s business valuation experts can determine the right approach for accurately determining what your firm is worth. Contact us today to find out how Morrissey Goodale can help leverage your organization.
A guide to help you better understand how AE firms are valued and – perhaps more importantly – what you can do to build value now.Read Newsletter
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