How Market Context Determines Company Valuations

How much is my architecture, engineering, or environmental consulting firm worth?

It’s the bottom-line question asked by any AEC firm owner seeking a company valuation—but it’s one without a single answer. 

When determining the value of an architecture, engineering, or environmental consulting firm, Morrissey Goodale’s AEC company valuation specialists typically rely on three primary methods:

1. Asset-based approach: Value is based on the company’s assets net of liabilities.
2. Income approach: Value is based on the present value of profits and cash flows.
3. Market approach: Value is based upon the sales of comparable companies. 

No single approach is applicable in all AEC company valuations. While all three approaches should be considered, an expert in architecture, engineering, and environmental consulting firm valuations will select one or possibly two methods that are best suited to a company’s unique circumstances and characteristics. (For more details on the three approaches, read How to Value an AEC Firm in 3 Simple Ways.)

The identity of a firm’s buyer adds additional variability to company valuations. There are fundamental differences between calculating firm values for external acquisitions and internal buyouts—including the metrics that are examined and the discounts that are applied.

Company Valuations for External Sales 

When determining a firm’s value for an external sale, Morrissey Goodale’s valuation experts look at the price an outside buyer would pay—and that can fluctuate considerably based on market conditions. We also consider what the buyer might be able to achieve by taking advantage of their strategic plans and the synergies of the combined entities. External valuations are more sensitive to recent results and are based in part on what buyers think they can do with a business. 

External valuations tend to be very focused on both a firm’s recent EBITDA history and what EBITDA buyers think that they can achieve going forward, so it’s based heavily on earnings and recent performance. To determine the appropriate multiple of EBITDA, we look primarily at Morrissey Goodale’s proprietary deals database, which contains data on the transactions of hundreds of small- to medium-size architecture and engineering firms. That is a much better metric than the public markets, which are more appropriate if we are looking at a very large company. 

Company Valuations for Internal Transitions 

For valuations for internal ownership transitions, there is a smoother value over time and less sensitivity to up-to-the-minute market conditions. Compared to external acquisitions, we’ll generally look back over a longer time period and examine a wider range of metrics that typically measure firm size and profitability, such as number of employees and net and gross revenue. We’ll usually also look at trailing historical averages to avoid sudden outsize fluctuations in the value of the business over time.

Most companies don’t want to see their stock valuations going up and down with the vagaries of the stock market every year because that tends to be disruptive to ownership transitions. Most internal valuations for ownership transition create a more stable program with less risk for participants by taking a longer perspective than the quarter-to-quarter view the stock market often takes. On the other hand, external valuations go up and down with the stock market because that’s what you’re competing against. 

Discounts for Internal Transitions 

Valuations for internal transitions typically include discounts for lack of control—meaning that no one individual has control over the company—and lack of marketability—meaning those stakes can’t be freely bought and sold. Due to those discounts, internal valuations are usually lower than external ones. In addition, a strategic buyer may also have synergies that they can exploit that internal buyers can’t. 

The Value of Goodwill 

Whether for internal or external transactions, the valuation methods we use will always take into account what architects and engineers tend to think of as the goodwill value of their firms, which is the value of their franchises above and beyond what the balance sheet says. Goodwill includes a firm’s:

• Reputation
• Customer base
• Infrastructure 
• Franchise 

Our valuations are based on the future earnings of franchises, and that automatically takes goodwill into account.

Morrissey Goodale Can Determine How Much Your AE Firm Is Worth 

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 architecture, engineering, and environmental consulting firm owners successfully navigate the complex process of AEC company valuation and ownership transition. 

Based on our deep AEC industry experience, Morrissey Goodale’s business valuation experts can select the right approach for accurately determining what your firm is worth. Contact us today to find out how Morrissey Goodale can help.