Judging by the number of inquiries we at Morrissey Goodale receive every week, one of the hottest strategic planning topics in the boardrooms of employee- and ESOP-owned firms these days is the examination of the “strategic options” that are available to create and maximize shareholder value.

AEC industry boards interested in getting the best returns for shareholders have three strategic options to choose from:

· Transition Option

· Sale Option

· Recap Option

Firms that pursue the Transition Option as part of their strategic planning want to and are able to transition their firms from the current leadership teams and majority shareholder groups to a next generation of leaders and owners. This strategic option is often weighed against the competing choices of selling the firm to a third party (Sale Option) or recapitalizing the firm with outside equity (Recap Option).

The Two Trends That Have Roiled the AEC Industry

Why is evaluating strategic options a top-of-mind topic for so many leadership teams? Essentially, it stems from the collision of two major trends that have been roiling the AEC industry for the past decade:

· The imminent retirement of baby boomer owners and leaders

· The availability of cheap financing

The first of these trends — which is rapidly coming to an end — is the imminent retirement of the balance of baby boomer owners and leaders from their architecture, engineering, and environmental consulting firms. Scanning the AEC industry, this dwindling group still holds significant ownership in their firms, and in most cases, their ownership is disproportionate to the value they create.

The second trend — which may be coming to an end after 20 years — is the availability of cheap financing for investors to acquire equity in these firms. Increasing interest rates have thrown a wrench in the plans of a number of smaller private equity groups that have been considering investments in the AEC industry.

Why AEC Firm Leaders Are Examining Their Strategic Options 

The impetus for leadership teams to invest their limited time and resources in scrutinizing their strategic options varies. In general, there are three drivers to why AEC firm leaders are analyzing their options as part of their strategic planning process:

· Some are concerned about the ability of their existing stock repurchase models to support the buyouts of departing shareholders at a time of record valuations.

· Others are aware that they’ve likely deferred succession planning five years too long.

· Still others have received offers from strategic acquirers or investors and feel compelled (or are required by charter) to consider the overtures seriously.

The First Step AEC Firm Leaders Should Take When Weighing Strategic Options 

Before a team can objectively assess its strategic options, it must take emotion out of the equation. This is for many an unanticipated — but authentic — challenge to sound, objective decision-making.

Most teams have an understandable and risky bias to favor the “steady as she goes” approach with the current business model. “Understandable” because of inertia, familiarity, loyalty, fear of change, contentment. “Risky” because choosing the status quo based on bias has significant potential to actually destroy shareholder value in the future — particularly if teams delude themselves about their own leadership and management competencies. (This happens more than you think).

The greater the emotion and bias in the decision-making process, the less optimal the outcome.

Why Specificity Is Needed When Comparing Strategic Options 

One of the biggest challenges teams face when evaluating strategic options is comparing the economic value (underline added for emphasis) created by transitioning the business to a next generation of owners and leaders to the economic value created via a sale or recapitalization. At the heart of the matter is comparing value created over an extended period of time (Transition Option) to value created at a single point in time (Sale or Recap Options).

This is where specificity is your friend

It’s critical to specify a point of time in the future (one, three, five, seven, and ten years are all viable milestones) that connects with the definition of a successful Transition Option. (Let’s call this point in time “Touchdown.”) It’s also important to specify what “success” is in this Transition Option.

For example, “success” could mean that 100% of key leadership and management positions have been transitioned in three years, and certain key financial metrics (such as revenues, profits, backlogs) have been achieved to secure the capital model. These financial metrics can then be converted to a firm value. This value can then be compared to the estimated value of a firm sale or recapitalization at any point in time along the way to Touchdown. The delta between the economic value in a firm sale or recap can then be objectively compared (with some time value of money thrown in). The team can then assess how the shareholder value resulting from a firm sale or recapitalization compares to the value created through transition.

A sober objective analysis of the economics of their strategic options allows leadership teams to then reconnect with their emotions and biases — as is their prerogative. They can choose to “leave money on the table” should a sale or recap point to greater value if they see beyond the pure economic value of the options assessment or believe that remaining in control and transitioning the business results in a different and more fulfilling set of benefits for employees, clients, and shareholders.

Morrissey Goodale Can Help Your AEC Firm Evaluate Strategic Options

Morrissey Goodale has been a trusted strategic planning advisor to many of the most successful architecture, engineering, and environmental consulting firms. Whether your AEC firm is weighing an internal ownership transition, external firm sale, or recapitalization with private equity, Morrissey Goodale is here to help.

Shareholders of architecture, engineering, and environmental consulting firms have too much at risk not adequately to prepare for their financial future. With decades of AEC industry specialization, Morrissey Goodale’s expert consultants have advised hundreds of architecture, engineering, and environmental firm owners about which internal and external ownership transition plans were right for their firms. In addition, Morrissey Goodale can help you understand the pros and cons of private equity, find and select the right private equity partner, negotiate the most optimal transaction terms, and make “apples to apples” comparisons when comparing private equity recapitalization as part of a strategic options assessment.

Are you weighing a Transaction, Sale, or Recapitalization Option for your architecture, engineering, or environmental consulting firm? Contact us today to find out how Morrissey Goodale can help.

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