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blog > AE Buying & Selling: The “Do’s” and “Don’ts” to Get Your Best M&A Deal
AE Buying & Selling: The “Do’s” and “Don’ts” to Get Your Best M&A Deal
by Nick Belitz
Morrissey Goodale’s expert advisors share M&A best practices for both buyers and sellers of AEC industry firms.
As backlogs boom and valuations soar, AEC industry merger and acquisition activity has risen to record levels in recent years. With robust demand for architecture, engineering, and environmental consulting firms of all shapes and sizes, buyers and sellers of AE firms have a lot to lose if they don’t follow M&A best practices.
Based on decades of experience facilitating, structuring, and closing hundreds of AE firm transactions, Morrissey Goodale’s M&A consultants know which merger and acquisitions strategies to pursue to help buyers and sellers get the best deals possible. Having assisted firms on both sides of the negotiating table, Morrissey Goodale’s mergers and acquisitions experts have compiled the following merger and acquisitions best practices for both AE firm buyers and sellers.
For AE Firm Sellers: The Seven “Don’ts” to Follow to Get Your Best Deal
AE and environmental firm CEOs have been inundated with offers to buy their firms in recent years. More than a few CEOs (and their boards) have moved from a pre-pandemic position of “We will never sell!” to “Hmmm…maybe selling or outside investment could be a very good thing for us.”
It’s a seller’s market like never before, but there are only a few more years remaining until the pendulum swings back in favor of buyers. If you’re one of those CEOs who has been assigned to open discussions with suitors, here are some tips on what NOT to do, so that you can get the best deal for your shareholders:
- Don’t do anything without an NDA.
- Don’t get emotional.
- Don’t take the suitor’s word for anything.
- Don’t accept the first offer.
- Don’t let a suitor speak to stakeholders without a signed LOI (letter of intent).
- Don’t assume the buyer’s accountant knows what they’re doing.
- Don’t think it’s done until it’s done.
1. Don’t do anything without an NDA.
The first priority at the start of any M&A exploration is to protect your firm’s brand and proprietary information. Until you have a signed non-disclosure agreement (NDA) in place, do not advance discussions and do not share anything written with any suitors. The NDA provides the ground rules and legal context for all future discussions and information exchanged.
Many suitors will try an “Aww shucks, we’re just talking here” initial approach to glean information. Don’t fall for it. You need to take Michael Corleone’s advice: “It’s not personal, Sonny. It’s strictly business.” Get the NDA in place first. And make sure it covers the fact that the discussions are even taking place — in addition to any content shared or exchanged. If the suitor won’t agree to this, then cease all discussions because they are not a quality buyer.
2. Don’t get emotional.
Don’t fall in love with the first suitor. Don’t make your decision based on the “charisma” of the suitor’s CEO. Don’t delude yourself that “it’s a perfect cultural fit!” after two meetings. First, it’s never a perfect cultural fit, and second, you can’t figure out the cultural fit by just meeting with a leadership team. It’s like your college-going child choosing a school based on a single visit to campus — makes no sense (for them or for your pocketbook). Save your emotion and passion for making the integration of both firms successful. Be dispassionate in your deal-making.
3. Don’t take the suitor’s word for anything.
Get everything in writing. If they say they are having a great year, get them to send you their financial statements. If they rave about their “best in class” bonus plan, get the details. If there’s information that isn’t available in writing, then get it verified by a third party.
If the suitor represents that they do a fabulous job at integrating firms, then get them to put you in touch with CEOs of firms that they have acquired. And don’t just talk with the names that they give you first (those will be the integrations that went well). Ask to speak with the CEOs of other firms they’ve acquired, too. (Their response to this request will be telling.)
4. Don’t accept the first offer.
It’s NEVER the best one. Negotiate, negotiate, negotiate. That is all.
5. Don’t let a suitor speak to stakeholders without a signed LOI.
Buyers will always want to talk with your “next generation” or “take a look behind the curtain.” They will want to talk with clients to “just check that you’re as good as your reputation.” One or, in some cases, both of these requests are reasonable. However, you don’t give them this level of access until they have put in writing the terms of the deal that floats your boat in a letter of intent (LOI).
6. Don’t assume the buyer’s accountant knows what they’re doing.
Every acquisition that involves a financial sponsor (private equity or family office) involves a Quality of Earnings (QoE) assessment. This must be completed to satisfy their lender’s criteria for the transaction. If the QoE doesn’t sync with the financials you’ve represented, then the buyer will either try to re-trade the deal (and this never gets re-traded UP to your advantage) or walk away from it.
The financial sponsor will bring in a national accounting firm to run the QoE. The problem is that these big accounting firms frequently assign junior folks with no AE or environmental industry experience to run the QoE assessment. These junior staff don’t know how to analyze project-driven businesses, and they frequently flat-out get the earnings analysis wrong. This can cause a huge amount of heartburn and wasted time and effort at a critical part of a transaction.
At a time when you and the suitor should be figuring out integration, you may find yourself instead going on a hugely problematic detour that can damage relations between seller and buyer and possibly kill the deal. Make sure the buyer’s QoE team knows what they are doing.
7. Don’t think it’s done until it’s done.
We’ve seen a buyer pull a deal the day before the seller’s leadership was to announce it to their internal staff (30 days before closing). The hotel room had been booked. The champagne was chilling. The speeches had been written. It was…awkward.
Deals have been killed on the five-yard line because of missed projections. It’s not unusual at the 11th hour for skeletons to fall out of closets that the seller didn’t even know existed, resulting in the rug being pulled from under a deal.
Due diligence is like reentry from space. It’s 60 days of non-stop turbulence and buffeting. You’re praying that the heatshield stays on. And you only know it’s over when you splash down safely. It’s the same with getting your best deal done: You only know it’s done when the money is wired to your team’s accounts (which is always a curious anti-climax).
For AE Firm Buyers: The “Do’s” and “Don’ts” to Get Your Best Deal
Just because a firm is successful in the AE and environmental industry doesn’t necessarily mean that it will be a successful buyer. There are firms with stellar industry brands—for service, innovation, or employee satisfaction—that fail repeatedly when it comes to making acquisitions.
In such a turbo-charged M&A environment, only the most naïve—or perhaps the most arrogant—buyers think they are the first to knock on the door of just about any AE industry firm these days. If you think you are the only game in town, you are sorely wrong.
With such immense demand for well-run companies, it’s imperative that buyers of architecture, engineering, and environmental consulting firms adhere to a series of merger and acquisitions best practices. Morrissey Goodale’s M&A experts are still seeing buyers make simple and obvious mistakes that are handicapping them and causing them to lose out on deals in this highly competitive market.
Be sure to follow these rules in order to be a successful acquirer in today’s market:
1. Don’t focus too much on your own strategic goals and too little on those of the seller.
2. Don’t let attorneys dictate the success or failure of a deal.
3. Don’t buy outside of your capacity. The biggest mistake in M&A is overpaying for the deal. It’s hard to come back from that.
4. Don’t grow fatigued from looking at so many deals and be unprepared to meet with a seller; this is happening a LOT in this super-hot market!
5. Don’t bring emotion into the mix.
6. Don’t insert language into agreements that exposes sellers to liability for anything, anywhere, at any time, whether known or unknown at the moment.
7. Don’t assume you know the motivations of sellers or fill in knowledge gaps with your own notions when the answers haven’t been uncovered yet. It’s useful to be a detective and come up with a theory but then gather evidence to either confirm or negate that theory. You don’t want to draw conclusions without investing the time to gather evidence, or you just might pass up on a good opportunity.
8. Don’t think your firm is “all that” once the LOI is signed. Sellers get turned off when a buyer’s “personality” changes from “sweet and romantic” during the courtship stage to “arrogant and dictatorial” during the due diligence phase. More than one seller has shut down a deal when this has happened.
In addition, buyers should follow these merger and acquisitions strategies to prevent deals from going south:
- Do dedicate enough time and resources to the process.
- Do plan ahead.
- Do put on your sales hat.
- Do start the integration process BEFORE the deal is closed.
- Do understand the perils of too little communication.
- Do learn from your mistakes.
1. Do dedicate enough time and resources to the process.
Much like the work that architecture, engineering, and environmental firms do for clients, M&A is a project. Successful buyers are committed to the process and milestones. Failed buyers are unaware of the cost in dollars, time, and management resources it takes to make M&A successful.
The false belief many buyers have is that by putting an M&A strategy to paper, they can expect to have a deal done in six to nine months. The most successful buyers in the industry, however, will tell you all M&A is built on relationships, and that means kissing the most frogs and meeting with the most firms in the pipeline because you know deals in the works could fall through at any moment. Successful buyers often build relationships with target firms for two or three years by teaming up on projects, entering into joint ventures, and so on. It requires patience and endurance.
2. Do plan ahead.
Before engaging in M&A, buyers need to define a strategic plan to help understand services and markets and define parameters.
3. Do put on your sales hat.
Buyers are trying to convince owners to hand over the keys. There needs to be some element of convincing or getting the owner to buy into the acquirer’s vision/message. There needs to be some selling of your personality, your culture, your vision, and your ability to steer the bigger ship. Buyers can’t be one-sided just trying to see what fits their ideas and is good for them. They need to be figuring out the win-win and convince the seller along the way.
4. Do start the integration process BEFORE the deal is closed.
Don’t wait until the agreements are finalized before starting integration planning. Make sure that when the ink dries, there is a clear plan to hit the ground running in the first 100 days. Also, recognize that integration is a two-way street; buyers also need to adapt to make a merger or acquisition a success. Recognize that change is scary—and too much too soon can be destructive.
5. Do understand the perils of too little communication.
Some buyers fail to recognize that there is no such thing as too much communication, but there is such a thing as too little communication. In the evaluation stage, don’t go radio silent for a month. If you say you’re going to do something by a certain date, do it. Given the market, targets are likely receiving inquiries from other buyers, and if you’re serious about the opportunity, don’t let the target’s attention go elsewhere. Stay engaged.
6. Do learn from your mistakes.
A “failed buyer” is not one who makes mistakes in the negotiation or integration process; all buyers have things that they wish they would have done differently. A failed buyer is one who does not acknowledge, document, and learn from those mistakes for the next deal.
If you’ve been frustrated by your team’s inability to close on an acquisition, then review your merger and acquisitions strategies and adjust your M&A tactics accordingly to put one in the win column for your firm.
Morrissey Goodale’s M&A Experts Are Here to Help
Whether you are thinking of buying or selling an architecture, engineering, or environmental consulting firm, Morrissey Goodale’s trusted M&A advisors can guide you through the entire merger and acquisition process. Our proprietary database of M&A pricing activity and our compilation of national and international AE buyers and sellers set us apart from other AE merger and acquisition firms. We have an unrivaled understanding of M&A trends and pricing that we can deploy to negotiate the right deal for you.
Morrissey Goodale’s expert buy-side consultants have developed an extensive network of relationships with industry decision-makers around the globe that makes us uniquely qualified to identify the right-fit acquisition target for your AE firm. On the other side of the table, Morrissey Goodale’s expert sell-side consultants can guide sellers through every step of the complex process of transitioning your firm—from preparing it for a transaction to finding you a right-fit buyer to signing the deal and preparing for successful integration.
Contact us today to find out how Morrissey Goodale can help your architecture, engineering, or environmental consulting firm get your best M&A deal possible.
June 12-14, 2024 Las Vegas, NV
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