Word on the Street: Issue 158

The End of the Affair

The founder, CEO, and sole owner of Alvarez & Associates (A&A) sat down in his office to write his mid-year “State of the Firm” message to be sent to his 100 or so employees. A naturally emotional and empathetic dude, he viewed his employees more as family than staff. He liked to write from the heart and share not only how the business was doing, but also his perspective on life, love, politics, and religion. You know, all the things that they tell you not to talk about in business. And that’s why his employees loved him.

He wrote two letters per year—one every December reflecting on the year that had been and looking ahead at the upcoming one and this, his mid-year update on the firm’s progress against its goals. He always started the same way—copying and pasting and then editing the prior version. As he did so this time, he realized that since 2018 each of his letters (except for the mid-year 2020 update that was—to say the least—“dark”) had started with “Thank you all for your hard work; we’ve just had another record six months…”

And that’s exactly how this letter was going to start off too…another unbelievably good six months. It was a GREAT time to be the CEO of a civil engineering firm in California. Or anywhere else in the country for that matter. But he didn’t take these good times for granted. He was, of course, old enough to remember when that was not the case. And as he pondered how the robust AE and environmental industry of today differed so much from that of 15 years ago when he almost lost his house and everything he owned to the bank, his mind began to wander to how he, his firm, and the industry had changed.

After the Gold Rush: He worried about all of the “high-dollar” folks whom his 100-person firm had added during and since the pandemic. Those had been crazy times, and his firm had paid over-the-top money to get talent on board. Signing bonuses, too. Big ones. Crazy. But all of his competitors and peers had been doing the same thing then, so he didn’t have a choice, right? He needed those employees to meet the massive wave of work headed his firm’s way. But now, in the cold light of day—even though his firm was still racking up record performance—it was clear that many of those “pandemic-era” hires were “B” and “C” players. And more than a few were all about—indeed, some were just about—the money. And with the addition of those folks to A&A, the firm’s culture felt…well, it felt lessened, cheapened. It felt different than before—and not in a good way. The pandemic and post-pandemic Gold Rush had been great for the firm and himself financially, but he wondered if it had changed his firm beyond recognition. He wondered if he loved the firm anymore.

Two-minute warning: At 65 he was at the top of his game. At least that’s what he told himself. He was still the primary rainmaker. Clients still called wanting to speak to him and have him either on or overseeing their projects. He was the clear and sole authority in A&A—even though he had developed a “leadership team” composed of three long-time employees (the “three amigos” as they were fondly referred to by everyone) around him. The firm revolved around him and his investment of time, energy, and finances. And he loved that. He was so proud of the firm that he and his team had built. But these days, more often than not, he was working 40-hour weeks instead of 50. He was spending more time travelling to see his grandkids than to meet new clients. He invested more time in his small but growing residential real estate holdings than the firm’s mentoring program. Three-day weekends had become five-day ones. In what seemed like the blink of an eye—but in reality, it was 25 years—his relationship with his firm had changed. He was no longer the entrepreneur whose every waking hour was consumed with growing and sustaining the firm. Now he was some guy trying to figure out how to liberate himself from that very same firm. One of his bridge club pals had recently told him, “You play the game differently in the final two minutes of the quarter.” Now he knew what it meant.

Generational changes: For sure, he knew he had slowed down. But it also seemed to him that there had been shifts in how his firm “worked” over his career. He remembered in the late ’80s and ’90s that it was not unusual for everyone—managers and technical staff—to work on the weekends in the office to get projects done. Sixty-hour weeks were regular occurrences. It seemed like that changed in the 2000s, with 50-hour weeks being the norm, with most folks realizing that if you were not putting in that amount of “face time,” then more likely than not you were going to be disappointed with your bonus. Today—despite the fact that his firm had more work and a larger backlog than ever and despite all of the technology to facilitate around-the-clock working—the spike of hours worked during the pandemic lockdowns had given way to a pervasive 40-hour mentality. Especially for the firm’s younger staff. He was having a very hard time squaring that circle.

May-December romance: He knew his firm needed a new, fresh, younger leader—someone who could take full advantage of the seemingly endless opportunities ahead. The firm’s residential land development business was booming like never before. Focused on wealthy coastal California towns and the communities surrounding Lake Tahoe, A&A could hardly keep up with the demand for tearing down old (built in 1990!) houses and replacing them with $20 million+ mansions—some sleek and modern, some traditional—all on the water or with water views. At the same time, the firm’s already busy public works practice was anticipating—but had no actual plan for—all the work that was going to hit when IIJA funds finally started flowing. The firm could easily double in size over the next five years. In many ways the firm felt like it did when he founded it 25 years ago—vibrant, growing, full of potential. He would have loved to have had both the energy and desire to be at the helm for the next decade of growth. But like an aging soccer team captain, his legs were gone, and with them his ability to lead from box to box. If he had not already outgrown his usefulness to the firm, he was not far away. The reality pained him. Long ago he had promised himself that he would never let things get to this point. But now here he was.

It’s not you, it’s me: He was no fool. Nor was he greedy. He knew that it was best for him, his family, and the firm that an orderly transition of business should take place. He had shared the wealth over the years with managers and employees to reward and retain the best. And he had tried on three separate occasions over the past decade to transition ownership internally and twice externally. Internally, folks never wanted to put enough skin in the game. Externally, one “buyer” was in reality a tire-kicker, the other was a bottom feeder. Both of them were great engineering firms, but lousy buyers. He suspected that he may have gone about selling the firm the wrong way. Maybe he should have proactively found better potential buyers rather than waste time with two non-starters. Or maybe he could have been more “reasonable” in what he wanted from an internal sale. But either way, here he was now, 65 years old with no viable exit strategy and a firm that, let’s face it, he was no longer compatible with. But at least it was a successful, thriving business that allowed him to take home $3 million a year. So as long as this dynamic kept on keepin’ on, things were not all that bad, right?

If leaving me is easy: He fired up his laptop and had just typed “It’s been another record year for us here at A&A…” when there was a knock on his office door. He looked up to see one of the three amigos—the one who had recently remarried, the one who ran all of A&A’s project operations—standing there. Apparently, his new wife was eager to travel the world—starting now. And at 63 and having never set foot beyond California, this amigo was all in with a vision to spend the rest of his 60s and hopefully his 70s visiting Warsaw, Wellington, and Walla Walla. So, he was tendering his resignation, effective the end of the month. And leaving on a jet plane (so to speak). So much for $3 million a year and keepin’ on keepin’ on, Alvarez thought. The rest of the year was going to be spent figuring out how to retool the business and shore up operations. He realized that not only did he not have the desire to grow the firm anymore, neither did he have the stomach to deal with the hard slog fixing it. He had left things too late. For a decade plus, he had known that he had three options—transition internally, sell externally, or wind things down. And he detested the thought of the last option. It reeked of defeat. But now here he was, and the wind-down was inevitable. He remembered something else his bridge partner had said, “Enjoy yourself, it’s later than you think.” The end of the affair.

For relationship or business advice, you can contact Mick Morrissey at [email protected] or 508.380.1868.

Why Some Integrations Succeed and Others Fail

Mark Goodale

Last week I had a chance to chat with Neil Churman, chief corporate development officer for Woolpert, one of the industry’s leading architecture, engineering, and geospatial firms. Neil has been involved in countless deals during his career in the AE industry, so it wasn’t long before we found ourselves knee-deep in an M&A discussion—most of it on the subject of integration. Here’s how it went:

Neil, thanks for contributing to “Word on the Street”!

Any time. 

You’ve been involved in many, many deals in this industry, and you know as well as anyone that some integrations go well, and some don’t. What do the successful ones have in common?

 Successful integrations trace back to the original deal strategy. Why are you doing the deal in the first place, and what are you trying to achieve? It sounds basic, but if you did the deal for geographic growth or cross-selling or expanding opportunities with a particular client type, you’ve got to take those things into consideration as you integrate, or your plan will miss the mark.

So, the deal team may know the deal strategy, but isn’t it the integration team that needs to make it work? 

That handoff is often challenging. The integration team needs to understand the investment thesis and rationale for the deal to inform the timing, cadence, and communication associated with the integration plan. Setting mutual expectations with the company coming on board prior to closing is critical. What are we collectively trying to achieve, and how do we build it? Now, it doesn’t have to be rigid at that stage—you don’t need to say, for example, that come hell or high water on day 75 we are bringing you onto our CRM platform. But you do want to lay out the fundamental phases and a general timeline.

A lot is made of culture during the deal-making process. But how is it made real during integration?

By encouraging folks to really get to know their team and their counterparts. And that means understanding their goals and motivations and what they want to achieve. Culture doesn’t mean you have to do things the exact same way, but you do need a baseline set of fundamental approaches for how you think about clients, employees, and yourselves compared to the rest of the industry. At a minimum, you need to be moving in the same direction at a similar velocity. We, as technical professionals, tend to see integration as a project plan, which is important, but before you dive in with both feet, get to know the team. It’s really a pretty critical, yet often overlooked, aspect of integration.

What else is important for a successful integration?

Communication of the integration plan as it’s being developed. The buyer should share a clear picture of dates, guidelines, and expectations with the employees who are being onboarded, so they know where they are in the process at all times and where things are heading. Without this kind of guidance, they tend to assume a poor outcome—it’s just human nature. Be proactive in communicating where you are heading, the pace everyone is on, and expectations for when you’ll get there together. And keep your eyes and ears open. Putting two companies together is about creating mutual benefits and combining the best practices of both organizations, so when you get feedback, act on it, and adjust the process when there is an opportunity to improve something. 

How important is it to communicate to the employees from the acquired company what won’t change for them?

It’s just as important as communicating what will change. It’s part of change management. You want to provide that reassurance of what doesn’t change, like your day-to-day activities, your peer groups, your immediate supervisor, your clients, and the projects you’re working on. Your purpose of driving success for your clients as a team—that doesn’t go away. The processes that allow the combined businesses to manage the business will change, but usually not the processes that are in place to work with peers and serve clients, which are the fundamental and most important things your people do. How and where you enter time on a timesheet, for example, is something everyone in the firm does (or is supposed to do), but it’s not what drives our success or failure. 

What’s at the root of failed integrations?

Fundamental misalignment of expectations, and it can happen in both directions. A buyer says one thing, and when the deal closes, something else actually occurs. For example, the buyer initially tells the seller, “You are going to operate completely independently post-closing.” Then following the closing, the buyer is in the seller’s office asking about consolidating financial support, criticizing the organization structure, and barking that the logo has to disappear overnight. And in other instances, it’s the seller reassuring the buyer that they’re in it for the long haul and they want to learn and adapt to how the buyer does things. But then the buyer finds that the seller’s key managers are checked out or are actively resistant shortly after they said they couldn’t wait to get started. Both parties need to be up front and honest, or the wheels can quickly come off the wagon.

What else can send things off the rails?

Being tone-deaf, not listening, and being unwilling to receive feedback. Some buyers get so fixated on executing the integration plan that when things don’t work out, they simply put their heads down and plow ahead. At a minimum, that creates unhappy campers in the short term, and it the long term, you end up with the wrong people in wrong roles just because you wanted to fill a box or keep someone in a certain role for the sake of optics. If the staff says that it’s too much, too soon but you are unwilling to slow down, you’re going to run into problems. Don’t allow your integration team to become myopic about checking the boxes in the plan, and keep eyes and ears and, especially, minds open.

What kind of dedication does it take to pull off a successful integration?

Skilled buyers don’t treat integration as an afterthought, a second job, or moonlighting. They consider it as a core function and a fundamentally important part of the business. They are serious about it. They have a dedicated team, and it’s part of their full-time job—not secondary to their daily activities. It has to be that way if you are serious about growing through acquisitions. Integration spans all of the important functions, starting with HR. It’s easy to get wrapped up into systems, technology, and financials. While all of that is important, don’t overlook people. Getting productive with your new teammates as rapidly as possible is what it’s all about.

Questions about integration strategy? Call Mark Goodale at 508.254.3914 or email [email protected].

Market Snapshot: Water (Part 2)

Weekly market intelligence data and insights for AE firm leaders.

Last week’s post featured overview, size, and outlook information about the water supply market for engineering and construction. If you missed it, you can check it outhere. This week we will cover drivers, trends, and hot spots.

Drivers

• Growth in population and urbanization
• Local and state government investment
• Pollution regulations
• Water supply
• Frequency of extreme weather events (droughts and rainfalls)
• Water use and reuse

Trends

• According to Water Online, the major trends in the water industry in the U.S. involve water shortages, water recycling, and contaminated drinking water.
• The water industry has experienced significant innovation not only through established EPC companies but also from an increasing number of startups focusing on technological advancements to address and improve processes around quality and testing, regulations, water sourcing, and water treatment.
• Some of the emerging technologies and their application examples include:
  • Internet of Things (IoT) devices, data analysis, and predictive modeling have many applications for water quality monitoring as well as consumption optimization.
  • Instrumentation, Control, and Automation (ICA) developments such as advanced digital controllers and visualization tools help improve, centralize, and automate the management of planning and operational processes.
  • Novel membrane materials and designs are increasingly being used for water purification and filtration systems. Water filtration advancements allow for a significant increase in the recycling of wastewater. Nanotechnology is on the leading front of innovation with the development of filtration membranes that remove micropollutants. 
  • New technologies are helping to improve efficiency and reduce environmental impacts within desalination processes.
• The U.S. Environmental Protection Agency (EPA) is in the process of implementing National Primary Drinking Water Standards for six per- and polyfluoroalkyl substances (PFAS). In addition, the agency has recently expanded the list of PFAS on the Toxic Release Inventory reporting program (TRI), which impacts companies operating industrial facilities.

Hot Spots

• States with a relatively high number of drinking water EPA violations and water quality issues include Texas, Pennsylvania, Indiana, Oklahoma, New Mexico, Ohio, and others.
• A study conducted by the Massive Data Institute at Georgetown University evaluated the quality of data submitted by states as part of their Intended Use Plans (IUPs), which are used to allocate Drinking Water State Revolving Funds (DWSRFs). The states with the lowest quality data were Georgia, Illinois, Iowa, Maine, Maryland, Michigan, Missouri, Montana, Nevada, New Jersey, New Mexico, North Carolina, Oregon, Vermont, and West Virginia.
• Water reuse and recycling (primarily in the Western states).

To learn more about market intelligence and research services offered by Morrissey Goodale, schedule an intro call with Rafael Barbosa. Connect with him on LinkedIn.

Weekly M&A Round Up

Congratulations to Saber Power (Rosharon, TX): Saber acquired Bath Group (Corpus Christi, TX), an electrical, mechanical, instrumentation and control, and commissioning engineering services firm. By joining forces with Bath, Saber immediately expands its Texas Coastal Bend presence while adding engineering coverage to markets not presently served such as El Paso, Tulsa, and Albuquerque. We’re thankful that the Saber Power team trusted us to initiate and advise them on this transaction.

Deal-making continues in Texas and the South: Last week we reported 13 domestic deals, including deals in Texas, Arkansas, and Alabama. You can check all of last week’s M&A news here. To learn more about M&A activity in Texas and the Southern States, register now for our Texas and Southern States M&A, Strategy, and Innovation Symposium. Early-bird registration is available only until the end of July.