Word on the Street: Issue 168

Seven Lessons Learned From 200 Transactions

Last week was a pretty big one for the team here at Morrissey Goodale. For three reasons. First, our client—and Atlanta’s largest architecture firm—Cooper Carry (ENR #221) announced their acquisition of architecture firm 505Design, thereby adding offices in Boulder, Colorado, and Charlotte, North Carolina. We were privileged to have advised Cooper Carry on this important expansion of their business.

Second, our client GHK Capital Partners (Greenwich, CT), a leading middle-market private equity firm, announced the creation of a new infrastructure engineering consulting platform through the almost simultaneous acquisitions of national engineering firm WSB & Associates (Minneapolis, MN) (ENR #178) and EST (Oklahoma City, OK), a transportation infrastructure engineering consulting firm with operations across Oklahoma, Texas, Colorado, and California. We were honored to have initiated and advised on both transactions for our client.

Third, with these transactions, our team reached a new milestone in our service to our clients and the industry, as we now have advised on or initiated over 200 AE and environmental firm deals. You can see the full list of those acquisitions, mergers, sales, and recapitalizations here.

In helping our clients with these 200 transactions we’ve done lots of negotiating, analyzing, and due diligence. We’ve also listened, reflected, and learned along the way. So, as we reach this milestone and look forward to the next 100 deals, we thought we would share some of what we’ve learned along the way.

1. Your emotional rescue: Emotions + poor communication = a real mess. Sellers, in particular, would be well served to accept that assessments made by potential acquirers or investors are only that…assessments, whether grounded or ungrounded. Buyers, in particular, could all but eliminate unnecessary drama by committing to communicate in real time and to buy into the notion that the tougher the conversation, the sooner it should be had. Otherwise, an immense amount of time and effort gets sunk into simply trying to get the parties back to the table.

2. Everyone has a tell: There are three reasons why employee-owned firms sell or recapitalize. The first is if they are unable to recapitalize internally—in other words, they cannot transition ownership to the next generation of employee-owners. The second is if they are unable to transition leadership. The next generation lacks either the desire or the competency to take the reins. Reasons number one and two frequently go hand-in-hand. Third is when their ambition outstrips their ability to access the requisite capital. In other words, their appetite for growth exceeds their ability to feed it. So, they seek outside capital—these days in the form of private equity. The result? Since 2016, the percentage of employee-owned firms among the ENR 100 has declined from 75% to 63%—and it will continue to fall.

3. Misplaced fears: Sellers tend to get really concerned that their competitors, clients, or staff will discover that they are selling or recapitalizing. Experience shows that this rarely happens. And even if it does, the intelligence is never solid enough to be actionable. Sure, sellers would do well to keep things close to the chest. But I can’t tell you the countless conversations I’ve had with sellers “scenario playing” a breach of confidentiality. The overemphasis on this “non-threat” is a waste of management’s time.

4. There are only two constants in life: Get qualified and experienced tax advice before a Letter of Intent (LOI) is signed. There is no avoiding taxes in life, but sometimes they can be deferred. The impact of taxes depends on the corporate structure of the buyer and the seller, plus the state(s) and localities the sellers pay taxes in, so get a CPA on board who has seen and done it before to understand what that final bill will look like.

5. Have your people call my people: It’s OK to suggest to the other side that a dispassionate third-party advisor is in order. Regardless of whether you’re a buyer or a seller, oftentimes the cold, clinical advice of an outside financial, tax, or legal advisor can offer an un-jaundiced assessment of even the thorniest issue. In an industry full of do-it-yourselfers, calling for outside help may not be the first choice for most, but more often than not we’ve seen deal issues get solved when one side or another calls for a lifeline mid-transaction.

6. Couples counseling for deal-makers: Infrequent communication can create a vacuum of information, leading to uncertainty, speculation, and disappointment. Providing regular updates, even when there is no significant progress, keeps the other side informed, prevents misunderstandings, and reassures them that they are not being kept in the dark.

7. Find yourself a great partner: As a seller, you want to find a buyer or investor who can take your business to the next level. Some buyers are good at this; many are not. The ones who are tend to be great at integrations. And in today’s world of consolidation, “integration” ranges from 100% on the same platform and with the same name on day one to the popular “house of brands” model that largely keeps acquired firms separate and “independent.” When you’re selling, do your due diligence on the buyer to determine if they will be a great partner for you. They are out there; you just need to find them.

On the topic of finding a great partner, we’ll be announcing the recipients of the Best Post-Transaction Performance Award at the Texas and Southern States M&A, Strategy, and Innovation Symposium in Houston next month—recognizing those acquirers that most improve the fortunes of the firms that they invest in. There’s still time to submit an application for the award. So, if you’ve made an acquisition that you’re proud of, and you believe it merits consideration for this award, then we invite you to begin the application process here. Once you’ve gathered all of the information required, the application should take no more than 30 minutes to complete. The window for applications is open until October 6. If you have any questions about the award, please contact [email protected].

We will be sharing more lessons that we’ve learned from over 200 transactions at our Texas and Southern States Symposium next month in Houston. We hope to see you there.

To connect with Mick Morrissey, email him at [email protected] or call/text 508.380.1868. 

Why Your AE Firm’s Board Doesn’t Work Like It Should

No doubt, some boards of directors in this industry get the job done. The right people tackle the right issues at the right time. But based on my experience, these boards are the exception, not the rule. Why is that? Why aren’t they consistently productive and impactful? After all, the people who serve on them are smart, well-intended folks. They are experienced, skilled, and dedicated. So, what gives?

Well, a number of things:

1. Directors don’t know what a board is really supposed to do. It sounds obvious, but if board members don’t know the role of a board, they’re going to flounder. The purpose of a board is to provide governance, maintain strategic oversight, and ensure a firm’s long-term success. Below is a list of some of the more prominent board responsibilities:

• Strategic planning: The board plays a pivotal role in setting a firm’s strategic direction, including framing its mission, vision, and long-term goals. The board also reviews and approves strategic initiatives and business plans.
• Leadership succession: The board is typically involved in selecting and evaluating the CEO or managing partner of the firm as well as other officers, such as the treasurer and secretary, and ensures there is a succession plan in place for leadership positions.
• Financial oversight: The board oversees the financial health of the firm, including budget approvals, financial statements, and major financial transactions. The board also decides what percentage of profits will be used for bonus and ownership pools and what percentage will be retained for reinvestment into the firm.
• Corporate governance: The board is responsible for maintaining sound corporate governance practices, such as establishing and enforcing ethical guidelines and ensuring that the firm complies with all relevant laws and regulations.
• Audit and compliance: The board establishes and oversees an internal audit function to ensure compliance with internal policies and external regulations. The board may also hire external auditors to review the firm’s financial practices.
• M&A and strategic partnerships: The board evaluates and approves acquisitions, strategic partnerships, divestitures, and external transitions—and it ensures that any and all align with the firm’s strategic goals.
• Crisis management: In times of crisis or significant challenges, the board provides guidance and support to the firm’s leadership and helps make critical decisions.
• Shareholder communication: The board is responsible for communicating with shareholders and ensuring that they have the information they require to make grounded assessments and informed decisions.

2. Boards are too big. I’ve seen boards that include every shareholder in the firm, and the ranks swell annually as new shareholders are added. I’ve never seen an efficient and effective 20-person board and likely never will—but they’re out there, sinking deeper and deeper into the tar pits of their own making.

3. Miscast directors. Boards fail when tenure alone is valued more highly than contributions. This results in a board composed of directors who have a limited perspective of how other firms do things and how things work outside of the AE industry.

4. “I’ve got mine” mentality. I often see boards filled with directors who are there to represent their office, service, or business line—but that’s not the job. Directors are there to watch the back of the shareholders and to look out for the best interests of the firm. If the board members aren’t watching out for the golden goose, they can’t expect it from anyone else in the firm.

5. Not enough diversity. I don’t need to describe the demographics of most boards in our industry—I trust you get the picture. Suffice it to say that decision-making improves and creative thinking increases as more perspectives are brought to the table.

6. Too many meetings. There’s no need for a board to meet monthly (or even more frequently than that). If your board is meeting that often, you’re not talking about board-level issues.

7. Meetings are too long. I’ve seen AE firms hold two-day board meetings at remote locations. Like having too many meetings, if you are in a board meeting that lasts that long, you’re not talking about board-level issues. When you factor in that most boards are too big in the first place, the cost is significant and the value produced is questionable at best.

8. Operational topics. Last but certainly not least, AE boards are famous for descending into day-to-day management issues, such as who’s going to run what department, who gets what bonus, and whether to have a holiday party this year. Before you know it, the agenda, if there was one, is blown. There are a lot of heated debates and passionate pleas, but an hour after the session, each director is hard-pressed to remember anything of substance that came out of the meeting. No notes were taken anyway, so nothing ends up being communicated, and the shareholders piece together their own narratives of what transpired.

But all is not lost. Far from it. In addition to reversing the problems listed above, here are a half-dozen measures you can take that will help create a high-performance board for your firm:

1. Have an odd number of directors. Having an odd number of directors on a firm’s board is often considered good practice. When there is an odd number of directors, it is less likely to encounter tie votes or deadlocks during board decision-making. Decision-making speeds up, which is particularly important in time-sensitive situations or when the board needs to respond quickly to emerging opportunities or challenges.

2. Stagger the terms. Staggered terms ensure that not all board members are up for re-election or replacement at the same time. This provides continuity of leadership, as a portion of experienced directors remains on the board even as new members are introduced. This continuity can help the board maintain institutional knowledge and historical perspective.

3. One director, one vote. While shareholders vote their shares to elect board members, directors should not be voting their shares on board decisions. Allotting each director one vote helps prevent the concentration of power in the hands of a few individuals or a single director. This distribution of voting rights ensures that important decisions are made collectively and in the best interests of the organization as a whole.

4. Add outside board members. Outside board members offer an objective perspective that can be crucial in decision-making. They can provide fresh insights, challenge conventional thinking, and offer unbiased assessments of the firm’s strategies and operations. They can also bring expertise and experiences from other industries that often proves valuable in addressing complex challenges. (See Mick Morrissey’s article on outside directors.) 

5. Prepare for each board meeting. Distribute the agenda to each board member in advance of the meeting so directors can provide input and ideas. Also, distribute financials in advance. That will eliminate time-sucking performance reviews at the beginning of the meeting.

6. Look ahead. Dedicate part of the board agenda to peering into the future. Explore changes and disruptions looming on the horizon (e.g., advances in technology, regulatory changes, shifts in client needs) and the implications they may have on your firm. Considering the future will help your board anticipate and adapt to these changes, ensuring your firm remains competitive and relevant.

Questions, comments? Call Mark Goodale at 508.254.3914 or email [email protected]. We’d love to hear from you!

Market Snapshot: Public Safety (Part 2)

Weekly market intelligence data and insights for AE firm leaders.

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

Drivers

• Urbanization and population growth
• Crime rates and community safety concerns 
• Aging infrastructure
• Governmental policies and regulatory changes
• Economic conditions and government budgets

Trends

• With the growth of smart city initiatives and technological advancements in IoT and data analytics, public safety buildings and systems infrastructure will need to be adapted to accommodate for predictive surveillance and emergency response tools. To implement these improvements successfully, agencies will also need to incorporate solid cybersecurity solutions.
• Local governments will be investing in multipurpose facilities that can serve not only as administrative law enforcement hubs but also as community and emergency response centers. In addition, training facilities may be in demand in large urban areas.
• The FY 2023 Homeland Security Grant Program (HSGP) is one of three grant programs that support the U.S. Department of Homeland Security/Federal Emergency Management Agency focused on preparedness and resilience. Last week, the U.S. Department of Defense awarded 17 Defense Community Infrastructure Pilot Program (DCIP) grants totaling approximately $100 million. 
• Aging and deteriorating prison facilities operated by states as well as the Federal Bureau of Prisons (BOP) are in need of structural, MEP, and security improvements.

Hot Spots

• Federal grant programs applicable to law enforcement agencies and fire departments from the U.S. Departments of Justice, Homeland Security, Transportation, and Agriculture. 
• States projected to have the highest percentage increases in law enforcement employment: Utah, Colorado, Maryland, Nevada, New York, and South Carolina.

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