Word on the Street: Issue 189

Miami Highlight Reel

–Mark Goodale and Tricia Washington

Miami was the site for Morrissey Goodale’s Southeast M&A and Business Symposium at the five-star Mandarin Oriental hotel. Now in its 10^th year, the symposium brought together 200 AE and environmental industry executives and investors in one of the nation’s most dynamic cities where they made valuable connections, learned what’s new in the world of M&A, and explored the future of the AE industry. 

Below are highlights from last week’s event:

“Let’s Get Down to Business” workshops: A new feature at this year’s symposium, these five customized workshops kicked off the event and were packed with practical and actionable information and insights. Led by Morrissey Goodale “coaches,” subjects included business valuation, ownership transition, strategy, innovation, and private equity. Here’s a quick rundown of each:

• “Business Valuation—‘101’ and Beyond” (Nate Wentworth): Both the science and the art of business valuation were examined as attendees learned the intricacies associated with valuing an AE firm and how M&A and internal valuations differ.
• “Strategy—Work ON Your Business, Not Just IN It” (Tricia Washington/Sarah Thornhill): Attendees were introduced to valuable tools for assessing the external environment and identifying legitimate internal competitive advantages. Challenged to “think big,” they practiced how to pair both sets of factors and frame actionable strategies.
• Ownership Transition—Simple, Not Easy” (Allie Tepper): Approaching retirement? This was the session for you. Allie covered a number of creative transition options that balance the financial and leadership aspects of transition. AE firm executives then participated in a number of eye-opening exercises that helped them assess the “transition readiness” of their firms.
• “Innovation—Making AI a Competitive Advantage for Your Firm” (Brendon Cussio/Gary McClure of Thrivence): In this workshop, innovation met practicality. The session was a deep dive into the dynamic realm of AI and machine learning—not only about where technology is headed, but how to deploy these cutting-edge technologies right now.
• “Private Equity—What’s It All About and Is It Right for You?” (Nick Belitz): Attendees explored the growing impact of private equity-backed buyers on M&A deal-making in the AE industry. During the session, attendees learned key terminologies and examined a specific case study to analyze the inner workings of a private equity transaction and the economic considerations involved.

The AE industry—We’re still having fun and you’re still the one: Despite the non-stop parade of disruptors in the last several years, like the 1976 hit song by Orleans, the AE industry still has it. In the “State of the Industry” presentation, Morrissey Goodale’s Nick Belitz shared the stage with Megan Miller, director of product marketing for Deltek, where they joined forces and combined the latest proprietary data and insights to deliver a compelling assessment of the AE industry and where it’s headed. The short version is AE firms are knocking it out of the park: Revenue and profits are up; balance sheets are stronger than ever; and backlogs are stacked to the ceiling—and there’s even more growth on the horizon, especially in the transportation, water, and power and energy sectors. The dark cloud? The talent crunch is only getting worse, which means even more investments in people, acquisitions, and technology are on tap.

ENR 500 CEOs go around the horn: With Morrissey Goodale’s Sarah Thornhill and Karen Erger, senior vice president and director of practice risk management for Lockton, asking the questions, the “Future of the Industry ENR 500 CEO Panel” touched all the bases. Starting with recruiting and retention, the panel floated experimental ideas like 36-hour work weeks, 3-day weekends, and unlimited PTO. They also emphasized the importance of investing heavily in training, especially given that the remote/hybrid work phenomenon doesn’t appear to be abating. Brian Curtin, CEO & chairman of BRPH (Melbourne, FL) (ENR #279), shared his firm’s “sunsetting retirement” strategy where ramping down is done in stages that focus on mentoring and sharing the valuable wealth of knowledge that has been accumulated over entire careers. AI was also a hot topic among the panelists, who agreed that it could fundamentally change the way AE firms deliver just about every service the industry has to offer, and then some. Gary Bowman, founder & CEO of Bowman Consulting Group (Reston, VA) (ENR #87), said, “It’s massively different than anything we’ve seen before. Don’t think BIM. Think bigger. Data is the new oil, and monetizing it is a huge opportunity.” Kouhaila (Ki) Hammer, president & CEO of Ghafari (Dearborn, MI) (ENR #137), noted the implications of rapidly advancing AI on leadership, adding, “We see it as critical that the group at the helm are receptive to all technologies and driven to figure out how to best integrate and leverage what’s available to our company.” So, what’s the next big disruptor? The hard truth—according to Scott Cattran, chairman & CEO of Woolpert (Dayton, OH) (ENR #56)—is that “we probably don’t even realize yet where the next one will come from.”

The art of patience: In “The All-Star Buyers Best Practices Panel” led by Morrissey Goodale acquisition consultant Katherine Van Leer, a panel consisting of 2023’s Excellence in Acquisitive Growth Awards recipients shared their experiences and insights. The big takeaway? Even the best in the business don’t rush things. According to Kristi Tahmasiyan, vice president of Terracon (Olathe, KS) (ENR #20), “You’ve got to put the right team together—and that takes time. It took us a while to simply realize we needed more people to get deals done.” Daniel Powers, senior vice president at TRC Companies (Windsor, CT) (ENR #16), suggested taking the time necessary to build up a comfort level for both parties. “Don’t just meet for dinner,” he said. “Invest the time to work on projects and even develop proposals together to build operational connectivity in advance of doing a deal.” Dan Huntington, executive vice president at IMEG (Rock Island, IL) (ENR #57), believes most obstacles are surmountable—if you take the time to be deliberate about the process, especially out of the gate. He advised, “Making acquisitions is a journey. Building a game plan for the first 30 to 60 days is critical. It should include a plan for newly acquired team members and clients, which is your priority in those early days.”

Trust—M&A’s super glue: “The Sellers Best Practices Panel” moderated by Morrissey Goodale consultant Sarah Thornhill shed light on not only the business side of external transition, but the emotional side as well. Panelists shared the importance of building trust throughout the process. Ward Friszolowski, president & COO of Harvard Jolly | PBK (St. Petersburg, FL), kicked things off by expressing the importance of building a circle of trust with his M&A advisory team, while Jennifer Gould, executive coach at IMEG, asserted that a structured acquisition process—including due diligence, internal and external communication, and overall integration—goes a long way in providing the stability needed for a successful outcome. Ed Buck, CEO of Inwood Consulting Engineers (Oviedo, FL), an Ardurra (Tampa, FL) (ENR #89) company, stated that the process he experienced as a seller was “never about the highest bidder,” and he shared his story about extending the trust he established with Ardurra to his entire team, making sure his employees felt as excited about the future as he did.

The deal drumbeat quickens: “The 1000 Club,” moderated by Katherine Van Leer, brought together three deal advisors and experts—George E. Christodoulo, partner at Lawson & Weitzen; Brendon Cussio, principal at Morrissey Goodale; and David Sullivan, partner at PKF O’Connor Davies who, among them, have advised on over 1,000 transactions. The first discussion focused on how deal timelines are compressing. Two years ago, the time from LOI to close averaged 60 to 90 days. Now, buyers are often seeking to close in as little as half that time. But the session’s experts preached balance. While negotiations that drag on for 100 days or more result in deal fatigue, trying to close in well under 30 days could severely compromise a firm’s operations. After discussing additional complexities of deal-making and how to navigate them, each expert was asked to give their bold predictions for the rest of 2024 and beyond. “The election year will not slow down deal-making,” stated Cussio. “I also anticipate a shift of M&A activity to the Rocky Mountain West, with more and more buyers focusing on this hotbed of growth.” Sullivan sees continued activity from private equity players and added, “They will continue to be a major influence in the recapitalization of the industry, especially if interest rates come down,” David also observes that ESOPs are becoming an increasingly popular option for firms that may not desire to go the private equity route. Christodoulo predicts more strategic buyers will yield to private equity. “It’s very hard to compete for acquisitions,” he said. “Compounded with the reality of aging leadership and the difficulties of internally transitioning to a younger generation, private equity will continue to play a prominent role in shaping the AE M&A landscape.”

What’s the big idea? “The Innovation Incubator for the AE Industry” showcased five of the industry’s most exciting new start-ups and their business ideas. Symposium attendees listened to each pitch, asked questions, and voted for the “Breakout” winner. The concept for the session was created with our collaborators at Shadow Partners (Atlanta, GA). Shadow Partners is the sister firm of Shadow Ventures, a thematic venture capital firm that invests in seed-stage “disruptors.” Climbing into the shark tank were five promising startups, including:

• HVAKR—HVAKR pitched a web-based platform powered by AI-assisted automation that streamlines HVAC design.
• Brillist—Brillist presented an AI-powered project management software that uses advanced optimization algorithms to reduce project durations by weeks or months while saving significant costs.
• Phoenix iO—Phoenix iO created a software tool, PX iO, that leverages advanced natural language processing (NLP) and machine learning algorithms to analyze RFPs. It rapidly identifies compatibility with a firm’s capabilities, flags potential risks, and suggests tailored proposal content, empowering better bid decisions.
• Ecobot—Ecobot invented a one-stop solution for environmental permitting and monitoring that uses AI-powered analysis and intelligent automation to streamline consultant access, team formation, and compliance processes.

And the Breakout winner…

• Aren—Aren’s winning concept is an AI-powered SaaS platform that transforms infrastructure inspections, optimizing maintenance spending while prioritizing safety. Its technology combines civil engineering expertise with advanced computer vision and deep learning algorithms.

The competition was followed by a cocktail reception where lively conversations continued around the impact of AI and related technologies on the AE industry.

The big picture? Pretty darn good: The symposium culminated with a thorough presentation of M&A and valuation trends led by Nick Belitz and Jon Escobar and moderated by Sarah Thornhill. Here’s just a sample of the many takeaways:

• AE industry M&A has more than tripled in the last 14 years with an even more dramatic acceleration of activity occurring in the last 3 years
• 2023 saw a slight decrease in deals compared to 2022’s record-setting pace
• 2024 activity is predicted to see an uptick, ultimately landing between 2023 and 2022 levels
• The effect, if any, of the unknowns associated with an election year would likely be no more than a slight and temporary downshift in M&A activity
• Attendees echoed this sentiment through a pre-symposium poll that indicated that most intend to continue with their current level of planned M&A activities
• A number of key industry M&A drivers—including federal and PE investments in the industry, record backlogs, and others—are culminating in historically high valuations that show no signs of abating

Congratulations to Bowman, Morrissey Goodale’s M&A award recipient! Morrissey Goodale awarded the 2024 Most Prolific and Proficient Acquirer Award to Bowman Consulting Group (ENR #87), the first of this year’s Excellence in Acquisitive Growth Awards series.

Bowman Consulting’s Gary Bowman, CEO (left), and Tim Vaughn, executive vice president of M&A (right), 
accept the 2024 Most Prolific and Proficient Acquirer Award from Nick Belitz (center)

Finally, a special thanks to our fantastic sponsors and partners, including:

• Deltek
• Lockton
• BST Global
• CTA
• Full Sail Partners
• Ames & Gough
• Lawson & Weitzen
• PKF O’Connor Davies
• CohnReznick
• ACEC State Chapters of Florida, Louisiana, South Carolina, and Tennessee
• Shadow Partners
• Morningstar Law Group
• ACEC RT

Register here for Morrissey Goodale’s Western States M&A and Business Symposium, June 12-14 at the Wynn Hotel in Las Vegas, Nevada. 

More Thoughts from Miami

-Nick Belitz, Brendon Cussio, and Jon Escobar

With the energy high and the outlook bright, the decision-makers from AE firms large and small who gathered at Morrissey Goodale’s Southeast M&A and Business Symposium compared notes on how the AE industry is performing and looked ahead to the future. From our time on the ground in Miami, here are some of the most critical topics that Morrissey Goodale’s principals heard being discussed:

Optimism reigns: There is still a very high degree of optimism among decision-makers, notwithstanding potential uncertainty around the upcoming U.S. presidential election and geopolitical conflict in critical parts of the globe. Backlogs remain high for firms touching any sort of infrastructure, water/wastewater, and power and energy delivery. Notably, architecture firms specializing in key niches—such as public-sector buildings in sunny, growing geographies, plus those with health care, pharmaceutical, and life science portfolios—are showing greater strength relative to last year. And finally, firms that serve private-sector development are also feeling bullish given widespread expectations for interest rate cuts later in 2024.

Deal-making is robust and trending higher: While interest rate rises and expectations for a resulting economic downturn likely dampened deal activity in 2023, M&A activity remained significantly high, with 436 transactions. This level of activity, while slightly down from the peak in 2022, underscores a period of unprecedented consolidation transforming the AE industry, and 2023’s tally is nearly TRIPLE the rate of acquisitions compared to a decade ago. The near-term indications are strong, with an early read on market activity in 2024 having the AE industry tracking to a new all-time high of 450 deals in the U.S.

Valuations are sustainably high: While the AE industry writ large has enjoyed broad-based increases in firm valuations just over the last few years, the spotlight was on firms in the Southeast states of Florida, Georgia, the Carolinas, Tennessee, Mississippi, Alabama, and Louisiana. The story of AE firm valuations here can be summed up by: Welcome to the Southeast, where the highs are higher and the lows are NOT lower! While overall valuations in the region generally track those of AE firms around the U.S., Morrissey Goodale data showed the most desirable, highly sought sellers get a noticeable bump in pricing and that deals on the smaller end of the scale tend to do a bit better, too. The message to buyers: If you see a firm you like in the Southeast (especially Florida), bring your checkbook and don’t be shy!

M&A success happens when the partnership starts on Day One: Success as a serial acquirer involves a combination of strategic vision, operational efficiency, cultural sensitivity, and a relentless focus on synergies and leadership excellence. A common theme from the experienced buyers in the room: Once the LOI is signed, start working and thinking together as partners right away. Stories from panelists and data shared by Morrissey Goodale show positive outcomes post-transaction, including doubled profits, increased backlog and revenue, and perhaps most important, reduced turnover rates within the first year of acquisition.

AI is here to save us—really! Taking the abstract and making it concrete, multiple entrepreneurs took the stage during the “Innovation Incubator for the AE Industry” to demonstrate applications of AI technology that would help owners of bridges identify and repair structural weaknesses, reduce delays in project scheduling times, and quickly revise and redesign changes to critical HVAC design based on shifting client requests. Startups such as Aren, Brillist, and HVAKR are introducing these technologies aimed at enhancing efficiency and cutting costs. Ventures such as Phoenix iO and Ecobot aim to revolutionize the sector with AI and analytics to streamline decision-making and simplify compliance processes. These innovations collectively pinpoint a pivotal industry shift towards embracing data-driven and technologically advanced solutions to tackle traditional challenges.

Just about everybody is thinking about new investments in technology, but some firms are way ahead getting applications put in place: Firms are at various stages of incorporating AI and digital transformation into their processes, with some firms leveraging technology for expedited renderings and others focusing on productivity improvements that directly benefit the bottom line. The mixed approach to AI, from bespoke applications in design to the cautious encapsulation of machine learning tools for internal use, highlights the industry’s careful navigation through the potentials and pitfalls of technological integration.

All told, AE firm leaders are focused on making their businesses and the industry better, more efficient, and more profitable while continuing to best serve the clients and the people they represent. 

Market Snapshot: An Update on Employment

In our March 11 post, we shared industry employment projections for engineering and architecture occupations. Shifting our focus from longer-term projections to current trends, we continue to see a strong labor market despite unemployment inching up and expectations that jobs growth will slow and wage rises will weaken. This scenario supports the narrative that the Fed may lower rates later this year. However, due to higher-than-expected inflation, the likelihood of it happening in June is now lower. 

According to February employment data from the U.S. Bureau of Labor Statistics (BLS), states such as South Carolina, Florida, Texas, Arizona, and Colorado had strong over-the-year employment growth in both percentage and numeric terms. The four top-10 lists below break down states based on numeric and percentage terms as well as overall and construction employment perspectives.

Top 10 states for overall employment percent growth (February 2024 vs. February 2023):

• Nevada
• Alaska
• South Carolina
• Idaho
• Florida
• South Dakota
• Texas
• Arizona
• Colorado
• Utah

Top 10 states for overall employment numeric growth (February 2024 vs. February 2023):

• Texas
• Florida
• California
• New York
• New Jersey
• North Carolina
• Pennsylvania
• South Carolina
• Arizona
• Colorado

Top 10 states for metropolitan area construction employment percent growth (December 2023 vs. December 2022):

• South Dakota
• New Mexico
• Arkansas
• Louisiana
• Kentucky
• Oklahoma
• Idaho
• Oregon
• Arizona
• Massachusetts

Top 10 states for metropolitan area construction employment numeric growth (December 2023 vs. December 2022):

• California
• Texas
• Arizona
• Louisiana
• Ohio
• Massachusetts
• Oregon
• Pennsylvania
• Michigan
• Georgia

For the latest insights on U.S. regions and AE markets, check out our 2024 AE Market Intelligence Webinar. Click here to access recording and materials.

Weekly M&A Round Up

Domestic deal activity down 3%: Last week we reported six additional domestic transactions, including Apex Companies’ (Rockville, MD) acquisition of PBS Engineering and Environmental (Portland, OR) (ENR #360). This marks the ninth sale or recapitalization of an ENR Top 500 firm already this year. You can check all the week’s M&A news here.