Word on the Street: Issue 224

Behind the Buyers in the “Big 3”

For more than a decade, California, Florida, and Texas have been the “Big 3” when it comes to industry consolidation. The one reliable constant in U.S. AE industry M&A is that every year these three states compete for—and alternately share—the gold, silver, and bronze when it comes to the number of in-state transactions. On an annual basis, they account for roughly one-third of all domestic AE and environmental consulting deals.

There are some obvious reasons why this dynamic exists. All three states are massive economies, accounting for almost 29% of U.S. GDP. They each have enormous public, private, and institutional sectors with huge appetites for AE and environmental consulting services. Between them, Texas and Florida are home to some of the fastest-growing metropolitan areas in the country and are among the most business-friendly states.

Beyond the big picture drivers for all of the activity in the Big 3, a closer look at the consolidation in each state over the past decade reveals some intriguing patterns, the most prolific buyers, and one surprising common theme.

1. California confidential: Over the past decade, firms headquartered in California have been the most active consolidators of the Golden State market for AE services—accounting for 142 acquisitions. In other words, intrastate consolidation is the name of the game. Most of these intrastate deals involved a firm based in Southern California acquiring in the northern part of the state, or vice versa. In-state firms leverage their pre-existing relationships through state and agency relationships to get a leg up on out-of-state acquirers for M&A targets. Over the same period, New York buyers were the second-most active consolidators in the state. The New Yorkers made 31 acquisitions as they looked to diversify their operations to the West Coast. Since 2014, the single-most active acquirer in California has been Montrose Environmental Group (North Little Rock, AR), which has made 14 acquisitions. 

2. Florida facts: Intrastate consolidation is also the most common form of M&A in Florida, accounting for 80 acquisitions over the past decade. Again, this is a reflection of the distinct regional markets that exist in the state. The strategic plans of many of the state’s most ambitious firms include acquisitive regional growth throughout Florida. Flush with success in their home state, and looking to diversify beyond it, Texas-based firms have been gaining market share in Florida through acquisitions. They are the most active out-of-state acquirers in Florida, making 30 acquisitions since the start of 2014. The most recent acquisition announced in the Sunshine State was that of Avid Group® (Palm Harbor, FL) by McAdams (Raleigh, NC) (ENR #262). (Morrissey Goodale advised McAdams.) Over the past decade, Florida’s own NV5 Global (Hollywood, FL) (ENR #24) and one of our Nine Movers and Shakers to Watch in 2024 has been the most prolific acquirer of firms in its home state, completing 10 acquisitions.

3. Texas by the numbers: Take a look at the strategic plan of any of the ENR Top 200 firms, and there’s a better than 90% chance that it includes a proposed acquisition in Texas. So most deals in Texas must be by out-of-state buyers, right? Wrong! As with California and Florida, intrastate consolidation is the primary driver of M&A in Texas, accounting for 143 transactions since 2014. Texans just like dealing with other Texans! The hyper-regionalism of the Florida and California markets is taken to the next level in Texas, with a healthy amount of intracity deals being a feature of the state’s consolidation. To emphasize the point, the most recent acquisition announced in the state was that of KSA Engineers (Longview, TX) (ENR #448) by Pape-Dawson Engineers (San Antonio, TX) (ENR #93). And, not surprisingly, the most prolific acquirer in the state is also Texas-based. LJA Engineering (Houston, TX) (ENR #67) has made a total of 16 acquisitions in the Lone Star State since 2014. The tremendous growth opportunities presented by the Texas market have not gone unnoticed in California. Buyers from the Golden State have been the most active out-of-state acquirers in Texas over the past decade, accounting for 30 acquisitions. 

Each of the Big 3 manifests its own unique consolidation nuances, patterns, and groups of buyers. However, they share one common trend—that of significant intrastate deal-making. 

We’ll be diving deeper into industry consolidation—trends, prices, and what’s next—at the 11^th annual Southeast M&A and Business Symposium in Miami in March. Join over 200 AE industry executives and investors for two days of networking and learning.

Connect with Mick Morrissey at [email protected] or 508.380.1868.

Transitioning Doesn’t Have to Mean Vanishing

You AE company owners are a lucky bunch. Just about every one of you with whom I’ve had the opportunity to work over the years can’t seem to get enough. You love being the glue, the compass, the rock. You love making a difference—the difference. So it stands to reason that the idea of stepping away from your business can be fraught with mixed emotions. You’ve built careers—and in many cases, entire firms—on your expertise, leadership, and vision. The company has often been more than a job; it’s been a second home, a laboratory for innovation, and a stage for professional accomplishment. When the twilight of your career approaches, many of you will face a dilemma: How can you remain involved in ways that are both meaningful and productive while also enabling the next generation of leaders?

Stepping back without stepping out

For many of you, the thought of playing endless rounds of golf or diving headlong into leisure feels hollow. “I love what I do” is a common refrain and rightly so. Work in the AE industry often fuels passion, gives purpose, and provides the opportunity to make a better world. The challenge, then, is finding a balance between being useful and being the focal point.

This balancing act can look different depending on whether the transition is internal—handing the reins to existing leaders—or external—such as acquisition or recapitalization. Both scenarios present distinct opportunities and challenges that require thoughtful navigation.

Internal transitions—think marathon, not sprint

Internal transitions are often the dream scenario for firm owners who want to see their legacy carried on by trusted, homegrown leaders. But they also come with their own complexities. You must relinquish control in a way that doesn’t undermine the confidence or authority of your successors while ensuring the firm maintains a healthy trajectory.

What you can do:

1. Mentor without micromanaging. Becoming a mentor allows you to impart your wisdom while giving new leaders the space to make their own decisions—and, yes, their own mistakes. The key is to be available as a sounding board without swooping in to take over. Schedule regular check-ins to discuss strategy or key challenges, but let successors lead these conversations to signal that the baton has truly been passed.
2. Champion big-picture thinking. Owners who are winding down are perfectly positioned to work on long-term initiatives such as strategic planning, thought leadership, or client relationships. These high-value contributions don’t interfere with day-to-day operations.
3. Take on a new role. Consider stepping into a defined role such as board chair or strategic advisor. It will create a formal framework for your involvement, making it easier for others to know when (and how) to lean on you. Just make sure to avoid undermining the CEO and the leadership team. Your role should complement—not compete with—their responsibilities.

Avoid these pitfalls:

1. Hovering. Staying too close to the action can unintentionally signal a lack of confidence in new leaders. Resist the urge to offer unsolicited advice on minor matters.
2. Failing to let go of clients. While maintaining some key relationships is fine, your job is to ensure successors have the opportunity to establish their own rapport with clients.

Navigate an internal transition effectively and enjoy watching your protégés flourish. The firm remains intact, the culture is preserved, and you can still contribute in ways that matter to you.

External transitions—sell the firm without selling its soul

External transitions may be more transactional but are no less personal. They typically involve bringing in new ownership and new cultural dynamics.

What you can do:

1. Set non-financial terms. You care deeply about your firm’s future, so seek buyers or partners who align with your values. Whether it’s ensuring staff are taken care of, maintaining a commitment to certain markets, or preserving the firm’s commitment to its communities, insist on clarity around these terms.
2. Serve as transitional ambassador. A buyer will benefit from you staying on for a period of time to ease the handover of key relationships, institutional knowledge, and processes. Just clearly define the scope and duration of this role up front to avoid ambiguity or overextending your involvement.
3. Become a change agent. Post-sale, use your credibility to encourage staff buy-in for new initiatives or systems introduced by the acquiring firm. Your support can help bridge cultural divides and ensure smoother integration.

Avoid these pitfalls:

1. Overstaying your welcome. A key difference in an external transition is that new owners or leadership must ultimately steer the firm. Staying too long can delay necessary changes.
2. Letting sentiment cloud judgment. Selling a firm is emotional, but you have to focus on finding the best fit for the firm’s future—not just clinging to past practices.

An external sale can bring financial freedom and peace of mind. If the right buyer is chosen, it can also lead to exciting new opportunities for the firm’s growth and evolution.

Building without stifling

Whether you opt for an internal or external transition, the biggest challenge is often the same: staying involved in ways that build the firm without overshadowing or undermining those tasked with leading it forward.

Key principles for both scenarios:

1. Prioritize legacy over ego. Letting go of control is easier when you shift your focus to creating a sustainable legacy rather than maintaining personal influence. The best leaders leave their firms stronger than they found them.
2. Build emotional agility. Transitioning out of a leadership role requires emotional work. Reconcile your love for the business with the reality that others may take it in new directions.
3. Embrace lifelong learning. Stepping back from day-to-day operations is an opportunity to explore new interests or deepen your expertise in areas you’ve always been passionate about. Some go on to write books, teach, or consult in ways that make use of your unique experiences.

You’re not done

If you’re facing transition, remember this: Your journey isn’t over; it’s simply entering a new phase. The contributions you can make—be it through mentorship, strategic vision, or industry advocacy—can be as profound and rewarding as the hands-on leadership you’ve provided. The key is to step back with intention, leaving space for others to rise while finding new ways to channel your passion. So, march on and design the next chapter of your legacy.

Call or text Mark Goodale at 508.254.3914 or email [email protected].

Market Snapshot: Onshoring Trends

According to research from Bain & Company, more companies are planning to make supply chain investments closer to their home markets by leveraging onshoring and nearshoring practices. Onshoring, also known as reshoring, involves bringing business operations or production back to the company’s home country, typically to enhance control, address supply chain challenges, and support the local economy. Nearshoring is the practice of relocating business operations to a nearby country (i.e., Mexico and Canada) to improve logistical efficiency, reduce costs, and streamline communication.

What’s driving onshoring and nearshoring trends?

• Post-pandemic demand for resilient supply chains
• Pressures for reduced carbon footprints
• Uncertainty associated with geopolitical issues
• Rising labor costs in traditional offshore markets and higher logistics expenses 
• Concerns related to national security and intellectual property

How is onshoring impacting U.S. markets?

• U.S. manufacturing construction spending is estimated to be 20% higher in 2024 compared to last year and nearly double the average of the last three years.
• Approximately 300,000 manufacturing jobs have been created in the U.S. since the pandemic-driven reshoring trend began, which represents a fivefold increase in job creation tied to onshoring in 2019.
• Companies driving onshoring activity primarily include manufacturers of semiconductors, EV batteries, energy storage products, solar panels, pharmaceuticals, medical devices, food, and defense components.
• Arizona, Texas, Ohio, Michigan, South Carolina, Georgia, and Tennessee are among key states experiencing significant manufacturing and supply chain infrastructure growth tied to onshoring trends.

What’s happening with regards to nearshoring?

• Even though interest in nearshoring in Mexico is high, companies are running into bureaucratic challenges and energy grid constraints, resulting in lagging implementation (Mexico is the largest U.S. trading partner accounting for 16% of total trade).
• The Biden administration put in place incentives that facilitate nearshoring. There is a possibility that the Trump administration will reassess these policies, potentially putting more emphasis in onshoring. Nonetheless, nearshoring will continue to be a complementary strategy for companies. 

For more market insights and a comprehensive outlook for 2025, don’t miss the 2025 AE Market Intelligence Webinar on January 28. Click here for details.

Weekly M&A Round Up

The Southeast continues to grow: Last week saw strong M&A activity with a total of 21 new domestic and global transactions. The Southeast continues to consolidate rapidly with three new deals in SC and FL. Register today at the early-bird rate for our Southeast M&A and Business Symposium to learn more about M&A in the Southeast and network with 200 industry executives, investors, and experts in Miami. You can check all the week’s M&A news here.