Word on the Street: Issue 230

A Tipping Point in 2025

Last Monday, the Wall Street Journal reported that January was the slowest month for M&A in the United States in a decade, with just under 900 deals announced. Key points from the article were that (a) CEOs and deal-makers are wary after several weeks of “whipsaw” action from Washington and (b) tariff threats have further dented business leaders’ confidence.

M&A in the design industry showed no such signs of a slowdown. There were 53 reported transactions in the first month of the year, on par with the 54 reported in January 2024 and right in line with the January deal counts for each year since 2020. Indeed, year-to-date reported deals are actually ahead of the same period last year (66 vs. 65) and also in line with the past five years. And looking at the moving 12-month average of deal announcements—which is at the heart of our M&A Update, the industry benchmark for deal activity—the pace of consolidation is up 6%. So, if there’s some pause in the larger M&A world, it’s not been felt yet in our industry.

However, we’ve been getting a LOT of questions about where we believe M&A—specifically deal activity—is headed in this first year of the new administration. Here’s our assessment of how things may pan out:

1. Supply-side drivers to remain strong: Leadership and ownership transition challenges for AE and environmental consulting firms are not going away this year, or any time soon for that matter. In fact, we expect to see an increase in firms either “hitting the market” or “tentatively exploring external options” as baby boomer owners joined by their leather jacket-wearing Gen X peers look to exit. In other words, there will be a continued abundance of firms proactively looking to sell or open to being acquired this year. Such is the nature of this mature and consolidating professional services industry. 

2. Demand drivers to change: Demand will look different this year—and as a result, so will the face of industry consolidation. We’re expecting acquirers to adjust both strategy and tactics to take advantage of opportunities presented by the new administration’s priorities (see Mark Goodale’s excellent article “Closing 2024 and Opening 2025”), the likelihood that some markets will heat up while others enter a multi-year trip to a Mars-type of deep freeze (check out our 2025 Market Intelligence Webinar), and a new business tax environment. We see these three factors combining to reshape M&A demand this year.

3. Demand change #1: All things being equal, employee-/partner-/ESOP-owned acquirers tend to be more conservative (in terms of valuations and deal terms) and slower (in terms of moving from first contact to deal closing) than their private equity (PE)-backed and publicly traded competitors. Firms in this cohort that expect to see one or more of their target markets freeze over in 2025 will—by virtue of their conservative natures—put the brakes on their acquisition efforts there. This dynamic will serve to reduce overall demand in 2025. And while firms in this cohort may well pursue acquisitions in more robust markets to find growth, they—by their conservative natures—will find it tough sledding against their PE-backed and publicly traded competitors. Chances are they will lose more opportunities than they win. As a result, we expect to see the percentage of domestic transactions by this group of acquirers decline by 5% this year to about 44%—its lowest percentage on record. 

4. Demand change #2: PE-backed acquirers and new PE platforms will fill the void left by the retreating employee-/partner-/ESOP-owned acquirers. PE recaps will continue given the opportunities that still remain in this mature consolidating industry—although the new PE players will be different than what the industry has seen thus far. PE-backed acquirers will allocate their investments according to their portfolio strategies. They will continue to aggressively consolidate—with premium pricing and favorable terms—“hot” markets. And they will selectively make acquisitions in markets that are in a down cycle—but at much reduced valuations and less favorable terms (buy low, sell high). We expect this approach will increase the percentage of domestic deals done by PE-backed acquirers and PE recaps from 41.2% last year to ballpark 46%. We anticipate the percentage of deals completed by publicly traded firms to remain around 9% of total domestic deal volume.

5. Tipping point: So, we believe 2025 is the year that PE acquisitions will outpace those of both employee-/partner-/ESOP-owned and publicly traded deals. This continues the trend of increasing consolidation by PE that began in earnest in 2016 when just 4% of the ENR Top 100 Design Firms were capitalized by private equity. That percentage is now over 25% and headed to 30% this year.

6. Deal count? We’re confident that the industry is headed into a fifth consecutive year of 450-ish transactions. With the demand changes described above, we’re anticipating the final 2025 deal count will fall anywhere between 440 and 490 transactions.

We’ll be revealing our in-depth forecasts for M&A and the AE industry writ large at our upcoming 11^th annual Southeast M&A and Business Symposium in Miami next month. Join a record-setting, 200-plus AE industry executives, investors, and experts for the opportunity to learn what’s next for AE and environmental consulting firms during our “State of the Industry” presentation in collaboration with our partners at Deltek. And follow that up by hearing from the CEOs of industry-leading firms about what they believe lies ahead for the industry in the “Future of the Industry CEO Panel” co-hosted with our partner Lockton.

Got a topic on your mind that you’d like Mick to cover in Word on the Street? You can contact him at [email protected] or 508.380.1868. 

Break Silos and Build Bridges in a Rapidly Changing 2025

The new administration has hit the ground running, shaking up the federal landscape—and to borrow a line from Bachman-Turner Overdrive, “you ain’t seen nuthin’ yet.” For AE firms in this blustery environment, the ability to collaborate effectively across teams is not just a nice-to-have—it’s the difference between slicing through the waves and taking on water. But collaboration looks very different depending on your organizational structure. Whether your firm is organized regionally, by market, in a matrix, or some hybrid of all three, the key to improving collaboration lies in adapting your approach to fit the structure you’ve built.

Let’s break down how you can foster better collaboration, structure by structure, and ensure that your teams play nice.

1. Regional Structure: Avoiding Silos Across State Lines

Common Challenge: Regional structures offer autonomy, speed, and deep local market knowledge—but they’re also breeding grounds for silos. Offices can end up functioning as mini-companies, which limits knowledge sharing and cross-regional collaboration.

Fictitious Example: SapphireWave Engineering is a 500-person firm with offices across the Southeast. The Atlanta office specializes in rail and transit, while the Orlando office leads water infrastructure projects. When a major city plans a transit-oriented water system, the firm struggles to collaborate because no one has defined how cross-office teams should work together.

Collaboration Tips:

• Appoint regional connectors: Designate “connectors” in each office whose primary job is to share information and resources across regions.
• Cross-regional projects: Encourage regional offices to co-lead select large projects, making collaboration a contractual necessity, not just a suggestion.
• Incentivize knowledge sharing: Build knowledge-sharing metrics into performance reviews. Consider awards for cross-office collaboration.

2. Market-Based Structure: The Battle for Resources

Common Challenge: In a market-based structure, where business units are organized around sectors such as health care, transportation, or energy, competition for internal resources can create a “me-first” mentality. Collaboration can take a back seat to protecting market turf.

Fictitious Example: BrightBuild Group organizes its business around three core markets: health care, higher education, and civic. When a federal resilience grant becomes available, the health care and civic teams both want access to the same internal sustainability experts to win their respective projects. The result? Internal gridlock and missed deadlines.

Collaboration Tips:

• Create a central resource pool: Build a centralized team of key specialists (e.g., sustainability, digital solutions, BIM experts) who can be deployed across markets.
• Set up a collaboration council: Form an internal collaboration council with representatives from each market to resolve resource disputes quickly and fairly.
• Align incentives: Link bonuses to firm-wide performance, not just individual market success, so employees have a vested interest in collaboration.

3. Matrix Structure: Complexity Overload

Common Challenge: The matrix structure, which combines functional expertise (engineering, architecture, business development) with project-based leadership, promises flexibility but often delivers confusion. Who’s in charge? How do decisions get made without stepping on toes?

Fictitious Example: SuburbanEdge Design is a 300-person firm using a matrix model, where project managers oversee multidisciplinary teams while discipline leaders control staffing and budgets. When SuburbanEdge takes on a major airport renovation, both the transportation lead and the project manager disagree on who decides staffing priorities, causing delays and more.

Collaboration Tips:

• Clarify decision-making authority: Develop a clear RACI (Responsible, Accountable, Consulted, Informed) chart for all major projects.
• Train teams on navigating complexity: Invest in conflict resolution and negotiation training to help leaders collaborate effectively in ambiguous situations.
• Focus on communication tools: Adopt real-time collaboration tools (e.g., Microsoft Teams, Slack, etc.) to reduce communication gaps and clarify decision-making.

4. Hybrid Structure: The Best (and Worst) of All Worlds

Common Challenge: Hybrid structures combine aspects of regional, market, and matrix models. They offer the most flexibility but also the greatest potential for confusion. Without clear alignment, hybrid organizations risk becoming chaotic and unmanageable.

Fictitious Example: FutureBuilt Engineering operates in a hybrid structure with regional offices, market-focused teams, and a matrixed approach for staffing expertise. When a large transportation project kicks off, the regional office sees it as their project, while the transportation market team wants to drive it. The matrixed staffing leader adds another layer of complexity by deciding to reassign critical staff mid-project.

Collaboration Tips:

• Align around strategic priorities: Clearly define which structure takes precedence in different situations (e.g., markets lead on business development, regions lead on execution).
• Simplify where possible: Avoid complexity for complexity’s sake. Consolidate decision-making where appropriate.
• Strong project sponsors: Assign high-level project sponsors to oversee large initiatives and break through organizational gridlock.

5. The Collaboration Toolbox for Every Structure

No matter your firm’s structure, some collaboration tools and tactics work universally across AE firms:

• Vision and values alignment: Make sure everyone understands how collaboration supports the firm’s broader mission and vision. Reinforce the importance in every relevant communication.
• Collaboration metrics: Measure and reward collaboration. Metrics could include shared revenue across offices or project delivery time improvements, for example.
• Technology investment: Collaboration tools aren’t just for tech companies. Use real-time project management tools to increase transparency and efficiency.
• Celebrating wins: Publicly recognize and celebrate successful collaborations. Create internal case studies of projects where cross-office or cross-market collaboration led to a big win.

How you organize and manage collaboration within your structure can be your greatest strength—or your biggest obstacle. The good news? It’s entirely within your control.

Contact Mark Goodale at 508.253.3914 or [email protected].

Market Snapshot: Massachusetts

50 states in 50 weeks – This series leverages our market intelligence database to bring you powerful AE industry insights. Each week, we highlight a new state in green while previously featured states fade to a lighter green. This week we cover Massachusetts.

Massachusetts Economic Performance and Outlook Grade: B-

• Economy: B
• Population: B
• Workforce: B
• Financial/Fiscal Health: D

Despite ongoing fiscal challenges, Massachusetts has the third-highest GDP per capita among U.S. states, and its economy is driven by a highly skilled workforce. The state benefits from a strong talent pool supporting its expanding infrastructure and technology sectors. Massachusetts ranks among the top states for enterprise revenue in the engineering services industry. Its transit and air transportation revenue are among the highest in the country, demanding continued infrastructure investment towards mobility and connectivity. In addition, the state’s latest five-year capital plan allocates significant funding for housing and climate resilience initiatives. Regional highlights for Massachusetts include:

• Boston: A national leader in transit-oriented developments, life sciences real estate, and commercial construction
• Cambridge: Expanding biotech and research hubs fueling demand for lab space and high-tech facilities
• Worcester: Growing industrial and logistics developments supporting regional economic diversification
• Springfield: Infrastructure improvements and urban redevelopment initiatives driving AE opportunities
• Lowell: Mixed-use developments and investments in higher education fueling construction activity

For sector-specific data and insights for Massachusetts or questions about our market intelligence and research services, call/text Rafael Barbosa at 972-266-4955 or email [email protected].

For a comprehensive outlook for 2025, you can access the 2025 AE Market Intelligence Webinar (recorded on January 28). Click here for details.

Weekly M&A Round Up

The Southeast continues consolidation: Last week, we reported seven new domestic transactions, including two in the rapidly consolidating Southeast. Other domestic deals were announced in MA, NY, ME, NE, and ND. Internationally, additional transactions were reported in Ireland, Canada, and Japan. You can check all the week’s M&A news here.