October 26, 2020
Headlines from our Fourth Quarter M&A Symposium
- Private equity accounts for 40% of the deals announced this month. Private equity firms and family offices are recapitalizing the A/E industry at a stunning pace and are supplanting the traditional employee ownership model. Prior to the pandemic, they accounted for a whopping one-in-four industry deals. Within 24 months, they may well account for over half of all industry transactions. And there’s no end in sight.
- Seven of the eleven most prolific buyers in the industry are private-equity backed. Between them, these seven have made 68 acquisitions since the beginning of 2018. For those of you counting, that’s two deals per month. (And they all are planning to announce new acquisitions before the end of this year.)
- Fourth quarter 2020 will see a deal bonanza. The last three months of this year will be a barnburner. This will make 2020 another record year for industry consolidation. Sellers are looking to get their deals done by December 31st to lock in their tax bills before any tax increases in 2021 or 2022. Buyers are looking to acquire quality firms to help them navigate and grow in a likely turbulent and diminished market for A/E & environmental services next year.
- The smart buyers are taking the long view. Their acquisition plans recognize the potential for short-term economic pain in 2021. Importantly, they anticipate the long-term opportunities created by pandemic-accelerated structural changes such as reimagined facilities design and operations, environmental health and safety needs, and digital delivery of services. They are bullish on the long-term outlook for our resilient and essential industry and recognize that it will be inexorably changed by this pandemic.
- The most skilled and active buyers are pushing the deal-making envelope. They are closer than ever to making acquisitions without meeting with the sellers in person. This would have been unimaginable just 12 months ago. The ability to pull this off successfully requires superior deal-making expertise, a commitment to a clear strategic plan, and a leadership team that embraces the realm of the possible. First-time buyers should not try this.
- Integration best practices are being adapted for a socially distanced world. Priority #1 for integration is getting the acquired firm on the same technology platform and domain as the buyer as quickly as possible. Why? It allows everyone who is working remotely in the combined entity to collaborate and share work and opportunities immediately. Priority #2 is allowing benefits and policies of the acquired firm to initially remain in place. Why? Employees are dealing with so much anxiety and trauma in their home lives during the pandemic that skilled acquirers are focused on minimizing unnecessary disruptions.
- Integration costs are being driven down. Buyers are using Teams or Zoom to communicate and integrate in ways that don’t require travel— nor the associated expenses of hotels, flights, Ubers, and wasted time. This approach is resulting in significant hard-dollar and time savings, thus driving acquisition costs down and increasing acquisition ROI.
- Texas is hotter than a stolen tamale. The Lone Star State has seen 34 design and environmental firm mergers through mid-October. That’s more than the record set in 2019. And there’s still two months to go in 2021! By the end of the year, deals done in Texas will account for over 10% of all industry consolidation.
- Why is Texas the epicenter of industry consolidation? It’s a heady mix of (a) long-term population growth trends, (b) the 10th largest economy in the WORLD, (c) a relatively stronger and faster growing economy than any other U.S. state, (d) massive transportation, water, and energy infrastructure needs, and (e) a super business-friendly business environment.
- What does this all mean for Texas firms? Pound for pound, all things being equal, any given firm in Texas has a higher value than the exact same firm anywhere else in the United States. If you’re a buyer that wants to enter the Texas market and you don’t understand this equation, you will fail to acquire market share in the hottest state in the union.
- PPP loan forgiveness is the most fraught topic in deal-making. It’s a moving target in any 2020 transaction and can make or break a deal. There’s new information coming out daily and multiple parties involved— from the SBA to the issuing bank. The most skilled buyers are on top of this. Sellers and rookie buyers are not. If you fall in the latter camp and want to get a deal done this year or next, you need good legal and tax advisors who can help you get safely across the finish line.
- These are just some of the headlines from the Symposium. If you’re a buyer, seller, or investor who wants the full story, purchase recordings from the Symposium here.
- Our Virtual Reality CEO Week is filling up fast! CEOs and presidents want to connect with their peers to discuss industry changes, trends, and best practices. They also want to experience game-changing Virtual Reality for themselves to decide how they will deploy its power in their firms in 2021 and beyond. You can choose to attend for the week or pick the days that work for you. You have to experience VR to believe it. Early-bird registration is still available for a limited time.
- Be the VR Trailblazer for your firm. Are you curious about how you can use VR at your firm to get closer to your clients, build and sustain your culture while your employees are working remotely, take training and development to the next level, and separate you from the competition? Then select one of our VRTrailblazer packages to explore a whole new world of possibilities for your firm.
TOP 20 FUNDAMENTALS COUNTDOWN
Welcome back to the Top 20 Fundamentals Countdown. This week, we present #10 through #6.
#10: Use your projects, not just your profits, to develop people.
If you were asked what purpose your firm’s projects serve, you would likely say something about meeting client needs, providing value, or serving the greater good. Fair enough. But what if you looked at it from a different angle? What if you decided that the purpose of projects in your organization is to develop your people? Think about it. You’d have a much different view of how to leverage those same projects. You might, for instance, create a policy where project team members have individual learning objectives on each project of a certain size and duration. Examples might include learning a new design technique, working with a new software, or taking on a different role with a client.
#9: Recruit around the clock.
It seems that no matter what’s happening in our world— good, bad, or otherwise— architecture and engineering talent gets harder to find by the day. So recruit around the clock. Build a backlog of high-potential individuals for positions that have been historically hard to fill. There should never be a time your firm is “not accepting applications”. Stay in touch with the men and women you would eventually like to hire. Like any good client, good candidates need to be courted. The best people are not out there looking for work. They are already employed. Spend time with top industry performers to build their interest in coming to the firm. It’s rarely an overnight process, often taking months to materialize.
#8: Become a “Systems” thinker.
When something goes wrong, do you look for someone to blame? It’s ok to admit it. We’ve all done it. But there’s a more productive way to address problems. It’s called “systems thinking”. It means looking to the process first when there is a breakdown— not the person (another way to say it is attack the issue, not the individual). This kind of thinking keeps you from working on the wrong problem. Practicing this way of thinking, however, requires a positive view of people— namely understanding and truly believing that everyone did the best job they could, given what they knew at the time, their skills and abilities, the resources available, and the specific situation.
#7: Be selfish with an hour a day.
Given that folks in the A/E industry are born problem-solvers, putting out fires can be addicting. But those fires never seem to end, and before you know it, the sun has set and you never got to the important stuff. Day after day of this kind of life can be draining, and you can lose focus of the bigger picture. For leaders to lead, they must make assessments and decisions that result in long-term competitive advantages for their firms. So take one hour every day to bring your thinking to a higher level— and make that time sacred. No phone calls, no Teams calls, no staff meetings, no client meetings, no nothing. This hour is for you to think about your firm’s vision and how to pursue it.
#6: Get resourceful about business development.
Gone are the good old days when you could actually take clients out to lunch without potentially endangering their health (or yours) just by sitting across the table from them. It stinks that you can’t take a client to a ball game or drop by the office to check in. But while some firms are lamenting the situation, others are leveraging advanced technology, like virtual reality, to recreate the kind of human connectivity that has been in such short supply in 2020. I speak from experience. We have created virtual reality environments for ourselves and our clients— and in short, it’s simply way beyond a Zoom call (click here to read about CEO Week in Virtual Reality). In any case, get resourceful. Don’t wait for things to get back to “normal”. That’s not happening anytime soon— if ever.
–Mark Goodale ([email protected])
Q1 2021 CEO Week
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