Understanding how your firm will be valued on the external market is critical whether you’re just starting to plan your exit or actively considering a transaction. Unlike internal valuations, which often emphasize predictability, external valuations are influenced by market dynamics, buyer profiles, and your firm’s unique positioning.
Buyers will always start with a multiple of your firm’s adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) to determine value. What they use to determine that multiplier is a function of what they perceive to be the balance of risk and opportunity involved in your firm. Further, the adjustments that underpin your firm’s EBITDA require deep knowledge of industry norms. Personal expenses, one-time costs, or above-market rent are common. But each must be supportable—and the post-deal structure must reflect the new cost reality.
Here are 10 key items that directly impact how the market will value your A/E firm:
- EBITDA Size Impacts Buyer Universe
Generally, firms with adjusted EBITDA of $1M or more are attractive to buyers. If you’re just below that, but in a hot market or region, don’t count yourself out—strategic buyers may still see potential. Buyers will consider the opportunity cost of investing into your company versus other targets that might present less risk or greater scale. Conversely, if the majority of your revenue is tied to an end market that buyers perceive as ‘risky’ then you can expect either a hit on valuation, or for buyers not to enter into discussions at all.
- Margin Efficiency Signals Sustainability
Buyers look closely at EBITDA per employee as a proxy for operational scalability. If your margins are healthy and supported by a solid project delivery system, this is a green flag. But if margins are high due to just a handful of producers, and not from scalable operations, the sustainability of those margins will be questioned—affecting the multiple. Could a buyer maintain or grow the margin after the purchase? Could the buyer scale operations in the same way as it could with a fleshed-out operation? The answer to that question helps underpin valuation expectations.
Additional note: Lower margins, lower valuation. Consider how compensation optics can shift value in buyer models
- Shareholder and Staff Compensation: A Sliding Scale of Value
Shareholder salaries can be flexed during deal negotiations. The higher your requested salary post-transaction, the less upfront value is attributed to the purchase price. Buyers calculate this trade-off like clockwork and will only consider reasonable ranges for the salary relatively in line with the market for that position.
Rule of Thumb: Multiply your salary ask by the deal multiple to understand its impact on deal value.
If your firm routinely bonuses out profits, buyers will treat those as recurring expenses—even if you view them as discretionary.
- Client Concentration Is a Major Risk Factor
If any one client makes up more than 25% of your revenue—or if a small group accounts for a majority—that introduces risk in the eyes of buyers. Losing one of a few key clients could severely damage the firm’s financial health.
That said, if work is spread across multiple relationships within the same client, this can partially offset the risk. Still, broadening your client base before going to the market is always wise.
- Geography Matters
Location isn’t everything, but it can make a big difference. Firms located along the I-10 corridor—particularly in Texas and the Southeastern U.S.—continue to attract outsized interest due to rapidly developing end-markets.
When strong geographic positioning is paired with high-demand services, firms can often command a premium.
- End Market and Discipline Drive Value
Not all A/E disciplines are valued equally. Some service areas are far more sought-after than others. Among today’s most desirable sectors:
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Water and wastewater engineering
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Civil and transportation infrastructure
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MEP/FP services
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Utility engineering and energy transition
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Healthcare and K-12/higher-education architecture
Buyers are drawn to firms in resilient and growing markets. Being in one of these sectors makes your firm more competitive.
- Designation Dependency (WBE, DBE, etc.) Can Limit Buyer Interest
If your firm’s revenue relies heavily on certifications, like the WBE or DBE, know that the associated set-aside opportunities often disappear upon a change in ownership. Buyers are cautious about acquiring firms whose topline could erode post-transaction.
Pro Tip: If most of your work comes from prime contracts rather than subcontracted set-asides, consider removing the designation before going to market to broaden your buyer pool and protect your valuation.
- Who Will Lead After You Leave?
Succession planning directly affects valuation. If you plan to leave soon and don’t have your next generation of leadership in place, buyers perceive elevated risk—commonly called “key-man risk.”
In contrast, a strong leadership bench increases confidence that the business will thrive post-closing. In fact, many buyers are actively seeking talented teams to lead growth initiatives. Investing in leadership development not only strengthens your firm today—it boosts enterprise value tomorrow.
- The Number of Buyers You Talk To Shapes Your Value
External valuation is not a fixed number—it’s a market-derived range. Think of it as a bell curve: most buyers fall near the middle, but you won’t find the high end unless you create at least a little competition.
Speaking to just one buyer rarely yields full value. A strategic buyer may pay a premium for the right cultural and market fit—but only if they know others are also at the table. If you want to see the true range of your value, and meet the best possible partner, a structured, competitive process run by an M&A advisor is the only way to really uncover your valuation range.
- Backlog and Revenue Visibility Support Higher Multiples
Finally, strong backlog and predictable revenue are critical drivers of value. If your firm has a healthy pipeline of contracted work extending over 12 to 24 months, buyers will view you as lower risk and more scalable.
Conversely, if backlog is thin or uncertain, expect buyers to factor that into a discounted offer.
If your firm has already won work and lined up a strong future, you can expect a premium reflecting the opportunity for the buyer to scale further.
In Summary
External valuation is not a fixed number—it’s a function of positioning, preparedness, and exposure to the right buyers. From client mix to certifications, compensation practices to succession planning, every factor contributes to how a buyer perceives your firm’s risk and potential.
And remember, valuation isn’t just about “the number”—it’s also about how you get paid. Will it be all-cash? A mix of earnout and equity? Will you stay on for three years—or exit after one? The structure of your role post-close can meaningfully shape the economics of the deal.
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If you're beginning to consider a transition—or simply want to know where your firm stands—connect with our team at PSMJ via the link below. We’ll help you explore your options and position your firm to achieve the outcome you deserve.
*This content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, or financial advice.