To get the latest and greatest insight on M&A market conditions and trends, we recently sat down with PSMJ Senior M&A Consultant Brad Wilson. Here’s what he had to say:
Q: What’s your outlook for M&A in the A/E industry?
A: Transaction activity is up. In fact, the number of transactions in the industry is back up to pre-recession levels. With the growing wave of retiring Baby Boomers and the pressure that is putting on internal succession plans, we are expecting consolidation to be a major force shaping the A/E industry in 2015 and beyond.
And, it isn’t just the ‘serial’ acquirers doing big deals anymore. More and more smaller firms are getting into the market and firms that have historically grown solely through organic means are also getting into the game. This trend is going to continue and better economic times will add to the attractiveness of a “growth by acquisition” strategy.
Q: How has the current economy impacted transaction activity?
A: Whenever this industry goes through a ‘bust’ cycle, transaction activity slows as buyers become risk averse and sellers decide to ride things out for a bit.This downturn has been no different. But, a few years out now from the initial meltdown, everyone has started to come out of their bunkers. Nonetheless, buyers are being more careful in finding targets and closing transactions.
Deals are getting scrutinized more within the buyer organizations, due diligence efforts are more thorough, and we’re seeing more buyers looking to shift some of the transaction risk onto the seller through pay-for-performance provisions or earnouts. M&A can unlock significant growth opportunities for buyers and sellers but, now more than ever, this isn’t for the timid. You need the right team with the experience to get it done right. If you are going in with limited experience, keep the first transaction small and uncomplicated so you
can build on success.
Q: What are buyers looking for most right now in a seller?
A: Well, many sellers have been hampered a bit over the past few years and most buyers will understand this. So, recent historical revenue and earnings might not be the best indicator of future value. There may still be some considerable forward-looking value or value that isn’t necessarily reflected in the financial
So, while they won’t always be looking solely to last year’s financials they will be looking for some degree of businesslike behavior and discipline to make a valiant attempt to preserve profitability as revenues declined. Have key metrics like utilization and overhead rates trended better than the broader market conditions? What kinds for core competencies were protected during the recession that might support stronger financial performance expectations going forward?
Q: Where are the hot markets?
A: We’re seeing a lot of interest in the energy, environmental, water, and healthcare markets. These markets are appealing to the strategic and financial buyers because of the connection to overall economic and demographic trends. Geographically, it is still really a mixed bag… though parts of the South and West are getting more interest than they’ve had in the past couple years. On the global scene, Australia is very attractive as are some of the emerging markets.
Q: When considering a sale, how can sellers be confident when entering into discussions with the ‘right’ buyer?
A: This is a worry that goes through the minds of many sellers, particularly first-generation owners who are selling a firm that they have built from the ground up. Sellers want to know that the firm’s brand recognition and employee loyalty aren’t thrown out the window after the sale. What’s important for sellers here is to do
their homework and be pro-active. First, define what the ideal buyer looks like…financially, strategically, and culturally and then put your resources to work to identify the most relevant buyers and ask the pertinent questions early on. At PSMJ, we have several tools that we use for our clients to gauge the ‘fit’ of a prospective buyer or seller. Relying on your gut and instinct is good but relying on proven, objective techniques is even better!
Brad Wilson joined PSMJ as a consultant in 2002 as one of the senior M&A consultants. Since, Brad has facilitated both the purchase and sale of A/E/C firms of all types and sizes. His broad-based knowledge of design firms’ cultures and operations has also been invaluable in integration planning and execution resulting in the achievement of financial goals for buyers and sellers. Brad will lead Avoiding the Million-Dollar Mistake: Winning Strategies for Today's M&A Climate, a preconference session at the PSMJ's 2015 Industry Summit, held December 2-4 in San Francisco.