Looking for Growth in All the Wrong Places…

PSMJ Resources, Inc.
Posted on: 01/15/21
Written by: PSMJ Resources, Inc.

With a lingering pandemic, ongoing market volatility, and time that just keeps marching on, you aren’t alone if you are wondering if this is a good time to consider selling your architecture or engineering firm. The answer is simple…yes, it is!

As buyers sit on large coffers of cash, borrowing money remains cheap, and an aging population keeps on aging, we are on the precipice of potentially unprecedented levels of merger & acquisition levels. If you are considering selling your firm, 2021 may be one of the best years in recent history to take action.

Of course, however, you may have some concern about the financial impact of COVID-19. The truth is that the impact has been quite uneven for A/E/C firms. Some regions and markets (e.g. commercial development, corporate offices, etc.) have been hit hard while others (e.g. water/wastewater, warehouse space, etc.) have held their own. Nonetheless, in any economy, one of the biggest red flags is declining revenue on accrual-basis financial statements…and that often flows right down to declining earnings as well.

Even if you are forecasting a blockbuster year ahead as we come out of the crisis, actual performance is always going to be the best indicator of future performance…or is it?

What if there were a way to see some of the dips (and corresponding recoveries) long before they hit the income statement? When you still have time to increase your marketing spend or initiate layoffs or other cost-cutting measures to preserve profits? There are!

If you are considering selling your firm or kicking the tires as a buyer, particularly now as we come out of the pandemic, always look beyond the income statement to these three metrics:

1. Proposal activity. Long before it hits the income statement, cash starts out in the (very illiquid!) form of proposals going out the door. Even earlier than counting actual sold/won proposals, the volume of proposals produced provides you with an early-stage leading indicator on which way market demand is headed for your firm. Whether you measure it in dollars, volume, or some other relevant form, examine proposal activity trends over time closely and you’ll see when a dip may be coming.

2. Backlog. Of course, the cash starts getting more certain when we look at actual hard booked backlog. Don’t get confused by soft backlog that may be weighted based on probabilities and such. Backlog reports don’t get the love they deserve in M&A forecasting (and certainly not the action they deserve when they start showing signs of trouble!).

3. Cash Receipts. Before it hits the accrual statements, the harvested fruit starts to come in the door as unearned cash. When the unearned cash coffers start to decline, the accrual-basis financial statements will soon feel the hit. By this point, in the long sales cycle of architecture and engineering services, it is getting hard to change near-term revenue trends, but you can still take action on the cost-cutting side to preserve profits.

SELLERS: Don’t wait until declining revenue is inked in the financial statements before you develop a recovery plan. Stay in front of it and you can avoid costly and transaction-killing surprises. You don’t get a second chance to make a first impression!

BUYERS: Don’t walk away from a potential acquisition simply because of a near-term dip in revenue. Dig deeper to see if the firm is down for now or down for good.

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