Nothing kills more deals and nothing creates more apprehension when it comes to putting together a merger or acquisition than misaligned valuation expectations.
To be sure, there is no single “right” way to value an AE firm and it is quite reasonable for two informed individuals to differ in their opinion as to the value of an enterprise. However, there is no better indicator of what a firm is capable of than what it has delivered in the past. If you are trying to convince a prospective buyer that 20% profit margins and double-digit revenue growth are in the near-future and there is no evidence that the company has done that historically (and no real change in market conditions that would drive this), it will be an uphill battle.
But, selling a firm right when recent financial performance has been volatile doesn’t have to be a ‘no win’ situation. Here are few points beyond the income statement that can convince a buyer that your firm’s best years lie ahead:
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Leadership depth. It isn’t all about the leadership team in place today, because many of these folks may be viewing a transition as a vehicle for succession planning. Look beyond that. What is your next-generation leadership team strength? Be sure to articulate how you are cultivating these folks for future leadership roles in addition to technical excellence.
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Hard (and soft) backlog. Backlog under contract and proposal activity is one of the best indicators of a firm’s near-term growth opportunities. If recent quarters or years have been slow, but the hopper is starting to fill back up, don’t understate this!
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Institutional brand equity. Beyond one (or a few) key individuals, does your firm hold recognized institutional value that positions it as a market leader to capture growth opportunities? Writing, speaking, and cutting-edge thought leadership from the entire Principal team can go a long way in broadening the value and in bringing qualified opportunities to the door.
Another way to look at the valuation game is to think about how you would purchase a publicly-traded stock. The marketplace isn’t hung up entirely on past financial performance of the movers and shakers. Rather, the equity markets are looking forward at the opportunities and how well a particular firm is positioned to capture the opportunities. Deliver a bad quarter or miss earnings guidance and investors will react, but show forward-looking promise and the market will quickly get excited and want a piece of it!
Merger & Acquisition (M&A) activity in the architecture and engineering space is certainly on the upswing and well on its way to reaching pre-recession levels. But, how ready are you for taking on the task of buying or selling an AE firm? If you are looking for tips to help your firm navigate through the M&A process, check out PSMJ complimentary ebook M&A Survival Tips for AE Firm Leaders. 
Other M&A Related Posts
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