Welcome to our “How to Sell” series with industry-specific information on how companies are valued and key factors affecting final sale price.
Companies offering architectural design, engineering design and construction services (AEC). These companies apply engineering principles to design and develop systems, structures, processes and instruments.
Key Valuation Considerations
- Retention of Specialized Talent: A firm’s success is based upon the skills and knowledge of the employees. Attracting and retaining qualified engineers is critical, but is also becoming increasingly difficult. High industry growth coupled with the retirement of experienced, baby boomer engineers has created a competitive environment for engineers with advanced technical skills and specializations. A firm’s bottom line is impacted in a lot of ways by the people it employs, including project cost overruns, customer retention, and services offered. In particular, client-specific knowledge is very hard to replace. A buyer must be confident in the skills of engineers and management and that employees will remain with the firm through sale.
- Reputation: Since work is project based, strong relationships with clients, other engineering companies, architects and construction companies are vital to continued success and growth. Referrals from these parties are based upon a firm’s reputation and how a firm cultivates these relationships over time. Engineering companies with complementary services commonly collaborate to bid on larger projects. Relationships that appear to be heavily reliant on the owner, however, pose significant risk for buyers and may affect payment terms. Earn out terms may be negotiated, where payments are be deferred over the course of years and tied to revenue retention.
- Specialties & Niches: Merger and acquisition activity has been on the rise as companies look to add niche capabilities. Niche expertise increases salebility as firms look to expand product offerings and add specializations that complement existing capabilities. Engineers on staff with special expertise and skills are highly sought after, employing such staff helps to increase sale price.
- Software & Technology: Up-to-date software and related technologies will help to increase valuation multiples. Modern technologies increases efficiency and improve client services. Trends include mobile technology, cloud computing, 3D printing, and specialized software for modeling, simulation and project management. Project cost overruns are a primary cause of financial distress in this industry, certain software and systems can help to control expenditures and provide more accurate estimates. If systems don’t align with buyer expectations, there may be additional concerns related to implementing appropriate technology and train staff.
- Other Important Considerations:
- Management Team
- Value Added Services
- Revenue Growth
- Market Share
- Customer Concentration
These are only a few variables. A professional valuation is strongly recommended for accuracy. Contact us for a simple, free valuation today or for information on our full suite of valuation services.
1 SDE: Seller’s Discretionary Earnings is EBITDA plus all owner compensation and benefits.
2 Based upon statistics from M&A Source, First Research reports stating average Market Value of Invested Capital/EBITDA is 4.7 for Engineering Services (2-8-16)