Things to Watch Out For When Hiring Your M&A Firm – Part I

Things to Watch Out For When Hiring Your M&A Firm – Part I

Most people will hire an M&A firm just once in their lifetime/business career. When you do, you want to make sure you are doing the right thing in hiring the right M&A firm. Here are some things to beware of and mistakes others have made that you can prevent as you choose the firm you want to work with for your business transition/sale or acquisition.

1.     Beware of the M&A firm that is charging a large retainer fee up front.

Many M&A firms charge $25,000 and more when they are retained to sell/transition your firm. Don’t do this. The reason for the large amount of up-front retainer fees according to these firms is for the valuation to determine a listing/selling price and preparation of the marketing materials to sell your firm. Valuations and marketing materials aren’t worth $25,000 or more. The real reason for the large charge up front is that these firms just “list” firms without focusing on selling the firms so they have to live off of the retainers versus a final success fee/commission. As a side note beware of firms who do not deduct the upfront fee from the final success fee.

2.     Beware of the M&A firm that does not have a focus in the Architectural / Engineering / Construction / Interior Design markets.

Architectural/engineering/construction and interior design firms are way different than general businesses: gas stations, healthcare companies, manufacturing companies, CPA firms, shopping centers and more. In the A/E/C industry there are other things to consider like, longer transition periods for a seller, tail insurances, work in process and backlogs, goodwill that makes them different than other businesses. Valuations are even unique to the A & E markets. Finding a firm that is focused on your industry niche will pay off in the long term.

3.     Beware of the M&A firm that lists businesses for sale, online and then adapting a “hope” strategy, especially in the A/E/C industry.

Engineers and architects do not visit online websites searching for businesses for sale. A/E/C firms are strategic buyers that are looking for specific fits and they have to be approached on an individual basis to understand the particular and strategic fit that they are looking for.

4.     Beware of firms with a lack of experience in your markets.

You will realize the most value for your business sale if you are working with an M&A firm that has prior experience transitioning a business similar to yours. Selling an A/E/C firm is much different than selling a house, online or other brick & mortar business.  Not only is the process different but so is the prospective target buyer. Working with a firm that is connected to the right types of buyers related to your business, understanding the nuances of the markets and that has the right process will increase the value of your sale.

5.   Make sure you work with a firm that understands value, the valuation process and pricing of the business to be sold.

Asking a mergers & acquisitions advisory firm how they value a business will give you a good indication of how experienced they are. If their response is a canned ratio or multiple only of some sort then move on from them quickly. There are many things to consider when valuing a business in the A/E/C industry. Many times banks and even CPA’s don’t understand all that goes into such a valuation. Finding a niche M&A firm that does will increase the probability of you getting more value for your firm in a sale/transition.

Most A/E/C businesses do have a value component based on a multiple of seller discretionary earnings (SDE), which are the net profits plus add backs of expenses that a new, prospective buyer/owner will not have to pay. Every business is different. Have this conversation with an advisory firm before hiring them.

As an additional note to this topic:

Work with an advisory firm to come up with a realistic valuation and listing price that will lead to a successful sale/transition. Typically the advisory firm doesn’t get paid unless your business is sold. Valuation and pricing strategies must be done correctly for this to happen. An experienced firm will not waste their time nor your time with a listing that isn’t priced correctly.

For more information on Stonemill Partners contact us:

Stonemill Partners

Patrick@stonemill-partners.com

Al@stonemill-partners.com

Stonemill Partners, Inc.

3350 Riverwood Parkway

Suite 1900

Atlanta, Georgia 30339

Phone: 404-477-4970

 

Patrick – Direct Line: 770-510-9367

Al – Direct Line: 630-740-1397

 

www.stonemill-partners.com

UPDATE: Business Available for Acquisition from Stonemill Partners

 

Businesses Available for Acquisition:

If you are interested in strategic acquisition in the design, build, construction market, consider the following companies available for acquisition. You can get more information after completing a non-disclosure agreement. Let us know which area of the country and business you are interested in:

Revenue           Cash Flow        Backlog

Midwest                      

NE Wisconsin Engineering Firm                                             $2,818,000       $364,000         $5,060,000

SW Ohio Architectural Firm                                                     $715,000           $72,425          $200,000+

 

Mid-Atlantic

Virginia Engineering Firm                                                         $830,000             $167,000         $535,000

Baltimore/Washington Pkwy Architectural Firm
(Just NE of Washington DC                                                      $914,000           $236,500         $1,767,000

Maryland/Metro DC – Special Contractor (Foundations),

Structural Engineering Firm                                                     $7,932,000         $950,000         $7,400,000

Virginia Architectural Firm                                                       $2,084,000         $439,000         $1,200,000

 

 Southwest

OK Design/Build Construction Management Firm            $7,400,000       $374,000         $6,000,000

OK Civil/Surveying/Land Planning Firm                             $2,600,000         $512,000         $534,000

                     

Southeast                    

Tampa area Architectural Firm                                                $1,076,000             $96,000         $1,116,000

North Atlanta Consulting Engineering Firm                         $1,499,000             $379,000       $1,000,000

Birmingham MEP Firm                                                             $1,047,000             $155,000        $1,000,000

Atlanta Architectural / Interior Design Firm                        $809,000               $200,000       $60,000

Atlanta Architectural Firm                                                        Just Listed

North Carolina Building Envelope Testing Firm                 Just Listed

NC PME Engineering Firm                                                       Just Listed

 

Atlanta Geotech/Environmental/Transportation Firm      $1,065,000         $171,300           $1,000,000

 

Northeast                    

New Jersey Architectural Firm                                                 $6,646,000        $1,192,000    $6,000,000

Please call us or email if you would like more information on these firms.

Increasing Firm Value – -Getting Your Financial House in Order-

Increasing Firm Value

-Getting Your Financial House in Order-

Many engineering and architecture firms are encouraged by improved business activity and are catching their breath after the great recession. Firms are now taking a closer look at their financials as they try to improve profitability and consider long term succession issues. It’s a great time to re-assess and take action.

You may have no intention of selling to an outsider. But consider this – you’re going to be leaving sooner or later. Bringing in an outside buyer or the next generation is like telling a story. Financials are part of the story. Orderly records and financials make the story more compelling. Just like buying a used car, once a potential buyer finds out the air conditioning doesn’t work they begin wondering what else might be wrong under the hood.

One never knows when an unsolicited opportunity may knock, or you find just the right person to be a vital part of a firm succession plan. If nothing else, consider the impact good financial information could have on operating your business.

Most interested parties are going to ask for five years of financials to assess the long term viability and trends of the business. It’s also difficult to plan and make good business decisions if the checking account balance is your only reliable piece of information.

Where to start?

·      Do you have monthly financials and do they make sense? Review every line item on the balance sheet and income statement. If you don’t understand (or can’t explain) chances are someone else would have questions as well.

·      Get copies of the latest detail schedules for receivables, payables, and work in process.

·      Look over the detail – are there old uncollectible receivables on the schedule? What is the balance over 60 days? Industry average collection period is approximately 75 days.

·      Does the payables schedule have balances you thought were paid or do not owe? Is the work in process current or does it show balances for closed jobs?

·      Take a closer look at the income statement. What is the operating profit on net revenue? Calculated by dividing pre-tax profit by net revenue (total revenue minus sub-consultants and reimbursable expenses). The industry average is 8-12%.

·      Can you locate copies of Federal, state, and payroll tax returns for the last five years. Do the financials agree with the returns?

If you can’t find or produce the financial information, you’ve got some work to do. Start internally, task your office manager or whoever is responsible for financial reporting. Get help from your accountant or someone if you have unresolved questions or issues.

 

 

 

 

 

 

 

 

Stonemill Partners – Tidbits, Information, Resources, Articles

We just wanted to recap some of the tidbits from previous communication to help you in the management of your practice and ongoing planning:

 

Free Marketing Report: 50 Marketing Tactics for Engineers and Architects – email us to request this

 

 

Success Story as reported by the Houston Business Journal:

 

http://stonemillpartners.com/2015/10/success-story-as-reported-by-the-houston-business-journal/

 

 

Article: Is a Merger or Acquisition Right For Your Firm?

 

http://stonemillpartners.com/2015/08/article-is-a-merge-or-acquisition-right-for-your-firm/

 

 

Article: Is Your Practice in the Gap?

 

http://stonemillpartners.com/2015/10/article-is-your-practice-in-the-gap/

 

 

Businesses Available for Acquisition from Stonemill Partners

 

http://stonemillpartners.com/2015/10/business-available-for-acquisition-from-stonemill-partners/

 

 

Stonemill Partner Searches – seeking these firms:

http://stonemillpartners.com/2015/10/stonemill-partner-searches-seeking-these-firms/

 

To discuss buying or selling an architectural, engineering, interior design, or construction firm, contact us.

Stonemill Partner Searches – seeking these firms:

Stonemill Partner Searches – seeking these firms:

 

Architectural Firm  Ann Arbor, MI, Atlanta

SDVOSB Engineering Firm – working on Veterans Admin projects

Transportation Engineering Firm – Chicago, Midwest, Florida, Georgia

MEP Engineering Firm – DC, Northern VA, MD

Geotech Engineering Firm – (mining, water, NEPA, SEFA, Environmental) – Western US, Intermountain West

Engineering Firm – full service – WI, IL, IA, IN, MI, OH

Geotech Engineering Firm – Southeast, Western U.S. States, Texas

Environmental Engineering, Construction Management – National –    less than 20 people

Architectural Firm – medical – Florida, Central Florida, Chicago, TX

Architectural Firm – Los Angeles – less than 10 people

Interior Design Firm – NY, Houston

Civil Engineering Firm – Houston, anywhere in TX

Environmental Engineering – TX, KY, TN 

Architectural Firm – Retail, Banking, Healthcare, Hospitality, Sr. Living – York, PA or Baltimore, MD

Civil Engineering Firm – telecommunications, electrical, gas, water – Calfornia, Indiana Plus many more searches….Contact us.

al@stonemill-partners.com

Business Available for Acquisition from Stonemill Partners

Business Available for Acquisition from Stonemill Partners

 

Revenue           Cash Flow        Backlog

Midwest                     

 

Design Build Construction Firm        $7,400,000    $374,000         $6,000,000

NE Wisconsin Engineering Firm        $2,818,000    $364,000         $5,060,000

Pennsylvania Architectural Firm       $799,000         $108,000         $1,260,000

Southwest                    

                                   

Arizona GeoTech Engineering Firm  $2,937,000    89,000               $4,534,000

(under contract – contact us to find more like this)

Houston Architectural Firm                 $1,350,000    $101,000         $590,000

 

Southeast                   

 

NC MEP Engineering Firm                  $647,000         $176,000         $350,000

Alabama Civil Engineering Firm         $1,952,000    $369,000         $1,465,000

Florida Architectural Firm                    $1,076,000    $57,000            $1,116,000

Virginia Engineering Firm                     $830,000         $167,000         $535,000

Multi-State SDVOSB Firm                     $2,216,000    $138,000         $3,300,000

(under contract – contact us to find more like this)

Northeast                   

 

New Jersey Architectural Firm           $6,646,000    $1,192,000    $6,000,000

MD Architectural & Interiors Firm    $1,540,000    $237,000         $1,767,000

 

Contact us for more information on the above referenced firms. patrick@stonemill-partners.com

 

Success Story as reported by the Houston Business Journal:

Success Story as reported by the Houston Business Journal:

 

http://www.bizjournals.com/houston/news/2015/08/03/ziegler-cooper-architects-acquires-houston-firm-to.html

Article: Is Your Practice in the Gap?

 

-Is Your Practice in the Gap?-
© 2015 Stonemill Partners

 

When he made the decision to sell to Stantec in 2010, Burt Hill – CEO said it best, “We’re too big to be little, and we’re too little to be big.”

Being in the middle can be difficult, just ask any middle child. You can see the same characteristics in mid-sized engineering and architectural firms as you see in middle children. Even a better example might be the size, “medium.” When is the last time that anyone ordered a medium anything? We want the “biggie” size, right!

Just like the size, medium, many architectural and engineering firms are stuck in the middle or “in-between.” These sized firms are always looking for more resources to fit in, survive and thrive. The large projects are harder to obtain, the key employees are harder to keep and it’s harder to keep up with the bigger firms in marketing and advertising budgets. This phenomenon has led many firms that are stuck in the “gap” to sell or merge to become larger and move out of the “gap.”

What constitutes a “mid-sized” architectural or engineering firm? If you ask 100 people, and believe me we have, you will get 100 different answers. There is no shortage of opinion on this topic. The industry is so fragmented with thousands of niche practices, some define “mid-sized” as 10 to 20 employees, 25 to 50 employees while others define “mid-sized” as 100 to 200 employees. Some say a single-discipline firm is “mid-sized” while others say that a firm with a single location will only be “mid-sized” at best. Then there are firms like Halcrow (6,000 staff) and PBS&J (3,900 staff) who, because of their “mid-size,” sold out to industry giants. This is too big of a range to accurately define “mid-size!” Regardless of size, the real questions are, are you stuck in a gap, can you get out of the gap and will more resources allow you to reap the benefits of a non-gap size?

We find that “mid-size,” firms have the following general characteristics:

  • Multi-disciplined service offerings
  • Mix of public and private sector clients
  • Anywhere from 1 to 50+ office locations, with activities often dominated in one state or several regional footprints
  • Privately held, with ownership profiles ranging from sole owner to 100% ESOP

 

  • Formal management structures, governance policies, and IT/financial reporting systems

A/E firms above 1,500 employees tend to get exponentially larger, are often publicly owned and focus on the largest building or infrastructure projects. Those below 50-100 employees typically tend to focus on several cities/counties in a particular geography, have higher client concentrations, fewer owners, and simpler organizational structures.

So why sell if you are “mid-sized?”

  • Higher Valuation – Most “mid-sized” firms typically do internal transfers at book value or at some other deeply discounted value as a means of affordability and simplicity. External buyers are offering much higher valuations usually in the 4 to 5 times adjusted cash flow range. For principals whose ownership stake in an architectural or engineering firm is their biggest asset in their retirement portfolio, they should get the greatest return on their investment as possible.
  • Ownership transition – Many “mid-sized” architectural and engineering firms are “top heavy” with principals in their late 50’s to 60’s who own the majority if not all of the stock. There just aren’t enough 30 to 40 year old licensed architects and engineers willing and able to buy out the senior owners with market values that will not take at least a decade or more to pay down. In addition aging principals of “mid-sized” firms haven’t done nearly enough to prepare and groom the next generation of principals.
  • Diminishing returns – “Mid-sized” firm principals are becoming more frustrated with the decreasing margins that they are experiencing because of the steady increases in corporate overhead, fixed costs, branch offices and slower decision making processes. This has caused lower shareholder returns!
  • You gain ability to gain new skill sets, additional people that means additional capacity, maybe brand equity and other resources that allow you to get bigger projects.

Are you stuck in the gap?

 

Article: Is a Merger or Acquisition Right For Your Firm?

Is a Merger or Acquisition Right For Your Firm?

Should you be considering a merger/acquisition for your firm? Certainly that is a strategic question for any business that has an objective of business growth. If that is an objective for your firm, here are some things to consider when determining whether you should pursue a merger/acquisition.

There are several reasons to merge or acquire (with the same considerations in play if you are ready for a transition or are available for an acquisition):

  1. You need people. In talking to architectural and engineering firms all over the country, business is good and people are busy; sometimes doing more with less and in need of more people to carry out projects. It’s not always the company with the most money that wins contracts and business. The company with the right talent usually comes out on top.
  2. You want to diversify your product/service offering. Right now there are certain project focuses that are hot. Anything medical related is gaining momentum. Schools, both K-12 and higher educational institutions are starting to spend more money, renovating and funding projects.
  3. New skill sets are desired. You have a good group of people but need certain areas of expertise bolstered. Some firms available for acquisition have a good concentration of skill sets within those that are professionally registered and/or certified. Sometimes this also comes into play when seeking that next level of partnership, ownership or management. Acquire the company, acquire the people, acquire the expertise.
  4. Operational synergies are available with acquisitions. There is a tried and true saying that a merger and/or acquisition should be a 1 + 1 = 3, 4 or 5 situation, taking advantage of synergies and efficiencies of all sorts. That is a bottom line focus all that improves with a merger or acquisition.
  5. There is a lot of talk right now about acquiring to, “get out of the gap.” Competition that is larger, offering more resources are winning business over smaller firms in the gap. Combining resources allows for a more competitive position with resources and offerings equal or better than competition.
  6. Those who have successfully acquired companies will state that it is typically less expensive and much quicker to buy a business than to build business from scratch.

Whether or not to pursue a merger or an acquisition is dependent on your strategic goals, your mindset for growth and being able to fully analyze the benefits that come with acquisition. With merger and activity up in this business cycle, one or any of these may justify either selling your business and being acquired or acquiring one to add to your strengths and current value proposition.

Meeting the Talent Challenge: Growth by Acquisition

Screen Shot 2015-07-20 at 1.43.27 PMPlease find below an article that we wrote that was just published in the July, 2015 issue of Professional Engineering Magazine. The article, entitled, Meeting the Talent Challenge: Growth by Acquisition, addresses the “people” need that firms are running into and the benefits of acquisitions to meet those needs. There are also benefits discussed related to acquisitions. Feel free to let us know what you think and to pass on to others interested.

 

Click Here for the Article:    PE July 2015 Private Practice

http://stonemillpartners.com/wp-content/uploads/2015/07/PE-July-2015-Private-Practice.pdf

 

 

For more about how you can make an acquisition or be acquired by an acquiring company, please contact us.

Patrick Neal or Al Lautenslager
Managing Partner
Stonemill Partners, Inc.
3350 Riverwood Parkway
Suite 1900
Atlanta, Georgia 30339
Phone: 404-477-4970
Mobile: 770-510-9367
Fax:     678-317-0864