Acceleration—Morrissey Goodale’s M&A symposium
Seven takeaways from the panel discussions involving buyers, sellers, and M&A experts
When over 170 AE industry leaders and investors come together to learn, share best practices, and network in one of the world’s most exciting cities, you know it’s going to be a great time. And that’s exactly what it was last week when we hosted our first Southeast States M&A Symposium since January 2020 at the beautiful Mandarin Oriental in sunny Miami.
From the salsa-themed opening reception on the beach on Brickell Bay to the presentations on M&A trends and deal pricing, and from the best practices panel discussions involving buyers, sellers, and M&A experts to the closing reception overlooking the stunning Miami skyline, the enthusiasm was strong, the learning was abundant, and the networking was fast and furious.
Here are seven takeaways from last week’s Symposium:
1. It’s a seller’s market, but…: Buyers are flush with cash, have access to still relatively cheap capital, are seeing record backlogs, are optimistic about the future, and want to make acquisitions fast. It’s a great time to be a seller. However, buyers are also being very savvy about the market and are next-level speed dating. They are approaching multiple M&A targets at a pace and on a scale that we have never seen before. So, if a seller has one too many internal problems (e.g., poor business practices) or challenges (e.g., recalcitrant minority shareholders, over-concentration in a market), buyers are more than happy to move on to Plan B. This means that sellers need to have their ducks in a row before they get into M&A discussions. If you’re going to sell in this super-heated market, you’d better make sure your financials are clean and can survive a rigorous Quality of Earnings (QoE) examination and that you can quickly produce accurate forecasts and projections. Otherwise, you’ll find yourself waiting at the altar after your suitor leaves you for another.
2. Faster, faster! That was the headline message from The 500 Club panel discussion involving three M&A deal-makers who between them have closed over 500 industry transactions. Buyers want to get deals done faster than ever before. What’s “fast” you ask? In some cases, as fast as 45 days after signing an LOI. Sound crazy? It’s the new normal. This puts enormous pressure on sellers to produce all of the information (contracts, leases, share certificates, etc.) needed for a successful deal closing. Most sellers cannot do this in a compressed time frame and need to outsource it.
3. Accelerating consolidation: As an industry, we’re in uncharted territory. 2021 was the first time we crossed the 400-deal threshold in a calendar year, representing a step function increase in consolidation activity. The first quarter of 2022 is already the most active quarter ever on record for transactions, and the deal volume suggests that this year the industry is on track to see over 450 transactions—a 7% increase. Demand for quality, high-performing design and environmental firms by strategic buyers and financial sponsors is off the charts.
4. Jaw-dropping or eye-popping: It’s your choice how you want to describe them. But either way, M&A deal prices are more Ferrari than Ford. Median deal multiples have increased over 5% since our last Southeast Symposium in January 2020. Upper-quartile deal multiples have jumped a stunning 17% over the same period. However, there’s barely been any increase in lower-quartile multiples. This speaks to the widening gap between quality firms that are either run well, in a hot region, or have specific expertise and those firms that are undifferentiated or under-performers. It’s a bifurcated market.
5. You always knew the Southeastern Conference was special: Or was it the former ACC? Either way, AE and design firms in the Southeast are special. And that’s borne out when you compare recent deal valuations of Southeast firms with those in the rest of the nation. All things being equal, pound for pound, a design or environmental firm in the Southeast is about 13% more valuable than one in any other state in the Union (except Texas). Why? When you look at the strategic plans of the largest firms in the industry or the investment theses of the investors looking to enter the AE industry, the Southeast is a top priority. The economic outlook for the region and its business-friendly environment are big reasons why buyers pay a premium to enter the market.
6. How optimistic are buyers and investors? Very. How do we measure that confidence? With our interstate M&A activity index, that’s how. This year, 7 in 10 transactions involve a buyer acquiring a firm in a different state from their headquarters. This continues the record level of cross-border M&A activity that we saw in the second half of last year. Buyers are using acquisitions to aggressively grow and diversify. Message for sellers: There’s a high probability that your buyer does not move in the same local professional industry circles that you do.
7. A fast-moving industry recapitalization: Sure, we all know that private equity and family offices are becoming more influential in the industry. They now account for over one-third of all transactions. But did you know just how quickly they’ve been remaking the industry? Get this, in the first three months of 2022 alone, financial sponsors have been responsible for 37 acquisitions. That’s DOUBLE the number of acquisitions they made in the entirety of 2016! Buyers backed by private equity make up the majority of the most-prolific acquirers in the market. The private-capital model is supplanting the traditional employee-owned model. In 2016, three-quarters of ENR Top 100 firms were employee- or ESOP-owned. That’s now down to two-thirds. Over the same period, PE-backed firms have grown from 4% to 15% of the ENR Top 100 firms. We are moving rapidly from a majority employee-owned industry to a minority employee-owned one. Employees will still have ownership—but on a much-diminished scale.
This article originally appeared on Morrissey Goodale’s website. Morrissey Goodale is a CFE Media content partner.
Original content can be found at www.morrisseygoodale.com.
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