Business of Engineering

Employee-owned firms face a challenging 2021

Morrissey Goodale is providing A/E leaders with news and perspective on COVID-19 and its impact on the industry. This week, they discuss challenges employee-owned firms face in 2021.

By Morrissey Goodale October 12, 2020
Courtesy: CFE Media and Technology

Morrissey Goodale is providing A/E leaders with news and perspective on COVID-19 and its impact on the industry. This week, they discuss challenges employee-owned firms face in 2021.

Employee-owned firms have a fight on their hands in 2021. Their capital models will face a sustained series of punches throughout the year and possibly into 2022. Critical to survival will be firm leaders who are 100% prepared to go 12 tough rounds for the concept of employee ownership. They cannot let down their guard next year.  Here’s what they’re up against.

High unemployment lands the first punch – a jab. Twenty nine weeks after mass layoffs started to hit the economy, the official unemployment rate remains stubbornly high at 7.9%. The real unemployment rate is likely higher. Hardest hit sectors are in hospitality, entertainment, and leisure – about one fifth of the economy. Vaccine or not, relatively high levels of unemployment will persist through 2021.

This will directly impact employee-owned A/E firms. Higher unemployment will mean less cash available for most households. In 2021, there will be a higher probability that the spouse or partner of a minority or potential A/E firm shareholder is out of work and not earning. There is also a higher probability that their child graduating high school or college can’t find a job and remains on the family “payroll” through 2021 putting additional pressure on household finances. Both of these factors will crowd out the capital that minority shareholders or potential owners were planning to use to buy into their firms – a critical element of all employee-owned capital models.

Then comes the cross punch – market contraction. The fiscal condition of most state and local governments will be more challenged next year. Likewise, huge swaths of the commercial markets will see declines. Combined these will herald a smaller market for A/E & environmental services in 2021 with downward pressure on fees. The result will be an industry that will move from median double-digit profits last year to about 7% to 8% in 2021. This downward pressure in profits will negatively impact the available earnings stream employee-owned firms rely on to fund ownership transition.

We saw the impact of this combination of punches during and after the Great Recession. There was a steady increase in sales of employee-owned firms starting in 2008. This was most notable in 2010 when a record number of employee-owned ENR 500 firms sold (many to overseas buyers) because they could not meet their internal ownership commitments in a challenging market for their services.

So, what’s the gameplan for employee-owned firms in 2021? Leadership must intentionally commit to being a high-performing firm and make this clear to all employees continuously. “High-performing” means high-profit AND growing. The first is important to preserve the engine to fund transition. The second is important to continue to foster demand for shares. Both sound simple, but neither are easy – particularly in a down market. The first will require tough decisions, the second will require smart client management and business development.

At the front-end management will need accurate forecasting. Far too many management teams have gotten sloppy about revenue and profit projections. The last several years of growth have conditioned many business unit managers to “mail in” growth projections similar to the prior year’s and leadership has  accepted the good news. That’s not going to work in 2021. This year requires an honest forecast in real time (not monthly!) that may show a flat or declining business. It’s only with this accurate information that leadership can make the tough decisions to quickly reallocate or reduce resources to preserve earnings.

High performance is not optional; it’s the only way forward for employee-owned firms. 2021 will be a year like no other. Employee-owned firms will face particular challenges to their capital models. To survive, their leadership must be intentional about high performance. In a down market this likely means shared sacrifice for all owners in many firms – as the most enduring employee-owned firms realized a decade ago navigating the Great Recession.

Industry M&A continues its wild ride. Having been down close to 20% earlier in the year, frenetic deal-making in recent weeks means that the 12-month pace of consolidation is now down just 3%.

This article originally appeared on Morrissey Goodale’s website. Morrissey Goodale is a CFE Media content partner.

Morrissey Goodale