Five things A/E firms need to watch out for in 2020

Morrissey Goodale is providing A/E leaders with news and perspective on COVID-19 and its impact on the industry. This week, they discuss what to look out for as 2020 comes to a close.

By Morrissey Goodale October 5, 2020

Morrissey Goodale is providing A/E leaders with news and perspective on COVID-19 and its impact on the industry. This week, they discuss what to look out for as 2020 comes to a close.

Five things to watch (or avert your gaze from) in Q4

2020 has been likened to living through the plot of a completely implausible and exhausting disaster movie. The bad news is there is still a quarter of the movie to go and it’s got some major twists and turns left that will tee up the sequel to be released in 2021. (Hopefully, it’s not part of a trilogy.) So, grab your gluten-free popcorn, here are five things to watch out for as we hurtle toward the end of 2020.

1. PPP loans forgiveness. It’s expected that the SBA will begin the forgiveness process this month. The AEC industry was one of the biggest beneficiaries of this CARES Act initiative. Many firms will likely have more cash on their balance sheets than ever before because of their PPP loan and dramatically reduced monthly expenses. The big question facing CEOs will be how to balance (well-deserved) bonus payouts for a (likely) record 2020 performance. Figuring out how much to invest in people, systems, and branding and how much cash to stash before the end of the year to help weather a 2021— which is looking increasingly dodgy for certain sectors and regional economies— will put leadership skills to the test.

2. Tax-driven M&A surge. Sellers will have to make a ‘game-time decision” on election night as to the timing of their deal closings. If there is a new administration in town and if the Senate flips, there is a very good chance that tax rates will increase next year. If that’s the case, sellers will have a huge, but unquantifiable, incentive to get their deals closed by 11:59 PM on December 31 to lock in this year’s lower tax rates. The industry consolidated at a record pace in August and September. Deals in each month were double what they were in 2019. With this additional incentive, we are expecting to see a blowout quarter for M&A with many brand name firms changing hands.

3. Even more volatility. In this craziest of years, it would be no surprise, and really par for the course, if we see the results of the presidential election contested in a way that makes 2000 look like a walk in the park. Any ensuing political and economic uncertainty and potential social unrest between election night and inauguration day will be bad. Once again, CEOs will have to dig deep to determine if and how to communicate with their employees about yet another set of unknowns. How this will impact the scale and timing of any Federal infrastructure stimulus plan in 2021 is hard to predict. In a perfect world, it could be a political win-win for both parties to pass a bill that has been badly needed for over 20 years. Or the political environment post-election could be so toxic, it gets delayed again – to the detriment of the economy and the A/E industry.

4. 2021 reality sets in. 2020 has been a mind-blowing ride and by and large a record year financially for the industry. But as flagged in the latest survey by the ACEC Research Institute, CEOs are getting worried about the outlook for 2021 and are anticipating declines across a broad swath of end markets. Nobody wants to talk about layoffs or staff cuts— especially after everything that their workforce has been through in 2020— but the writing is on the wall and the whispers are starting in Boardrooms. (See Point #2 above for the decisions that CEOs are having to make in Q4.)

5. Emergence of the next industry-disrupting players. While many leadership teams are worrying about 2021, there are at least two sets of firms leaning into the opportunities that will be presented in next year’s challenging market. The first are those firms backed by either private equity or family offices. They are deploying their capital to acquire quality firms to navigate 2021 and emerge as industry leaders on the other side. Heading into the pandemic, these firms accounted for one in five industry deals. Now account for one-in-four. Watch for multiple acquisition announcements from them in the remaining three months of the year. The second set is those firms that are seamlessly blending technology, software, consulting, and design. While big names like Palantir get the headlines, the major action in our industry is in and around the ENR Top 500 where leadership teams have been investing in technology and software initiatives prior to, and during, the pandemic to both meet and anticipate the needs of project owners. The result is the rise of a cohort of tech/design and tech/consulting engineering firms that are growing rapidly and moving way beyond the continually commoditizing world of traditional A/E services firms.

Industry M&A continues its wild ride. Having been down close to 20% earlier in the year, frenetic deal-making in August and September means that the 12-month pace of consolidation is now down just 4%. Everything we are seeing now points to another blowout year for industry transactions.

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

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