M&A Valuations in 2023: Nuances Prevail in Very Interesting Times

With the financial world absorbing the twin pressures of rising interest rates and large-scale bank failures, over 200 AE industry executives and investors gathered in Miami for this year’s Southeast M&A, Strategy, and Innovation Symposium to hear how the machinations of the wider world are affecting valuations in deals across the industry. With deal pricing over the past two years pushed ever higher by strong macro-level drivers that include continued investment by private equity in AE firms, the need for current AE firm owners to transition, and billions of dollars of work flowing from the Infrastructure Investment and Jobs Act, all eyes were on the data to see what nuances the latest and greatest information on valuation in deal-making revealed.

Here is a summary of what attendees heard at last week’s symposium:

We see some softness in valuations in 2023, but that does not apply to all—or even most—firms

No doubt some would-be buyers in attendance hoped to hear the audible thud of deal prices falling like ripe coconuts all around them, making it easier to convince their respective boards and investors to close a deal, but that’s not quite what the data show. The early read this year is that valuations of AE M&A deals for the largest firms, or those valued at between $150 million and $200 million and higher, did decline by one or more turns of EBITDA. We can largely attribute this to the swift rise in the cost of debt over the past three fiscal quarters, making big deal pro formas based heavily on borrowed money less palatable for buyers, resulting in a reduction in prices acquirers were willing and able to pay. For smaller firms, however, it’s a different story…

Deal valuations remain high for lower middle market AE firms

For finance professionals and private equity firms, “lower middle market” means AE firms smaller than $100 million in revenue. For everybody else, “lower middle market” translates to “the vast majority of AE firms in existence.” Valuations climbed higher in 2021 as the industry emerged from the pandemic years busier than ever and then rose again in 2022 to record-setting levels for firms across a range of services, specialties, and geographies as buyers looked to diversify and grow through acquisition. Taking a step back, it’s critical to note that overall valuations are still very much above historical norms of just three years ago—often between 1x and 2x EBITDA higher than what we saw prior to 2020. That creates a strong incentive for potential sellers to test the market’s waters in 2023. And for firms looking to maximize transaction pricing…

All else equal, three traits make sellers more attractive and, therefore, more valuable

Buyers assign their most aggressive valuations for selling firms with one or more of the following characteristics: 1) those serving the critical infrastructure markets of transportation, water, and energy; 2) those located in the Sun Belt or along the densely populated U.S. coasts; and 3) those having investments in innovative or digital technologies that distinguish the firm from other AE peers. One of these factors is good, two are better, and firms having all three may expect to command distinct valuation premiums in the days ahead. And as for the overall market, AE firm executives and owners need to understand…

The industry is on pace for another highly active year

With the first quarter of 2023 nearly behind us, Morrissey Goodale has tracked nearly as many deals from January through mid-March of this year (111 transactions) as we tracked in the first quarter of 2022 (118), and that year turned out to be the most active on record. Turbulence in the financial markets notwithstanding, AE firms are flush with backlog, and the industry offers long-term opportunities for growth. Add to that a mix of buyers motivated to make their firms bigger and better via acquisition and sellers evaluating their strategic options in the context of a changing competitive landscape, and we have a table set for another exciting year in M&A. Considering that, we can’t wait for the next symposium in Las Vegas this June when we’ll review the latest pricing data and discuss and debate the implications for buyers and sellers of all types.

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