As more architecture, engineer and construction (AEC) firm owners reach an age where they want to extract substantial liquidity from their ownership stakes, more firms are considering a possible sale to a larger company. This fact begs the question of what firm owners should do, beforehand, to maximize the potential for financial liquidity upon sale to a larger firm and to maximize the firm’s and its employees’ ability to comfortably transition into — and “fit” happily and productively within — a larger organization.
Many mid-sized, owner-led AEC firms, for good reasons, are organized around short-term operational and financial priorities. Given that fact and the need for leadership control, a balancing of priorities and organizational fine-tuning (rather than optimizing the firm to maximize transferable value) is needed in order to maximize extractable liquidity from a sale.
While important for establishing general appeal to buyers, subtle and intangible value drivers such as brand, reputation, prestige and the emotional appeal of “one’s life’s work,” project portfolio and client list contribute far less to M&A value and realizable liquidity than many firm owners assume.
So what are the most impactful drivers for maximizing financial liquidity upon sale, and what operational and management topics should receive the most attention before initiating a sale process?
For AEC firms at any level of revenue, M&A valuation and deal structure benefit in proportion to:
Operating Margins & Free Cash Flow
To maximize, focus on the following:
- Identifying, monitoring and managing key performance indicators that have the largest impact on operating margins, such as overhead factors, staffing and utilization, as well as proactive contingency planning to mitigate the impact of downward changes in workload on margins
- Risk management procedures, internal financial controls and data analytics on completed projects to reduce project write-downs, a major cause of inconsistent profitability
- Establishing efficient accounts receivable processes and examining how client payment terms are addressed contractually. This will lower working capital requirements and can also increase the portion of the operating margin that is available as free cash flow that can then be distributed as dividends and incentive compensation.
Young Leadership
Even a team that has missing players or that is not 100% ready makes a firm more valuable to buyers than if the firm is totally dependent on the owners/leaders who wish to sell. To make the most of your next generation talent, focus on:
Leadership Development
Talent is in-born; skills are taught and learned. Select team members for their talents, even if their skills aren’t fully developed, then teach, train and develop their skills. Demonstrate the firm’s willingness to “invest” in their talent and their future success by nurturing their leadership skills.
Performance, Accountability & Incentives
Establish expectations and identify behaviors required to meet performance expectations. Monitor performance and react accordingly. Acknowledge small, early successes, and proactively manage negative behavior/performance trends. Then design and tailor financial incentives tied to performance expectations and based on an understanding of each individual’s driving goals and aspirations.
While most firms employ some of these tactics, they are often implemented in an ad hoc, inconsistent manner. Enhancing the degree of focus and consistency in these practices, long before initiating a sale process, can substantially increase the amount of liquidity that exiting owners can realize upon sale.
