Ian has spent the past twenty years working with hundreds of architecture, engineering and environmental consulting firms large and small throughout the U.S. and abroad with a focus on ownership planning, business valuation, ESOP advisory services, mergers & acquisitions, and strategic planning. Ian is a professionally trained and accredited business appraiser and holds the Accredited Senior Appraiser (ASA) designation with the American Society of Appraisers and is a certified merger & acquisition advisor (CM&AA) with the Alliance of Merger & Acquisition Advisors.
Newly Released A/E Business Valuation and M&A Transactions Study Shows Peak Performance
January 14, 2021
The latest edition of Rusk O’Brien Gido + Partners’ A/E Business Valuation and M&A Transactions Study
was released on January 12th and shows that industry firms had reached peak financial performance levels and valuations multiples immediately before the advent of the COVID-19 pandemic.
Revenue growth, as measured by three-year compounded average growth of net service revenue from 2017 through 2019, hit a high of 9.6%, and earnings before interest, taxes, depreciation and amortization expense (EBITDA) margins hit a high of 15.4% of net service revenue.
| Financial Metrics | FY 2019 | FY 2018 | FY 2017 |
|---|---|---|---|
| NSR Growth (CAGR) | 9.6% | 9.2% | 6.8% |
| EBITDA / NSR | 15.4% | 15.1% | 14.1% |
Most of the data on privately held firms was collected for fiscal years ended December 31, 2019, with a smaller number of mid-year 2020 fiscal years, so the private firm statistics are largely reflective of pre-pandemic conditions. Anecdotally, senior managers at participating firms report starting the calendar year 2020 with backlog levels at or near all-time highs, and optimistic outlooks for the year. As the reality of the pandemic settled over the industry, most of these firms were able to adjust quickly to remote operations, and many actually saw improvement in utilization levels, and decreases in overhead costs (mostly due to reduced travel costs and meals & entertainment expense).
The most commonly cited negative trend has been a decline in contract backlog and concern over the limited opportunities to network and conduct typical business development activities, which could impact growth and financial performance in 2021 and beyond. However, the stock performance of the publicly traded firms offers some encouraging insight into the near-term outlook.
While the public markets experienced tremendous volatility in March of 2020, over the course of the year as businesses adjusted, and with the roll out of the CARES act, markets began to settle, and stock prices began to rebound. By 2020 year-end, most publicly traded A/E firms were trading at prices well above their pre-pandemic highs, indicating improved investor confidence and outlook for the industry as a whole.
Select Publicly Traded A/E Firm Historical Share Prices - 2020
In terms of valuation metrics, the enterprise values of the ten public firms measured as a multiple of EBIT and EBITDA over the latest twelve months ended December 31, 2020 were up relative to the previous three fiscal year ends (note many of the public firms have fiscal years ending on September 30).
| Median Valuation Multiples | LTM 2020 | FY 2019 | FY 2018 | FY 2017 |
|---|---|---|---|---|
| Enterprise Value / EBITDA | 13.5x | 9.5x | 9.3x | 10.4x |
| Enterprise Value / EBIT | 16.3x | 14.4x | 12.9x | 14.6x |
As we begin to collect data on calendar year 2020 and Q1 2021 performance, I believe we will see further evidence of the resilience of the A/E sector to the sorts of business interruption caused by the COVID-19 pandemic. Technologies already adopted by most firms allow professionals to work from remote locations, collaborate with project teams and conduct meetings via video conference. Yet to be seen is how many of the adaptations made in response to the pandemic will be permanent, and if the industry will benefit in the long-term from some of these increased efficiencies.
The eighth edition of the A/E Business Valuation and M&A Transactions Study can be ordered online here.
And don’t miss the upcoming webinar on February 9th, Enhancing Design Firm Value through Profitability and Effective Business Management presented in collaboration with Berkley DP. Click here for more information and to register.
