E.BOOK SERIES

M&A SURVIVAL TIPS FOR A/E FIRM LEADERS

E.BOOK SERIES

II

IT’S PROCESS, BUT IT’S UNPREDICTABLE

UN·PRE·DICT·A·BLE ƏNPRƏˈDIKTƏB(

Ə)L/

ADJECTIVENOT ABLE TO BE PREDICTED.

“THE UNPREDICTABLE WEATHER OF T

SYNONYMS: UNFORESEEABLE, UNC

Merger & Acquisition (M&A) activity in the architecture and engineering space is vigorous and reflective of a robust economic environment. But before jumping in and taking advantage of the many financial and strategic advantages of M&As, how ready are you? How do you make sure you aren’t overpaying or leaving money on the table? How do you avoid a million-dollar mistake?

PSMJ recently polled A/E firm leaders on their readiness to undertake a merger or acquisition. More than one-third(37%) of respondents admitted that their management team only "somewhat" has the current capacity to undertake M&A.

No matter where you perceive your readiness, a first step to success is in understanding the process and possible pitfalls along the way. It's easy to make one small oversight or misjudgment that leads to major problems later on.

In this M&A Survival Tips for A/E Firm Leaders e-book, we'll help you navigate some of the thornier parts of getting started as well as provide steps for implementing a realistic and successful M&A plan.

We can only cover a small corner of the vast world of mergers and acquisitions. For more information and additional resources, please contact us at 617-965-0055 or by email at customerservice@psmj.com.

To request a confidential, no-obligation discovery discussion with a PSMJ's M&A Consultant, visit www.PSMJ.com/MAcall

R

E.BOOK SERIES

1

TABLE OF CONTENTSPART ONE: BEFORE YOU STARTAssessing Current M&A Market Conditions and TrendsThe Steps in the M&A ProcessHow to Set Yourself Up for Success in M&A Key Ingredients for M&A SuccessA Quality Transaction Partner Might Be Right Under Your Nose

PART TWO: SO YOU WANT TO SELL YOUR FIRM?Growth Through Selling? 5 Must-Follow Tips When Selling an A/E FirmThe Relationship Between Valuation & MarketabilityHow Do You Sell an “Earnings Club” to an Outside Buyer?

PART THREE: SO YOU WANT TO BUY A FIRM?It Takes a Lot of Patience to Grow by AcquisitionSome Points to Keep in Mind about AcquisitionsUnderstanding and Managing Investor Risk with an A/E FirmBuying a Firm: Assets or Stock?

PART FOUR: MAXIMIZING YOUR M&A SUCCESS Interference from Earn-Outs3 Strategies for Achieving Integration Success8 Steps to Retain Key People in a Merger

Copyright ©2019by PSMJ Resources, Inc.®

All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying and recording, or by any information storage or retrieval system without the prior written permission of the publisher.

PSMJ Resources Inc.’s material is protected by copyright. It is illegal under Federal law to make copies or faxes of the publication without permission—even for internal use. Violators risk criminal penalties and damages up to $100,000 per offense.

PSMJ Resources, Inc. will pay a reward of up to $1,000 for actionable evidence of illegal copying or faxing.

PSMJ Resources, Inc.®P.O. Box 95190Nonantum, MA 02495Phone: 617-965-0055Fax: 617-965-5152Email: customerservice@psmj.comwww.psmj.com

E.BOOK SERIES

PART ONE: BEFORE YOU STARTASSESSING CURRENT M&A MARKET CONDITIONS AND TRENDS To get the latest and greatest insight on M&A market conditions and trends, we recently sat down with PSMJ Senior M&A Consultant Dion Kenney. Here’s what he had to say:

Q: What’s your outlook for M&A in the A/E industry?A: Transaction activity is up. In fact, the number of transactions in the industry is back up to pre-recession levels. With the growing wave of retiring Baby Boomers and the pressure that is putting on internal succession plans, we are expecting consolidation to be a major force shaping the A/E industry in 2019 and beyond. And, it isn’t just the ‘serial’ acquirers doing big deals anymore. More and more smaller firms are getting into the market and firms that have historically grown solely through organic means are also getting into the game. This trend is going to continue and better economic times will add to the attractiveness of a “growth by acquisition” strategy.

2

Q: How has the current economy impacted transaction activity? A: Whenever this industry goes through a ‘bust’ cycle, transaction activity slows as buyers become risk averse and sellers decide to ride things out for a bit. This downturn has been no different. But, now we're a few years out now from the initial meltdown, everyone is out of their bunkers. Nonetheless, buyers are being more careful in finding targets and closing transactions.

Deals are getting scrutinized more within the buyer organizations, due diligence efforts are more thorough, and we’re seeing more buyers looking to shift some of the transaction risk onto the seller through pay-for-performance provisions or earnouts. M&A can unlock significant growth opportunities for buyers and sellers but, now more than ever, this isn’t for the timid. You need the right team with the experience to get it done right. If you are going in with limited experience, keep the first transaction small and uncomplicated so you can build on success.

Dion Kenney, MS, MBA

E.BOOK SERIES

Q: What are buyers looking for most right now in a seller? A: Well, many sellers have been hampered a bit over the past few years and most buyers will understand this. So, recent historical revenue and earnings might not be the best indicator of future value. There may still be some considerable forward-looking value or value that isn’t necessarily reflected in the financial statements. So, while they won’t always be looking solely to last year’s financials they will be looking for some degree of business-like behavior and discipline to make a valiant attempt to preserve profitability as revenues declined. Have key metrics like utilization and overhead rates trended better than the broader market conditions? What kinds for core competencies were protected during the recession that might support stronger financial performance expectations going forward?

Q: Where are the hot markets? A: We’re seeing a lot of interest in the energy, environmental, water, and healthcare markets. These markets are appealing to the strategic and financial buyers because of the connection to overall economic and demographic trends. Geographically, it is still really a mixed bag…though parts of the South and West are getting more interest than they’ve had in the past couple years. On the global scene, Australia is very attractive as are some of the emerging markets.

Q: When considering a sale, how can sellers be confident when entering into discussions with the ‘right’ buyer? A: This is a worry that goes through the minds of many sellers, particularly first-generation owners who are selling a firm that they have built from the ground up. Sellers want to know that the firm’s brand recognition and employee loyalty aren’t thrown out the window after the sale. What’s important for sellers here is to do their homework and be pro-active. First, define what the ideal buyer looks like…financially, strategically, and culturally and then put your resources to work to identify the most relevant buyers and ask the pertinent questions early on. At PSMJ, we have several tools that we use for our clients to gauge the ‘fit’ of a prospective buyer or seller. Relying on your gut and instinct is good but relying on proven, objective techniques is even better!

3

Better economic times will add to the attractiveness of a “growth by acquisition” strategy.

E.BOOK SERIES

HOW TO SET YOURSELF UP FOR SUCCESS IN M&A In any acquisition, buyers and sellers must have a clear vision of why the deal makes sense. This may sound like an obvious statement. However, even in today’s economic climate, firms continue to jump head first into deals with little strategic direction. This trend is especially true for potential buyers, who are currently presented with an abundance of acquisition opportunities.

Still not convinced? Consider this example of a potential transaction that lacked any strategic focus. At an association convention last year, an office manager from a large Midwestern A/E firm met one of the principals of a small Northwestern civil engineering firm. Their firms seemed very alike in types of work and clients served but neither was especially in the market to buy or sell.

The two individuals stayed in touch after the convention. Later, the leadership team from the larger firm casually brought up the idea of an acquisition (largely because another large firm nearby had been making several transactions over the last few years... a ‘keep up with the Joneses’ strategy).

The principals in the small firm were flattered but were not prepared to offer a clear picture as to what a suitable transaction would look like. Many critical issues were avoided by both firms during six months of discussions, and by the time the larger firm decided to get PSMJ involved to help close the deal, the principals of the small firm had been distracted by this for so long that their business was in decline and the financial results would not be attractive to any buyer. In the end, both firms wasted eight months and the smaller firm’s owners took a significant hit in the wallet as a consolation prize.

While there’s nothing wrong with being an opportunistic buyer or seller, deals will almost always end in trouble if the opportunity does not fit within your strategic or personal plan.

4

While there’s nothing wrong with being an opportunistic buyer or seller, deals will almost always end in trouble if the opportunity does not fit within your strategic or personal plan.

E.BOOK SERIES

Advice for buyersFirst, just because you can buy another firm doesn’t mean that you should. Take time to define the major objectives you hope to achieve in making an acquisition. Be as specific as possible. Is an acquisition truly the way to go or could you achieve the same objectives through internal development or by opening a branch office?

List some good reasons why you would want to buy, as well as bad reasons. Good reasons would include:

• Strategic infill as part of your strategic planfor growth. In other words, your firm’sleadership has recognized a specific geographicregion or service type that it's not reaching andan acquisition will most efficiently serve thatstrategic need.

• Following a high-quality client. Your firmmay have a client with needs in a differentregion or state and acquiring a strong presencein that area may help you to serve that clientright away, as opposed to slowly building abranch office from the ground up.

45

Key Ingredients For M&A Success

Know yourself. Begin with a thorough understanding of your firm: your position in the marketplace, your strategy, your culture, and why you want to buy or sell.

Know potential buyers or sellers. Identify them carefully, and get to know them thoroughly.

Take your time. Identify and study all aspects of the deal. Weigh all the pros and cons.

Develop a full integration plan before you sign the contract, anticipating every management and marketing issue that might arise.

Ensure a cultural match. Look for good chemistry among leaders, a shared professional and business philosophy, and compatibility of staff and clients.

Look for complementary strengths, not the same strengths. In an ideal agreement, each firm strengthens the other.

E.BOOK SERIES

• Growth to drive employee opportunities.Firms that stop growing can stagnate and youneed growth to retain and develop the topdesigners and managers who may somedaybecome firm leaders. An acquisition may bringin new and exciting work to keep your peoplehappy.

On the flip side of this, some bad reasons are: • Keeping up with the firm down thestreet. There are many firms that are saying“Everybody else is acquiring, so we shouldtoo.” This reasoning will only lead to failure.

• Overhead economies of scale. Large firmswith strong HR and marketing departments inplace can have false notions that expansion willadd little to their overhead. PSMJ survey datashows that as your staff grows, your overheadwill continue to rise.

• Thinking you have an opportunity to acquirea firm at a really good deal. You may find anamazing deal out there. But, more often thannot, it is just too good to be true. Is the firmin trouble? Is the owner desperate to sell thecompany? Why? Are there any skeletons inthe closet? Deals that seem too good to be truemost likely are.

Advice for potential sellersIt can be flattering to be approached by a firm you have always looked up to, but are you sure that becoming part of that firm will help you achieve your strategic goals? Ask yourself a number of serious questions before you begin the potentially gut-wrenching process of selling. Most importantly, what are your:

• Financial goals?

• Personal and professional goals?

• Goals for the firm?

Do you want to get as much cash for the firm as possible and leave it forever? Do you want to continue to be involved on a daily basis, on a project basis, or in some other way? Do you want to see the firm strengthened on its current path, or taking a new direction, or doesn’t this issue matter to you?

6

You may find an amazing deal out there. But, more often than not, it is just too good to be true.

E.BOOK SERIES

A QUALITY TRANSACTION PARTNER MIGHT BE RIGHT UNDER YOUR NOSESo many firm leaders, both prospective buyers and prospective sellers, voice frustrations with finding quality firms that would be candidates for a prospective transaction. Some frequent sentiments are along the lines of “None of the good ones are interested in talking” or “They all want too much money.”

Well, the truth is that great merger or acquisition partners don’t often fall in your lap. But, the good news is that finding quality merger or acquisition partners can often be a whole lot easier than it may appear. Consider the recent merger of E/A firm I&S Group (Mankato, MN) and civil engineering firm Kuehl & Payer (Storm Lake, IA). These two firms came into transaction discussions not by one knocking on the other’s door and simply asking to dance. Rather, it was a process that inherently got them off on the right foot.

As Chad Surprenant, President and CEO of I&S Group puts it “We had long wanted to expand our geographic service area and, specifically, to get to a certain area. In the meantime, we were aware of Kuehl & Payer, and knowing that we were not direct competitors

(our geographies somewhat touched but did no overlap), we had contacted them in somewhat of a peer review scenario where we could ask them operational questions, learn of shared opportunities, and simply learn from each other.”

This initial discussion to compare notes then turned into something good. According to Surprenant, “As we talked about our vision of expansion, they were compelled by it and asked if we would consider merging them in as opposed to us leap frogging them or competing against them. We have long been admirers of their work in their specialty areas, but we also knew that we had services and vision from which they could benefit.”

If you are spinning your wheels in finding quality merger or acquisition partners, don’t put the cart before the horse by seeking a firm that will immediately engage in transaction discussions and then using hard sell techniques. That can be a turn-off for many successful firms. Instead, always keep the golden rule in mind and you just might find a successful transaction to be closer than you thought.

7

E.BOOK SERIES

PART TWO: SO YOU WANT TO SELL YOU FIRM?GROWTH THROUGH SELLING? Anyone paying any attention at all to A/E industry news knows that growth through acquisitions fuels the expansions of a handful of very big firms at the top of the food chain. You may have also noticed that a lot of mid-sized firms have entered the M&A market as their confidence in the rebounding economy fuels decisions. They reason that they too must make acquisitions to grow and keep up with their larger competitors.

But what about small firms looking to grow? Is it possible to grow your firm by selling it? We think so and a growing number of our clients appear to agree.

While it is true that older shareholder retirement needs still drive most sales, we have spoken to many younger ownership groups who see many opportunities in a hot economy, but lack the capital and/or the infrastructure to take advantage of it. Due to increased competition from larger firms, these owners are looking for a faster way to be more competitive for the projects they want.

Breaking into new markets and incremental growth in capabilities by working on incrementally more challenging projects is too slow. So, an increasing number of these firms are thinking outside the box and have started looking for strategic partners to “merge” into (that’s the PC way of telling someone the firm is for sale).

Most firms do not have to sell. They have younger ownership groups and have weathered the last recession relatively well. They have the luxury of being able to be picky as they are talking to potential acquirers. Their goal is to make a quantum leap in the market from a small firm that revolves around a few key leaders to a midsized firm that operates through systems that are independent of any person or small group. It is very possible and very powerful, but can be perilous too.

8

E.BOOK SERIES

THE RELATIONSHIP BETWEEN VALUATION & MARKETABILITYIf you are the owner of a small A/E firm that has maintained revenue growth and decent margins through the recession, now is an excellent time to think about selling the firm.

However, your ability to do so will be greatly impacted by the things you have done to continue to thrive over the last two years. You should look very critically at the sources of your firm’s revenue and profits and ask, “Is my system transferable to another firm? Can another firm utilize the things we have in place to continue to be successful? Or is our success a product of special circumstances that are dependent upon me?"

Looking only at free cash flow, your firm may appear to be very valuable and marketable, but if your business cannot be integrated effectively into a larger firm, this will reduce the firm’s value.

We recently spoke with a small water/waste water firm in a remote part of the western United States that touted last year as their best year ever. They had a stable client base that continued to give them enough projects to support the modest operation. They did little or no marketing but produced good profits—around 20%.

When the owner wanted to investigate a sale of the firm, it took no time at all to recognize that they were already over-achieving in their geographic market, and furthermore, had developed a culture of introverted technical expertise that looked at growth as the downside of being good at what they do.This firm was providing a very nice life for its owner but had very serious marketability issues. An acquirer would get good cash flow by buying this firm but integrating the operations to achieve growth targets would have been a nightmare.

Three potential buyers looked briefly at the firm before declining to make an offer—the outside sale value of the firm was virtually nil. However, the firm had significant value to the next generation of engineers (after all they didn’t have to do any marketing) and we were able to create a plan for the internal transfer of ownership that was less than the owner wanted but much more than liquidation value.

9

You should look very critically at the sources of your firm’s revenue and profits and ask, “Is my system transferrable to another firm?”

E.BOOK SERIES

10

HOW DO YOU SELL AN “EARNINGS CLUB”TO AN OUTSIDE BUYER?PSMJ has long grouped the A/E industry into two kinds of firms; those that reinvest their earnings back into the firm to fuel growth and those that endeavor to distribute as much profit as possible each year to the shareholders, and in doing so avoid corporate taxes. We call the first group the “share appreciation” club and the second the “earnings” club.

It is relatively straightforward to sell your company to a larger A/E firm if you follow the share-appreciation model. Your firm has probably grown over the years and ownership is more distributed, so a formal system of governance has been created. Your balance sheet probably shows a substantial amount of equity, and the shareholders have reconciled themselves to the fact that all for-profit corporations pay taxes.

All of these conditions, for various reasons, make an M&A transaction easier to achieve. But what about the firms that follow the earnings club model? They are much more numerous in the A/E industry and can be just as strategically attractive to buyers.

The issue is that the very practices that place a firm in the earnings club also support and encourage continued independent operation. By definition, the shareholders of these firms maximize their earnings each year, and because profits are, to a large part, distributed along ownership lines, the impact of dilution is felt directly by existing owners. This keeps the shareholder group small and the firm closely controlled by an informal decision making process.

Making sure the annual distributions are large enough to eliminate corporate taxes also gets a lot of attention in these firms. So, what can be done if you’ve happily been operating an earnings club for 20+ years but the lack of leadership transition is pointing you towards an outside sale?

E.BOOK SERIES

11

You must come to terms with these things:

1. Realize that each year as you maximized your earnings, you were taking out some of the value of the firm, and you won’t get paid twice for it. Reinvestment of profits is, to a company, as good as food is to your body. Without it over long periods of time, you undercut the health (and value) of your firm.

2. Understand the value of a formal governance structure. There is no way to have an efficient decision-making process if the key managers in your firm also make up the shareholders and board members.

3. Be aware that not all shareholdershave to be capable of management at the corporate level. As ownership broadens in the share appreciation model, leaders within different parts of firms are commonly offered ownership. It’s possible for you to have a place on the board of directors and own fewer shares than someone who doesn’t.

4. Recognize the difference between tax management and tax avoidance. Nobody likes to pay taxes, but few earnings clubspay attention to the collateral damage oftax avoidance. Giving a non-performing shareholder a sizable distribution and saying, “At least we didn’t have to pay corporate taxes on that money,” is a backward priority system and will get fixed as part of the sale of your firm.

5 Must-Follow Tips When Selling an A/E FirmAs market conditions improve and valuations continue trending upward, we’re hearing left and right from A/E firm leaders wishing to explore whether an external sale is right for them. Of course, there is never an absolute “yes” or “no” answer to this question. But for many of these firm leaders, an external sale provides a degree of liquidity, security, and investment return that no internal transition can match.

If you are thinking that an external sale might be the right fit for your A/E firm, here are five quick tips to boost your odds of getting it right:

1. Check your emotions at the door. Particularly in first-generation firms, it will be difficult to separate sentimental and emotional value from fair market value.

2. Be prepared for a process that is both exciting and draining. Designing a win-win M&A transaction is a roller coaster ride. There will be ambiguity and there will be surprises. Be sure to lean on a trusted and experienced advisor.

3. Don’t jump at the first offer that comes your way. Do your research. Understand the complete set of terms associated with the deal. And, most importantly, benchmark the deal against A/E industry norms and best practices.

4. Don’t hold out for a slightly better offer. Perfection or the ideal transaction can be hard to come by. When you get to agreement ona transaction that is fair and consistent with industry norms, go for it. Timing plays a huge role in M&A. A very good deal now is often better than holding out for the perfect deal that may or may not every actually happen.

5. Find trusted and experienced M&A advisors. You only get one chance to sell and this really isn’t something you want to tryon your own. The personal and professional implications for you are huge. Build a team of advisors who have been through this process before and who can think completely objectively about the deal.

E.BOOK SERIES

PART THREE: SO YOU WANT TO BUY A FIRM?IT TAKES A LOT OF PATIENCE TO GROW BY ACQUISITIONAs the consolidation of the A/E industry continues, smaller and smaller firms are looking to become acquirers. Where just a few years ago, growth by acquisition was a strategy almost exclusive to the ENR Top 200, today there are many potential buyers with less than $10M in revenue in the marketplace.

However, pursuing a growth by acquisition strategy and being truly successful at it are two entirely different things. Regardless of size, one of the biggest issues we see holding back first-time buyers is lack of patience. This impatience can manifest itself in several ways.

Even buyers that have done the proper amount of market research prior to launching the acquisition process can have trouble finding the right seller. While being very specific in describing the kind of firm you want to acquire is usually a very good thing, expecting to find exactly that firm can be frustrating. That frustration can be multiplied when you find a match but they aren’t looking to sell and will only take you seriously if you show up driving a Brink's truck.

Buyers can relieve this stress by clearly defining which aspects of their “perfect match” are crucial and which are optional, and then having the patience to look around and talk to several firms that meet the crucial criteria, but also have varying degrees of optional attributes.

Talking to several potential sellers, and letting all of them know that you are talking to several firms, takes more time, but also greatly increases the chances the your firm will indeed grow by acquisition.

Many buyers grow impatient with the amount of incubation time needed for potential deals to move forward once a good match has been found. Remember, as a buyer, you’ve had time and dedicated some effort to getting ready. The sellers have usually had no such opportunity.

In order to respond to the buyers’ requests for meetings and exchange of information, sellers must be reactive and carve out time in their already busy schedules. In some cases, buyers find that the concept of selling was attractive to the sellers but that the process of selling is so overwhelming that the sellers simply push away from the discussions.

12

E.BOOK SERIES

Buyers that take intentional actions to keep the process from being so overwhelming must have patience to put themselves in the sellers’ position, but in doing so give themselves an opportunity to acquire a firm that otherwise could decide to walk away due to lack of available time.

The final area where patience is needed is probably the most sensitive of all. Buyers have to realize that the advisors picked by most sellers will have been chosen because of long-term relationships and not because of significant, relevant M&A experience.

If it appears to a buyer that decisions that were made months or weeks ago are being questioned again late in the M&A process because of concerns raised by the sellers’ advisors, the buyer really has no choice but to be patient and work through the details again (and again, if needed).

This issue can be alleviated to some extent by suggesting or coaching the seller on the proper role of the advisors and when they are needed. But buyers also have to recognize that there can be a conflict of interest on the seller side where their advisors are not as enthusiastic about losing a client as you are about making an acquisition.

Some Points to Keep in Mind About AcquisitionsDon’t seek an acquisition unless you are financially strong enough to pay acquisition costs and integration costs associated with transferring the acquired business into your hands.

All acquisitions are difficult; be prepared for surprises.

There’s no such thing as knowing too much about the seller.

You may have to walk away from a deal. No matter how promising it seems at first, be prepared to walk away if you see signs of potential disaster such as tax problems, over extension of credit, a bad cultural match, skeletons in the closet, or poor client relations.

Be conservative in your revenue estimates, since some of the acquired firm’s clients will probably go elsewhere.

No matter what you do, some people will not like the new arrangement and will leave.

Many people need to be informed about the agreement: staff, clients, the press, banks, attorneys, even competitors.

Nothing happens until the deal is signed. Before that, everything’s open for discussion. After that, it’s too late to raise new issues.

Making the deal is the easy part. Making it work is tough.

The assets you’re really buying are the people. Throughout the acquisition process, focus on what you’ll do to keep the team working.

13

E.BOOK SERIES

UNDERSTANDING AND MANAGING INVESTOR RISK WITH AN A/E FIRMRisk is something that A/E firm leaders live with every day. Liability comes from any one of a number of angles and the probability of damage or injury or loss resulting from a firm’s actions can be very real. However, put that type of risk aside for a moment as we think specifically about investor risk and the probability that the actual return on investment will differ (in reality, be lower) than expected. All other things being equal, a higher level of risk translates into a lower valuation.

But what exactly are the elements of risk that an investor or potential buyer considers? It can come from a wide range of sources and, whether an external or internal ownership succession is in the cards for your firm, it is always important to understand them and have a clear plan for managing or mitigating them.

Some common sources of investor risk for A/E firms:

• Firm size

• Ownership concentration

• Leadership concentration

• Client concentration

• Market/Geographic concentration

• Earnings margin, growth, and consistency

• Business development methodology (sole source versus competitive bid)

• Project type (on-going versus singular)

• Project size

Of course, none of these variables operate in complete isolation. For example, a firm may have a relatively significant client concentration but have those clients locked in with long-term agreements and/or sole source project opportunities. As another example, there may be significant ownership concentration, but the firm may have a Shareholders’ Agreement that clearly articulates how stock redemptions will be managed under various scenarios.

14

E.BOOK SERIES

Additionally, the firm may have secured insurance products and conducted extensive redemption liability modeling to manage the risk associated with this ownership concentration.

In short, particularly if you are considering an external sale of your firm, it is important to understand the risk profile of your firm and what factors mitigate those risks.

Once you understand your risk profile, the next step in the context of business valuation is quantifying them. There is an entire body of knowledge devoted to this, and determining an appropriate “discount rate” should be made in collaboration with a trusted and experienced M&A advisor. In the meantime, we leave you with a simple question to evaluate the risk associated with an investment in your firm.

That is, if you had $1 million to put to work in any number of investment opportunities, would you invest this capital in your firm? If not, what makes you think that a potential outside buyer will?

Buying a Firm: Assets or Stock?Most acquisitions in our industry are asset purchases, where the buyer buys all or some of the selling firm’s assets. Usually, once the net asset value of the firm is determined, the seller keeps the portion of that value represented by cash, receivables which the seller then collects, and work-in-process. The buyer pays the difference between the agreed upon price and the net asset value.

CONSIDER BUYING ASSETS WHEN:

• You want a portion of the firm.

• The firm has potential future liabilities(litigation).

• You are not buying the firm’s portfolioand qualifications.

CONSIDER BUYING STOCK WHEN:

• You are acquiring the whole firm.

• There are minimal litigation concerns.

• You want the firm’s projects in yourqualifications.

15

What exactly are some of the elements of risk that an investor or potential buyer considers? Well, the truth is that investor risk in an A/E firm can come from a wide range of sources.

E.BOOK SERIES

PART FOUR: MAXIMIZING YOUR M&A SUCCESSINTERFERENCE FROM EARN-OUTSThe common mindset among many successful acquirers of A/E firms is that complete integration of the two firms’ operational systems is the best and fastest way to maximize ROI on capital invested in the acquisition. However, this philosophy has collided more than once with the need to include an earn-out (performance component) in the deal structure—even in revenue-based earn-outs.

As the A/E continues to thrive in favorable market conditions, many potential sellers see more opportunity than risk in joining a larger firm. In fact, too much optimism from the seller can work against the deal and virtually guarantee the need for an earn-out from the buyers’ point of view. This creates a natural barrier to integration as the seller must be “left alone” during the earn-out period as to not compromise their ability to achieve the performance targets.

The classic problem occurs when the earn-out is based on the profits of the seller after closing, yet there is a perceived need to integrate project management systems between the firms. Even a new PM system, which may offer eventual operational improvement for the seller, can cause some integration inefficiency within projects and negative impact on profits.

Several buyers have begun to adopt earn-outs that are based on top-line revenue targets in an attempt to avoid the potential that integration plans will be compromised. However, even this strategy has not been without issues, especially with sellers that have a large amount of state and municipal government work.

The degree of “support” given to elected officials by A/E firms that is allowed or expected varies greatly from place to place. In response, many A/E firms looking to do business in the public sector have adopted policies on what they are willing to do (and not do) to get work from these officials.

16

E.BOOK SERIES

A buyer looking to enter a new geographic region and seek work in the public sector should do homework on what the business development “standards” are in that area.

Obviously, a seller that is familiar with the standards for their area cannot be told that their BD practices will be “modified” by buyer policies while also being given revenue-based performance targets that trigger additional payments (or not) within an acquisition. With the increased importance of the public sector to the A/E industry, this situation has occurred many times.

We at PSMJ have always been—and remain—very skeptical about the true benefit of earn-outs. We understand that prenuptial agreements can make some marriages more durable, but our experience also tells us that trust between the parties within an M&A deal is the key ingredient. If both firms cannot agree on a common vision for future success that drives an acceptable valuation and deal structure in today’s market, it is likely that there are other firms still out there that will be better matches for both.

Give yourself enough time and flexibility to be able to afford to be picky.

17

8 Steps To Retain Key People In A MergerThe success of a merger hinges on how well your firm’s management communicates with employees and how fast you resolve employee uncertainties about the deal. Here’s how to tackle the upheavals that come with a merger:

Act fast. Don’t allow rumors to spread and start employees worrying about the transition.

Make a plan. Before signing the deal, make a plan for handling your people.

Attack the critical players. Meet with key team members immediately and enter into employment agreements with them.

Define a new direction. Give all employees a role in figuring out where the new entity should go, then set a vision for the new organization. Develop a road map of what the new company could achieve.

Find and promote winners. To help employees cope with the transition, choose managers who radiate confidence and credibility.

Level with people. Don’t procrastinate giving employees bad news, or you’ll risk losing trust and increase anxiety.

Share some history. Tell employees what has happened after past mergers and acquisitions to assuage their fears.

Develop a contingency plan. Despite your best efforts, you must be prepared to see employees leave. Planning for this before the fact will help you fill vacancies more efficiently and with stronger contributors.

E.BOOK SERIES

3 STRATEGIES FOR ACHIEVING INTEGRATION SUCCESS

Conceptualizing a deal is relatively easy. However, achieving a successful merger or acquisition requires not only imagination but hard work. It's too important to be left solely in the hands of dealmakers who won’t have to live with the consequences after the closing.

When it comes to post-transaction integration, it is critical to have a plan in place pre-closing that works for both parties. Some tips for successful integration planning include:

Empower the TeamCarefully select the leader and integration planning team members from both sides. Make sure that transaction goals, team roles, and management expectations are explicitly clear. Remove competing assignments and attention-grabbers from team members and publicly demonstrate their authority with total executive support. Insist on an organized and flexible project plan with questions to be answered, an approach to be followed, information to be gathered, and measures for progress. Distribute the project plan to stakeholders for feedback and buy-in.

Dig DeepMake sure the team gets to know each other and understands how their respective organizations tick as they develop integration plans. Objective information such as examples, models, templates, prototypes, and stories of operational processes are important.

However, a subjective understanding of each other’s people, culture, operations, philosophy, and values may be more valuable in the long run. This is the time to mine for conflict, competing imperatives, sacred cows, resistors, and revolutionaries. Investigation is done when there is sufficient information to design a robust integration plan and make an informed Go/No-Go decision.

18

Carefully select the leader and integration planning team members from both sides. Make sure that transaction goals, team roles, and management expectations are explicitly clear.

E.BOOK SERIES

Assess CriticallyMergers and acquisitions are among the riskiest projects a firm can pursue. The planning team must consider alternatives for office organization, management structure, marketing approach, operational consolidation, and more.

Outline each alternative, how it would be pursued, the risks, likely outcomes, and costs. Costs include not only cash expenditures but also key staff demands, lost clients, and employee departures. Be realistic; not every client or employee will survive or want to stay with the merger.

It is essential that the most significant foreseeable risks are identified and workable contingency plans are developed. When evaluating the recommended plan, focus on the outcome, confront difficult issues, and insist on clarity. If the integration plan does not meet or exceed expectations and provide a viable response for every identified risk, there are fatal flaws. Stop. Do not proceed.

If you can’t afford your best managers to plan and implement post-transaction integration like a “real project”, you likely cannot afford the transaction in the first place!

19

Over 40 years of helping A/E/C firms achieve business success.PSMJ Resources, Inc. is the world’s leading authority, publisher, and consultant on the effective management of architecture, engineering, and construction firms.

With offices in the United States as well as the United Kingdom and Australia, PSMJ offers over 150 titles in book, audio, and video format.

In addition, the company publishes several monthly periodicals and delivers dozens of seminars, roundtables, conferences, webinars, and in-house training sessions every year for A/E/C professionals around the world.

PSMJ’s sought-after consulting expertise covers a range of critical business areas such as strategic planning, project management, valuation, succession planning, and mergers & acquisitions.

PSMJ is also active within the community, utilizing our resources and the contacts at our fingertips within the A/E/C Industry to help those in need.

ABOUT PSMJ

YOU LEARN:• The pitfalls of M&A that can lead to a million-dollar mistake.

• Exactly how win-win transactions are getting structuredright now.

• How to accurately understand an A/E firm’s valuation andmarketability.

• Major landmines that might be lurking in your Letter ofIntent.

• Proven strategies for keeping talent after the closing.

• The biggest blind spots in due diligence.

• How to hit a home run when announcing the transaction.

FULL AGENDA AND MORE AT PSMJ.COM

Whether on the buying or the selling side, entering into a merger or acquisition can be a very risky bet. Even a seemingly small oversight or error can lead to a million-dollar mistake.

A/E/C Mergers & Acquisitions Roundtable is built on our 40+ years' experience and the latest strategies for structuring win-win transactions… from finding the right fit all the way through to implementing a successful integration strategy.

YOUR FACILITATORS:Dion Kenney, MS, MBA is a senior consultant in PSMJ’s mergers and acquisitions, valuation, and ownership transition practices. His approach is defined by recognizing the value of an organization aside from its physical assets and multiples of revenues/profitability metrics. Dion advises on M&A and organizational design/ performance improvement process for privately held companies in the professional services and construction industries.

Karl Wohler, MBA provides advisory support to the mergers and acquisitions, valuation, and ownership transition practices at PSMJ. His diverse experience in operations management, finance, M&A deal structuring, and process management provides him with a unique perspective to assist architecture and engineering firm leaders in developing effective growth, transition, and exit strategies.

An interactive and engaging gathering of executive-level A/E/C firm leaders focused on the high-priority issues and challenges of mergers & acquisitions

&A/E/C

R O U N D T A B L E ®

MERGERS ACQUISITIONS

CALL: 617.965.0055

E-MAIL:education@psmj.com

VISIT: www.psmj.com/ma-roundtable IN-HOUSE TRAINING: We can bring any of our programs to your firm–completely tailored to your challenges and your needs. This cost-effective and powerful way delivers on growth and success at an enterprise level. To learn more, visit: go.psmj.com/iht

8

(

*

H

REGISTER NOW!