Editorial: Buying A/E firms in today’s market
By Mark C. Zweig
There is a lot of interest in buying and selling firms these days. We are even having six seminars/conferences on M&A this year. Our investment banking group at ZweigWhite has never been busier!
Contrary to what some folks think, however, every firm is NOT for sale. There are some firms actively looking for buyers— but they are mostly small firms. Mid-size and larger firms that want to sell are just sitting there waiting for someone to approach them. Most owners are either too scared to actively look for a buyer (someone may find out, after all!) or unwilling to spend a few bucks on it to make it happen. So… nothing happens for them unless someone like us happens to call them.
Other interesting observations I can share:
1) Many buyers start out around 50% of NSR (net service revenue) for a valuation of potential targets, then adjust that up or down depending on the balance sheet, profitability, dependence (or lack of dependence) on one or two major clients, revenue growth trends, strength of second tier management, and more. I have seen values as low as 7% of NSR (yes— that is low!), and as high as a little more than one times revenue.
2) A good third party negotiator can do a lot with terms of the deal, even if the price is pretty well agreed to. There is so much more to it than price— employment agreements for principals, how much of the price is to be paid in cash vs. a note paid over time vs. stock in the going concern, and so much more. The negotiator can also help insulate the buyers from the negotiation process and perhaps avoid damaging the future working relationships of buyer and seller. I find it annoying when either a buyer (or seller) tries to negotiate the deal without us. We’re getting paid anyway— and we can help get it done!
3) If you do work with a third party to help you buy, be sure they have experience in our industry. But also be sure they have some creativity (that may come from working on deals OUTSIDE the A/E business), along with the spirit it takes to get one of these deals done. By “spirit,” I mean some guts, some moxie— so you don’t get run over by the parties you are buying from. And look for a firm to help you, not a one-man band. You need someone who can not only develop prospects and help you negotiate, but also help with due diligence, integration planning, and appraisal, among other things. A single source is just going to be more efficient and improve communications throughout the process.
4) Most critical if you are buying— really (deeply) understand the motivations of the sellers. Do they want to get out— all or just one or more than one? Are they warring with each other? Do they want to stay in? Are they looking for liquidity or really thinking about what is best for their company and their employees? Do what it takes to understand their motivations and it will make your job structuring an offer that gets accepted that much easier.
5) Use the one-page LOI (letter of intent) or a one-page term sheet to find out if your sellers are realistic about what kind of deal they can get from you. Don’t waste too much time with the sellers before getting them an LOI or term sheet.
Like most things in life, the more firms you buy (or attempt to buy), the better you will get at it. Practice makes perfect (or closer to perfect).