If selling, a merger or acquisition (M&A) is in your growth strategy – you are not alone. There’s been a steady increase in M&A activity in the architect, engineering and environmental (A/E/E) sector over the past decade. Activity slowed in COVID-driven 2020, then surged in 2021 with deals coming back on the market. For 2022 - M&A’s  are approximately 23% over the previous 12 months. If you are considering playing in this game - due diligence is an absolute necessity.

 

 

Prime driver of M&A activity - finding personnel to fill key positions. Unemployment is near all-time lows, making it difficult for A/E/E firms and contractors to find staff. Based on claims data - inadequate staffing leads to litigation. The shortage goes across the table - skilled labor, design, engineering, project management, estimating and leadership positions. Lack of qualified staff makes organic growth difficult while the desire for service diversification - to become a more “full service” provider - remains an attractive option for many. 

 

 

In addition to the staffing shortage, other challenges are impacting the industry. Obtaining construction material in a timely manner has delayed projects. Backlogs are near all-time highs, however may be driven by projects taking longer to complete, and owners pushing out schedules hoping for lower product and material cost. Supply chain problems are causing substitutions outside design specifications impacting project performance and incrasing risk. 

 

The Federal Reserve is raising interest rates to slow inflation which will have a negative impact on construction costs and activity. Further hikes in material costs are expected in the near term based on interest rates. This is complicating the estimating and bidding process and fixed priced projects are extremely difficult and risky in this environment, specifically for design-build projects. 
 
M&A Risk

 

Based on staffing, labor, supply chain, and economic concerns, in-depth due diligence is more important than ever when considering merging or acquiring another firm. An extensive analysis of industry claims, representing over $900 million in claim expenses identifies that 75% of claims are driven by the “softer side” of the firm’s business – their operational/business practices and risk management efforts - rather than actual technical work. However the non-technical practices are leading to technical claims. On average claims are filed years after a project is completed - peaking at five to seven years. How a firm appearance on paper financially can differ greatly from an operational risk standpoint. A more in-depth due diligence is essential to avoid inadvertently taking on tremendous liabilities that could badly injure, or even bankrupt, an unsuspecting firm.
  
Risk Assessment Advantage 
  
Whether selling, merging or buying a firm, a formal independent risk assessment is helppful and strongly recommended. When selling - the independent analysis demonstrates to potential buyers the firm’s overall risk profile including ratings in specific operational and practice management categories. This helps remove the uncertainties about hidden liability exposures. If concerns are identified in the process, the concern can be addressed. 

 

When buying - the acquiring firm obtains a better understanding of existing practices and operational procedures that could impact risk. In addition to evaluating operational procedures - info on past claims, project types and lessons learned are reviewed with possible liabilities quantified.

 

Risk Assessments includes an analysis of 10 operational and business practice categories. The following identifies five important categories.  
 
1. Staffing - Experience and Amount
2. Contracts - Review and Approval Process
3. Project and Client - Due Diligence Process
4. Project Communication and Documentation Program
5. Risk Management Culture
 
Upon completion - a firm receives a firm specific Profile Report that includes an analysis of risk in each category, risk ratings, and recommendations to help mitigate future risk and liability exposures. Firms also receive a Risk Management Plan Outline and Certificate of Completion. 

 

 

 

 

Exploring buying or selling your firm, or work with firms that do - please contact SmartRisk. Our services and extensive contacts within the industry could help your efforts.