Engineering Firms – and Their Talent – are a Hot Commodity in the M&A Marketplace

Firms in talent-scarce fields like engineering are valuable acquisition targets in the current marketplace, with strong valuations being driven by the scarcity and high cost of talented employees, among other factors.

The M&A market for middle market companies is seeing robust activity and, for firms where founders are reaching retirement age and considering their exit strategies, this is an attractive scenario. The economy is rebounding from COVID, and inflation and interest rates probably are near their peaks. Private equity cash that was previously sidelined is now ready to be invested, and the companies that performed well through the pandemic are attractive to potential buyers.

Our firm specializes in middle market M&A and has been tracking some interesting trends.

In one recent acquisition, a 3,600-employee engineering firm that had previously been valued at a little over $200,000 per employee, was sold at a valuation of over $270,000 per employee. A similar firm was acquired last year for nearly $250,000 per employee.

Compare that with a relatively large acquisition of a well-known firm in the engineering firm just five years ago. The purchase price equated to only $80,000 per employee. Other acquisitions of engineering companies around that time were in the range of $50,000 – $150,000 per employee.

This is all attributable to the idea that it has become cheaper and more effective for the business as a whole to buy engineering firms for $250,000 per employee than it is to try to build organically by hiring people at an all-in cost of around $200,000 per employee.

Of course, talent acquisition is just one factor, albeit an important one, driving acquisitions and valuations in consulting and professional services industries. Strategic buyers are focused on growth and gaining the resources they need to scale up their business. They are interested in businesses that have performed well during the past few challenging years and that have a solid customer base.

Some see opportunities through deployment of technology at legacy businesses that can improve efficiency and margins. Others are interested in synergies in geography or capabilities, with a merger offering an expanded physical footprint and the ability to combine or broaden practice areas, adding, for example, a design group to a traditional construction practice.

Another factor is the emergence post-COVID of private equity firms that have maintained large amounts of dry powder over the past few years, stockpiling a cumulative amount of investment capital estimated to be in the trillions – with investors eager to see that money put to work.

Concerns about rising interest rates and the cost of capital weighing on valuations have not destroyed the M&A market. As much as we’ll miss seeing 2% interest rates, by historic standards, what we’re seeing now is still relatively moderate. And we’re seeing a significant amount of flexibility from Baby Boomer sellers, ready to exit and wanting only a fair and reasonable payout for their life’s work in building a business.

In business-to-business services like engineering, consulting and others, demand for viable companies with valuable talent is high. The middle market is clearly where the most interest lies. A survey by Citizens Financial Group, reported in MarketWatch, found broad agreement among middle market companies and private equity firms that valuations would remain stable or increase in 2023 – with management teams attributing their interest in acquisitions to a need to drive growth.

That sentiment is well-founded and likely to add fuel to the accelerating consolidation and growth of strong middle market companies in fields like engineering in the coming year. Owners who have contemplated selling need to begin positioning themselves to be attractive targets for acquisition.