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Key valuation insights

Key valuation insights

By Will Swearingen, Vice President & Director of Research & Advisory Services at Zweig Group

From the Zweig Letter:

The 2024 Valuation Report highlights strong AEC industry performance and essential metrics for firm leaders.

The recent release of the 2024 Valuation Report of AEC Firms marks more than three decades of Zweig Group’s commitment to providing the AEC industry with comprehensive valuation data and analysis.

Zweig Group’s 2024 Z-Values indicate strong financial performance and growing confidence in the stability of the AEC industry as a whole. Many of our metrics have seen increases in the last year and will be important measures for firm leaders to track as internal stock valuations and negotiated external transactions increasingly come into focus. This industry has an aging owner issue, with nearly 80 percent of firm owners looking to transition in the next decade. Despite global economic challenges, our industry has shown remarkable strength and adaptability.

Here are some key takeaways from the report:

  • This year’s report underscores a significant upward trend in firm values, reflecting the industry’s resilience and growth. The median firm profiled in the survey has 38 full-time equivalents (FTE), five owners, and exhibits a book value of $2.4 million. The data further shows a net service revenue (NSR) of $6.3 million, pre-bonus profit of $910,000, EBITDA of $965,000, and a solid backlog of $7.4 million.
  • The 2024 report presents compelling insights, notably the value per employee metric which has climbed to $96,661 from $89,809 in the previous year, highlighting a dynamic market for talent and the intrinsic value of human capital within the industry. Concurrently, the value/NSR ratio has appreciated to 0.64, indicating a rise in profitability for each dollar of service revenue as well as the close connection between revenue growth and firm valuation.
  • Conversely, the value/backlog ratio has registered a marginal dip to 0.65 from 0.73 in 2023. This could be attributed to an increase in the firm’s backlog volume over the last couple of years as many firms held more than 12 months of backlog in 2022 and 2023. Despite a slight dip in the metric, backlog is still a primary driver of valuation as it indicates the stability of the firm’s future earnings.
  • Furthermore, the value/EBITDA ratio surged to 4.23 in 2024, ascending from 4.04 the year prior. The industry continues to see consolidation at record levels with significant demand from both financially backed and traditional strategic buyers. This phenomenon has prompted many owners to consider their internal calculations and has also pushed up pricing on internal transfers. We expect 2024 to continue to be a strong year for M&A activity in the AEC industry.
  • The equity value/profit metric continues to stand firm at 3.91, mirroring the robust performance of the preceding year. Simultaneously, the equity value/book value ratio has seen an uptick to 1.80. Many firms held excess cash on their balance sheets as PPP and ERC money flowed into organizations during 2020 and 2021. These funds are finally getting worked through as growth in the industry has impacted the working capital requirements and capital investments of these firms.
  • The premium for control level transactions versus minority level remains significant, reinforcing the fact that firms can access higher returns on their investments via the external market. As the industry experiences a surge in ownership transition activities, the demand for independent, third-party appraisals has also intensified, mirroring the sector’s growth and the need for precise fair market value calculations.

Zweig Group’s Valuation Report of AEC Firms remains the industry’s go-to resource for benchmarking and understanding firm value. The comprehensive data and analysis provide invaluable insights for firms preparing for transitions, seeking to benchmark their performance, or aiming to understand their position within the industry landscape. 

Will Swearingen is vice president and director of research and advisory services at Zweig Group. He can be reached at wswearingen@zweiggroup.com.

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