The Value of a Business: Zweig Group’s 2023 Valuation Report of AEC Firms 

By Will Swearingen

Zweig Group recently released the 2023 Valuation Report of AEC Firms, an annual publication administered by Zweig Group for more than 30 years. 

When it comes to estimating the value of a business enterprise, it is important to understand exactly what is being valued and for what purpose.  Without an established market in which a firm’s shares are actively traded, an appraiser can only estimate the market value through the application of pertinent measures and indicators of value from relevant data.  The compilation of data contained in this report is intended to provide benchmarks and metrics that allow firms to see how their own value ratios compare to industry norms.  

The median firm in the sample had 53 FTE, six owners, book value of $2.4 million, NSR of $7.6 million, $900,000 pre-bonus profit, EBITDA of $1.1 million, and $6.7 million of backlog.

The report contains six different value ratios (value vs. FTE count, net service revenue (NSR), EBITDA, pre-tax, pre-bonus profit, backlog, and book value), comprising Zweig Group’s Z-Value formulas. Four different values (Z1, Z2, Z3, Z4) are calculated based on the reason for the valuation. For example, the Z3 formula is determined by valuations that were done explicitly for internal ownership transitions. Each Z-Value represents a different cross section of the survey sample, and indicates value based on different circumstances. 

Zweig Group looks back on 10-years of valuation data to capture trends, consistency, and variability in these metrics. This most recent report revealed that over the past decade, value/FTE showed the greatest degree of change from year to year. This metric continues to increase at a steady pace (roughly 4.4 percent per year) as inflation and cost of living increases drive prices up. For similar reasons, value/NSR, generally a more stable metric, showed an average year-over-year increase of 1.2 percent. Over the 10-year period, value/EBITDA has historically shown 0 percent average change, however it rose to show an average 1 percent per year increase as we included data from 2022. This indicates we’re in a period of increasing EBITDA multiples over the last few years.

EBITDA is often cited as the gold standard metric for value determination as it represents cash flow through the business. Larger firms are generally valued higher from a value to EBITDA ratio standpoint than smaller firms, because there is greater confidence in the underlying growth of their cash flow. For most firms, as they mature and grow, the relative value of the firm also grows. 

Zweig Group’s 2023 valuation data indicate that most metrics followed their historical patterns of slight year-over-year increases since 2016. For EBITDA multiples, this is the first year we saw the previous high in 2007 get eclipsed. The only metric that continued to buck the upward trend was the equity value/book value metric. Historically firms have carried about 15 percent of their total assets in cash, but over the last couple of years, we have seen firms hold around 28 percent of their total assets in cash which has resulted in higher book values, driving this metric down.

Valuations conducted for the purpose of a potential or actual acquisition yielded  values that were nearly a 40 percent premium compared to values that were developed for minority level internal transactions. We saw an increase in the number of formal valuations submitted with more than 50 percent of the sample representing valuations done by an appraisal and not a formula. The increase in ownership transition activity across the industry has prompted more firms to request a third-party, independent appraisal as they prepare for a transaction. For internal share transfers, the median minority level discount was 16 percent.

To learn more about the 2023 Valuation Report of AEC Firms, visit this link or contact research@zweiggroup.com. 

Will Swearingen is principal and director of Ownership Transition at Zweig Group. He can be reached at swearingen@zweiggroup.com.