Exit and Growth Strategies for Middle Market Businesses

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Construction & Engineering Sector | M&A News

By Jeff Johnson | Feb 15, 2017

construction & engineeringNew US infrastructure projects such as repaving roads, shoring up bridges, and expanding busy highways with toll roads – a key source of demand for contractors – are predicted to rise in value in 2017 compared to the year before, according to Dodge Data & Analytics. The value of new public works construction & engineering projects, which include highway, street, and bridge construction as well as natural gas and oil pipelines and environmental work, is expected to rise 6%. The forecast represents improvement over 2016, when the value of new public works projects fell by 3% year over year. Demand is being driven in part by highway and bridge work funded by the new federal transportation bill.

New US regulations make it easier for companies that construct highways, streets, and bridges to begin or expand their use of drones. The FAA in mid-2016 issued commercial drone regulations that allow construction companies to begin using drones within days, rather than weeks or months. The infrastructure sector, along with the engineering & construction sector, leads in the number of exemption applications since the FAA began granting exceptions to its ban on the commercial use of drones. According to the Association for Unmanned Vehicle Systems International, nearly 40% of FAA-approved exemptions so far have come from these sectors.

Industry Indicators

  • The value of US nonresidential construction spending, a demand indicator for builders, rose 4.1% year-to-date in November 2016 compared to the same period in 2015.
  • US steel mill product prices, an indicator of commodity steel product costs used in construction, rose 8.7% in December 2016 compared to the same month in 2015.
  • The spot price of crude oil, which affects highway construction costs for asphalt, bituminous concrete, plastic pipe products, and for running equipment fleets, rose 50.3% in the week ending January 13, 2017, compared to the same week in 2016.

Posted by Jeff Johnson.

Read the Entire Engineering & Construction M&A 1st Quarter Newsletter Here

M&A News | Construction and Engineering Sector

By Jeff Johnson | Oct 20, 2016

Construction and Engineering SectorM&A activity in the Construction and Engineering Sector for North American based target companies in the Engineering & Construction sector for Q3 2016 included 63 closed deals, according to data published by industry data tracker FactSetThe average transaction value was $383 million.

Nonresidential construction and heavy engineering activity continued along an upward path during the quarter and funding for government infrastructure projects continues to be strong.

As demand for new homes rises, builders nationwide are struggling to find workers at all levels, according to the National Association of Home Builders. The association estimates that 200,000 US construction jobs are unfilled, 81% more than just two years ago. Some states, including Arizona, California, Georgia, and Missouri, are seeing 20% fewer people working in construction than at the market peak, according to the Associated General Contractors of America. The ratio of construction job openings to hiring, a measurement maintained by the Department of Labor, is at its highest level since 2007. In the meantime, the persistent lack of skilled trades has spurred companies to increase pay for hourly workers, ramp up in-house training, and add more overtime hours.

Industry Indicators

  • The value of US nonresidential construction spending, a demand indicator for builders, rose 5.1% year-to-date in July 2016 compared to the same period in 2015.
  • US steel mill product prices, an indicator of commodity steel product costs used in construction, rose 0.3% in August 2016 compared to the same month in 2015.

Posted by Jeff Johnson.

Read the Entire Engineering & Construction 4th Quarter Newsletter Here

M&A Trends | Engineering & Construction Industry

By Jeff Johnson | Aug 25, 2016

Engineering & construction industryEngineering & Construction industry companies reliant on business from energy producers may consider shifting their bidding efforts to other sectors. While 44 US states and the District of Columbia added construction jobs between March 2015 and March 2016, five energy-producing states logged construction employment declines, according to Associated General Contractors of America. Job gains were concentrated in California, Florida, New York, and Massachusetts, states that altogether added 100,400 construction jobs year-over-year. Two of the nation’s smallest states, Hawaii and Rhode Island, saw the highest percentage increases in new construction jobs. Due to declining prices for coal, oil, and other fuels, demand for construction is waning in states that rely on energy extraction for economic stability. North Dakota and Alaska, big producers of coal and natural gas, suffered the highest percentage of construction job losses during the year, along with Wyoming, Kansas, and West Virginia.

Engineering services firms that specialize in infrastructure projects should anticipate rising requests to bid on tunneling projects as more big cities turn to underground development. Creating demand for specialized engineering services, more cities worldwide are extending their reach underground rather than building up, thanks to new technologies, analytical tools, and materials. Urban centers are tunneling at a record pace, according to The Wall Street Journal, as subterranean development has grown highly technical and surprisingly less expensive. Digging manually can cost nearly $1 million per foot as compared to about $19,000 per foot using a giant boring machine.

Industry Indicators 

  • The value of US nonresidential construction spending, an indicator of the health of the construction market, rose 7.1% year-to-date in May 2016 compared to the same period in 2015.
  • The value of US residential construction spending, an indicator of the health of the construction market, rose 9.8% year-to-date in May 2016 compared to the same period in 2015.
  • US steel mill product prices, an indicator of commodity steel product costs used in construction, fell 4.6% in June 2016 compared to the same month in 2015.

Posted by Jeff Johnson.

Read the Entire Engineering and Construction M&A 3rd Quarter Newsletter Here

Engineering & Construction Industry M&A Trends

By Jeff Johnson | May 19, 2016

engineering & constructionOne of the largest transaction announcements in the sector during Q1 was in the engineering space on March 29 when design firm Stantec (Edmonton, Alberta, Canada) entered into a definitive merger agreement to acquire MWH Global (Broomfield, CO), a 6,800-person engineering, consulting and construction management firm focused on water and natural resources for built infrastructure and the environment. The transaction is valued at approximately US$795 million or a multiple of approximately 7.3x adjusted 2015 EBITDA.

As more project owners require contractors to use certain technologies, construction companies of all sizes are now incorporating the Building Information Modeling (BIM) process into their implementations and more widely adopting emerging technologies such as 3D laser scanning. No longer limited to major companies, use of BIM is becoming a necessity for smaller firms in enhancing a project’s consistency and accuracy and speeding up the process of document generation. Additionally, owners primarily benefit from and capitalize on data that’s captured through BIM. Engineering & construction companies that use the modeling process can expect improved collaboration and coordination, as well, among a project’s stakeholders. Adoption of 3D laser scanning is also expanding. The emerging technology makes measurements more precise than conventional methods and isolates potential problems more clearly for client discussions. Laser scans produce a digital reproduction of objects and consist of millions of data points that are put into a BIM. Use of laser technology in construction projects is expected to grow for several years. Indeed, the global 3D laser scanning market is forecast to expand from an estimated $2.06 billion back in 2013 to $4.08 billion by 2018, according to industry research group MarketsandMarkets.

  • The value of US nonresidential construction spending, an indicator of the health of the construction market, rose 11.1% year-to-date in February 2016 compared to the same period in 2015.
  • The value of US residential construction spending, an indicator of the health of the construction market, rose 11.4% year-to-date in February 2016 compared to the same period in 2015.

Posted by Jeff Johnson.

Read the Entire Engineering & Construction M&A 2nd Quarter Newsletter Here

The Market is Peaking and the Window is Closing

By Jeff Johnson | Mar 02, 2016

The Market is Peaking and the Window is ClosingAccording to GF Data Resources LLC, which collects transactional data from over 200 private equity groups (PEGs), the average lower middle market EBITDA multiple paid was 9.1x in 2015, which is up 16.6% over 2014.  GF Data defines the lower middle market as companies with values between $100M to $250M.  These multiples are some of the highest historical multiples paid for lower middle market companies.  When analyzing the entire market, PEGs paid an average of 10.3x EBITDA for companies in 2015, this exceeded the 9.7x they paid in 2007.   These stratospheric multiples make it very difficult for PEGs to show an above average return on investments to their limited partners.  So to achieve good returns, PEGs have relied on the debt markets to provide lots of cheap capital and as a result, higher leverage is used to close transactions.

With interest rates increasing, albeit slowly, there is no room for M&A multiples to continue their expansion.  GF Data sees multiples flattening in 2016; however, with the amount of dry powder in the market no one expects deal flow to slow.  If multiples decline slightly, GF Data believes PEGs will be more active as they need to put their committed capital to work. Read more »

M&A News – Engineering & Construction

By Jeff Johnson | Jan 28, 2016

M&A News Construction & EngineeringIndustry Update – Engineering & Construction

Larger buyers are continually seeking smaller acquisitions of companies with specific capabilities to provide greater services to the market. This is especially true in the area of infrastructure based engineering & construction with a focus on rail and transportation.

A larger percentage of US construction firms are paying their bills sooner and receiving better credit ratings, according to The Wall Street Journal. Weather woes and shortages of labor or materials often contribute to later bill payments by companies in the construction industry than by companies in other industries. But that is changing, according to a Creditsafe study that compared data generated between July 2014 and July 2015. US construction companies paid their bills 9.5 days past due on average, compared to an average of 11.5 days past due the previous year. The business-credit company also found that roughly 250,000 construction firms, or 6%, are no longer considered to be high-credit risks as compared to a year earlier. The Associated General Contractors of America, whose members focus primarily on commercial projects, attributes the credit upswing to steadily growing demand for construction services nationwide. Also helping to improve the financial health of construction companies are double-digit increases in home-construction starts and high US construction employment.

  • The value of US nonresidential construction spending, an indicator of the health of the construction market, rose 9.3% year-to-date in November 2015 compared to the same period in 2014.
  • The value of US residential construction spending, an indicator of the health of the construction market, rose 13.1% year-to-date in November 2015 compared to the same period in 2014.

Posted by Jeff Johnson.

Read the Entire Engineering & Construction M&A 1st Quarter Newsletter Here

Engineering & Construction Industry News

By Jeff Johnson | Oct 15, 2015

Hard HatAs with other industries the engineering & construction space is continuing to evolve with technology. This trend has had an impact on M&A and technology companies look to get a foothold in the space. As an example, Bentley Systems, Incorporated announced in March that it had acquired the business of Oakland, California based EADOC, LLC, a provider of construction management cloud services. Bentley said that this addition to its MANAGEservices (cloud services) offerings helps construction managers at engineering/construction management firms and infrastructure owner organizations with capital projects to reduce risk and staff hours, improve information quality, and provide owners with real-time visibility into costs. EADOC allows facility owners to increase return on investment through faster project completions, easily monitor project financial performance, and maintain detailed construction records without administrative staff.

US Construction Spending Hits New Post-Recession Peak, US construction spending has hit a new high. Construction spending nationwide rose 0.8% in May to a seasonally adjusted annual rate of $1.036 trillion. The welcome bump represents the highest level since October 2008, according to the Commerce Department. Spending broke the $1 trillion mark in March 2015. Reaching the new peak was possible because of private construction spending, the highest since July 2008. The latest milestone can be attributed to spending on private nonresidential building, which inched up 1.5% to $393 billion, as well as manufacturing spending during the past year. Looking at the latest figures, some economists also anticipate an increase in activity from homebuilders that should help boost the labor market and the overall economy.

Read the Entire Engineering and Construction M&A 4th Quarter Newsletter Here

Preparing For An Exit – Part 2

By Jeff Johnson | Jul 21, 2015

Exit photoThis post is the second of two parts discussing Preparing for an Exit and making sure that your Company is worth what it should be.  You can review Part 1 here.

Valuation Drivers:

In Formula 3 (EV=Adjusted EBITDA ×5) there two terms – the number five and Adjusted EBITDA.  The following discussion provides guidance to positively affect both.  Some of the items are easily addressed while others cannot be fixed.  We believe that it is our job as investment bankers to help you recognize ways to improve value and present your company to the market in the best possible light.

Impacting the multiplier

Why do some companies receive a 7x multiplier instead of a 5x or 4x multiplier?  The answers typically revolve around risk – the lower the risk, the higher the multiple.  For example, if Verizon Wireless was in play, a potential buyer knows that it has long-term contracts with recurring revenue.  Additionally, a buyer knows that every month Verizon’s customers pay their mobile phone bill, and they know the historic net customer gain/loss per month.  These specifics are very attractive to a buyer as it creates a clear picture of the expected revenue over the next couple of years.  Additionally, no single customer accounts for a significant percentage of revenue.  These factors greatly reduce a buyer’s risk; therefore, the buyer is willing to pay up.  The following are some concepts that can increase the EV multiple for a company – it is not all-inclusive, but touches on those with the greatest impact: Read more »

Engineering and Construction M&A News

By Jeff Johnson | Jul 16, 2015

Construction and engineeringConsolidation in the crowded mid-sized engineering and construction segment is inevitable as smaller companies look to compete with their larger counterparts on larger, more complex projects and build-out capabilities. The industry is continuing on a path toward full-service integration and mid-size firms have to increase capabilities to compete.

Commercial and heavy construction contractors may see more opportunities to bid on projects in the southern US in the second half of 2015. Several southern US states with growing populations and rejuvenated economies are expected to serve as hotbeds of activity for the construction sector, according to Associated Builders and Contractors. Metropolitan areas like Houston, Dallas, Oklahoma City and Atlanta have experienced strong economic turnarounds since the late-2000s recession. Many southern states are logging rapid population growth, a leading indicator for demand in the industry, and seeing gains in both residential and commercial construction. As an example, Louisiana has received significant industrial investment, bolstered by the energy business, rebounding residential real estate, and the widening of the Panama Canal.

Construction firms stand to gain business as Canadian infrastructure projects, particularly work on public transit in and around its largest urban areas, and receive funding through a newly approved federal budget. A Public Transit Fund, recently rolled out as part of a new federal budget, offers a permanent source of funding for Canadian infrastructure projects that aim to alleviate problematic congestion across many of the country’s largest cities. According to the Canadian Construction Association, which represents more than 20,000 member firms, the transit fund allows municipalities to proceed with long-term public transit planning. Available in 2017, the allocated funding is intended for public-private partnerships and includes $750 million doled out over two years with $1 billion a year thereafter. The budget also maintains a $53-billion program that extends through 2024 to enhance provincial and municipal infrastructure.

Posted by Jeff Johnson.

Read the Entire Engineering and Construction M&A 3rd Quarter Newsletter Here

Preparing For An Exit – Part 1

By Jeff Johnson | Jul 14, 2015

Preparing for an ExitIs your Company worth what it should be?

When we meet with business owners, we always find it interesting to hear what they think their company is worth.  We have a slide in our pitch book that has two words on it – “EXPECTATION” and “MOTIVATION.”  This slide always generates interesting conversation.  Often the owner has an inflated expectation of his company’s worth and when asked how they came up with that value, the response has nothing to do with the company’s operations but what the owner needs for retirement.  As such, we should probably add a third word to the slide – “REALITY!”  We thought it would be germane to discuss three things: 1) how to value your company to determine if that amount is sufficient for you to retire on, 2) what drives value, so you can take actions now to increase your value, and 3) when is the best time to sell a privately held company.  We might be biting off too much, so for the blog post we are breaking this into two parts:  1) how to value your company and 2) how to increase the value of your company and the timing issue.  Is it time to sell?


When valuing your company, there is only one value that truly matters: the one someone will pay you for your company. You can hire the best valuation firm in the world to derive what they think your company is worth, but that valuation is not worth the paper it is printed on until a buyer makes a genuine offer at that value. We are not saying that a formal valuation is a waste of time. There are numerous legal reasons that effectively mandate a company to hire a third party firm to perform a valuation. However, the valuation does not determine the value of the company – the market does. Until a willing buyer and willing seller agree to a price, fair market value has not been achieved. Another nuance to understand is that when we discuss the value of a company, we are referring to Enterprise Value (“EV”). EV is not the equity value that the owner gets to pocket upon the sale of his company. EV is the total value of the going concern and includes a company’s debt and cash. Formula 1 below calculates EV and after a little manipulation, Formula 2 solves for Market Equity (“ME”). Read more »