How to Prepare an Architectural Services Firm for Sale
Make sure your business secures a higher multiple by taking these steps now to increase the value.
Starting and growing a business takes years of planning, strategizing and forecasting but what many business owners do not realize is that selling your business takes just as much thought and effort. There are several factors that go into selling a business and as an entrepreneur, you know how important it is to be prepared. Industry conditions, financials, buyer demand, and economic climate are just a few of the elements that go into planning for the sale and if you are in the architectural services industry, these components are all currently aligning in your favor.
The architectural services industry was hit hard during the 2009 recession as this field is incredibly reliant on the housing market and construction. But according to Architecture & Design, the architectural services industry is coming back strong and is expected to grow rapidly over the next 5 years. Experts are predicting a 7% growth rate in 2016 and IBISWorld estimates revenues will exceed $7 billion by 2020. There are currently over 102,000 firms in the architectural services field and on average, successful firms are seeing profits as high as 21%! Competition is fierce, but opportunity is plentiful due to a decaying infrastructure and positive construction activity. Market segmentation is split about 60/40 between new architectural projects and renovations and as our government receives more pressure to renovate official buildings, the opportunities for architects are endless. With such growth potential and opportunity on the horizon for architects, why would anyone consider selling? While it may feel counter-intuitive, the best time to sell your business is when it is trending upwards and the industry is experiencing high growth.
If you think the time is right to consider selling your architectural services business, the first step is getting a valuation. To get an idea of how value is calculated for architectural services companies, we have included some formulas below. Please keep in mind that only a professional business broker can tell you the true value of your business and that these multiples vary by broker.
- 60% of annual sales + inventory
- 2.75-3.25 times SDE (cash flow)
Now that you understand how the valuation will be calculated, you can start preparing for the sale of your company. Contrary to most businesses, the past 3 years of financials will not carry as much weight with an architectural services firm; the value lies in the forecasted financials and backlog. We have valued several architectural services firms over the years and have compiled these tips to help you build your company to its full potential so that your valuation is right where you want it to be.
Due to the competition with larger firms, smaller to mid-sized firms are using M&A as a growth strategy. The benefits of using M&A to grow in the architectural services field is that by acquiring other firms, you are expanding your geographical reach, adding new services or specialties, and building a team. These are all things that intrigue buyers and build value. Many firms are working to widen their offerings and in doing so, are merging with engineering firms to create a one-stop shop that offers both design and engineering services (AE firms). M&A also allows businesses to build their team, which ultimately will lead to higher revenues as industry experts claim that architectural employees bring in over $173,000 each, per year (industry average). Using M&A should set your financials on a steep incline for a few years and show buyers that your business is easy for them to expand as well.
Goodwill is a major factor in the architectural services field, so it is important to build client relationships and a reputation that can transfer to the new owner. To do this, we recommend hiring a team of project managers or supervisors who will serve as the main customer liaison and forefront of all projects. Business owners should remain behind the scenes and manage the business as a whole, while trying not to get involved in lower-level activities. This may be a difficult transition but when it comes time to sell, you will thank yourself because now this goodwill will be transferrable. The reputation will no longer be based on owner. It will be based on the firm as a whole and clients will have great things to say about employees that are still with the company long after you have made your transition. In the architectural world, buyers will look for firms that do not showcase the owner as the face of the company so that it is easier for them to transition in and pick up where you left off.
Architecture has come a long way from hand-drawn blueprints, but in a sector that always seems to be changing, it’s important for businesses to have current, state of the art technology. Fortunately, there are several types of software that can help your firm be more successful, varying from CRM tools to intricate design software. The software you use will be taken into account during the valuation process, so you will want to make sure it is taken care of and current. If your firm is due for a software upgrade, check out the resource below, which lists some of the best software created for architects.
By updating your technology, your firm is not only able to run more efficiently and thus, make more money, but buyers will also be enticed by your up-to-date software and the price of your business will increase.
Build Your Team
One of the most valuable parts of a business is its team. No buyer wants to walk into a business where the team is disorganized or needs an overhaul. Start your sales process off right by building your team and getting everyone in sync. Growing a team all starts with hiring the right people. Identify the type of culture you have and set standards for your employees, then hire people who meet those standards and mesh well with the team. Take the time to invest in your employees individually and watch them grow and thrive. We also recommend designating “area experts” within your employees to strengthen your firm. By assigning your employees areas of expertise, everyone can contribute expert opinions in certain areas rather than having a bunch of “jacks of all trades”. Aligning these areas of expertise with your employee’s interests or backgrounds will only motivate them to learn more and invest in themselves. Take the time to build your team and you will have a robust culture with a powerful team of staff that any buyer would want to be a part of. Watch your revenues increase too!
Architecture offers many niche markets for businesses to take advantage of. If you are currently servicing niche markets such as extreme weather or environmentally-friendly designs for example, use this to market your business. Let’s use extreme weather design as an example. Forecasters are predicting a year of intense El Nino around most of the United States; if your firm provides extreme weather design services, make sure to include it on your website to get the word out. If you have a designated architect who specializes in this area, make sure to have them on the forefront of all bids that take extreme weather design into consideration. By establishing your specialties as a firm, you can better market your services and set your company apart from the rest. This will ultimately help you secure more projects, increase your sales and show buyers a stable stream of revenue coming in from niche markets.
If you have been thinking of planning your exit or just want to explore some succession options with a professional, the timing is right for the owner of an architectural services firm. 2016 is expected to be a great year for the architectural industry and if your financials area trending upwards, we recommend getting a professional valuation so you can establish your long-term goals and plans. Even if you are not ready to sell for a couple years, valuations are a priceless tool that all business owners can use to their advantage. When you are ready to take the next step, Viking Mergers & Acquisitions is here to assist. Let 2016 be the year you take your business to the next level. Call today for a no-cost, no-obligation valuation and take the first step to securing your future.