T R E N D L I N E S M a y 1 1 , 2 0 2 0 , I s s u e 1 3 4 4 W W W . T H E Z W E I G L E T T E R . C O M
Addressing questions about the impact of COVID-19 through the lens of the Great Recession. Look ahead by looking back
T he financial advisory team at Zweig Group has been gently pelted with questions from across the AEC industry over the last months regarding how the COVID-19 crisis compares and contrasts to the Great Recession. Even during the previous heights of AEC profitability and demand for services leading up to the last recession, the lowest-ranked reason for acquiring a firm – consistently – was adding staff. During those simpler times, we didn’t suffer the chronic shortage of talent in the AEC industry like we are facing today, or, at least, it wasn’t a primary driver for inorganic growth. In fact, the talent shortage didn’t start to become reflected in our data until 2016 as a driver of acquisitions. Fast forward, and the equation has completely shifted. The demographics entering COVID-19 will not have changed at its conclusion: 80 percent of AEC firm ownership is held by individuals age 50 or older, and the average age of a land surveyor is 60. There are several statistics about fewer graduates exiting A/E college programs that point to a continued limit of supply of talent over at least the medium term based on evolving visa limitations, curriculum challenges, and other topics best addressed at the higher education level. Without drawing a conclusion, suffice it to say that there is reason to be concerned that we may see another gap in our businesses at the entry level. While understandable that entry-level talent today isn’t a top concern, leaders are making decisions that will inevitably result in perpetuating the very same hole that – just a mere two months ago – certain CEOs I know by name swore never, ever to repeat: and in 10 years, please don’t be surprised that deciding not to hire out of the Class of 2020 causes a missing gap of 10-year experienced project managers. There ought to be other conversations around the scarcity of staff related to career development and training, as well as technology investments, but those are for another article. Once we see an increase in demand for services or at least a semblance of stability, the question that will be in front of us is how much talent will remain in our firms, and where does that place staff in the ranking of reasons to purchase a company? This gap at the middle tier of companies across the nation will likely influence ownership transition options in the next 10 years, or potentially – here’s my optimism – we may finally see AEC firms warming up to the concept of transitioning small percentages of ownership to people in their 40s. It seems – to me – that if you are deemed old enough to run for president of the United States, you might just have what it takes to buy 2 percent of your 30-person engineering firm.
In Zweig Group’s 2020 Principals, Partners & Owners Report of AEC Firms , we asked principals how they planned to sell their ownership interests, when the time came to do so. Would they sell it internally, externally, or for the highest price? When analyzing this question by firm growth rate, we noticed that principals in growing firms were more likely to sell their stock internally than stable or declining firms. The chart above shows the percent of respondents who plan to sell ownership internally. This seems to indicate that a healthy internal ownership transition program can promote growth, which in turn enhances overall firm value.
Jamie Claire Kiser
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F I R M I N D E X Daft-McCune-Walker, Inc......................12 LACO Associates..................................12 Miyamoto International..........................10 Pfluger Architects....................................2 Shield Environmental Associates.............6 Ware Malcomb......................................10 MO R E A R T I C L E S xz MARK ZWEIG: Don’t know what to do? Page 3 xz Approachable leadership: Mark Sweet Page 6 xz KIT MIYAMOTO: Leadership in action Page 9 xz LINDSAY YOUNG: What you can do with extra time Page 11
See JAMIE CLAIRE KISER, page 2
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