TZL 1533.5 special (web)

April 19, 2024, Special Issue WWW.ZWEIGGROUP.COM

TRENDLINES

Severance packages

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What it means to be an entrepreneur and run a smaller AEC firm in today’s competitive environment. An evolving landscape

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Median

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According to Zweig Group’s 2024 Principals, Partners & Owners Report , there has been a decrease in the median and mean number of weeks specified, from 14 to 8 weeks and 21 to 15 weeks, respectively. This trend reflects a strategic response to economic pressures and changing labor market conditions, highlighting the need for firms to manage costs and remain competitive. Participate in a survey and save 50 percent on the final or pre- publication price of any Zweig Group research publication. 2023 2024

A sk any leader of a smaller AEC firm about the challenges they face in today’s climate and you’ll likely get an earful. From recruiting and retention challenges to feeling like they are constantly being stalked by larger serial acquiring firms, sometimes it’s not easy to stay focused on the aspects of the business that bring joy. For the purposes of defining a smaller firm in this article, we’ll focus on firms with around 75 full-time employees (FTEs) or fewer and/or $18 million or less in gross revenues. Running one of these smaller AEC firms can have many benefits, both professionally and personally, including: 1. Flexibility. Not only do you have more control over your work- life balance, you are also more flexible inside the firm to make adjustments and adapt to changes in the marketplace. Additionally, the decision-making process in small firms can be faster as there are fewer layers of bureaucracy. This agility can also be advantageous in responding to staff and client needs. 2. Stronger financial performance. Firms in this data set tend to perform better than their larger peers in profitability (pre-tax, pre- bonus on NSR median 16.4 percent versus 15.5 percent for all other firms), return on owner’s equity (pre-tax, pre-bonus 47.3 percent versus 43.2 percent for all other firms), and annual growth rate (14.5 percent versus 12.6 percent for all other firms). 3. Specialization and niche markets. Smaller firms can specialize in niche markets or specific types of projects. Have you ever heard the phrase “there are riches in the niches”? Refer to the above stats as evidence. Specialization can create a competitive edge and attract clients seeking expertise in a particular area. While we could go on citing other advantages smaller firms can have, many of them also face some significant challenges, including: 1. Lower overheads. Operating costs for smaller firms are typically lower than those for larger firms (overhead pre-bonus 148 percent versus 164 percent for all other firms). This can result in higher profit margins and increased financial stability, however, there is a dark side to keeping overhead low. Many firms in this category need to start building necessary business infrastructure to continue growth and struggle to do so as overhead costs are seen as bad. This is not true. Leaders in this challenging phase must strategically decide

Chad Clinehens, P.E.

FIRM INDEX Atwell........................................................................... 10

BEI Engineering Group, LLC.......................10

Mead Gilman & Associates.........................10

Summit Engineering........................................10

Ware Malcomb.......................................................6

MORE ARTICLES n YING LIU: Your plan isn’t strategic Page 3 n MARK ZWEIG: Entrepreneurial vs. small business thinking Page 5 n LUKE CAROTHERS: Kindling for growth Page 7 n TRACEY EAVES: Your own worst enemy Page 9

See CHAD CLINEHENS, page 2

THE VOICE OF REASON FOR THE AEC INDUSTRY

Chad Clinehens | Publisher cclinehens@zweiggroup.com Sara Parkman | Senior Editor sparkman@zweiggroup.com Tel: 800-466-6275 Email: info@zweiggroup.com Online: zweiggroup.com/blogs/ news

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2. Invest in the business. The pressure to invest in the business is especially strong in smaller firms and startups, but for those in the 50-75 FTE range, some need big leaps to maintain a competitive edge. If you don’t invest in the right people, it can harm your firm and create even more challenges for you to manage. Invest more in planning. Have a strategy for growth, ownership transition, and technology. If you need some high-level leadership/ management help, consider fractional C-suite positions before committing to hiring or promoting into full-time positions. 3. Drive efficiency. With the talent crunch, efficiency is more important than ever. To approach this, think beyond recruiting and retention of people. Small firms are probably in the best position to take advantage of evolving technology and advancements around artificial intelligence. Every project and every phase, down to the task, can be examined to find where efficiencies can be gained. Fractions of a percent on people’s time can make the difference. Cut through the hype and fear around AI and look for tools that can speed up processes or repetitive tasks that can free up staff to focus on design and client service. AEC firms of fewer than 100 staff stand to gain the greatest competitive advantage with AI. Could it be the great equalizer for small and large firms? The incredibly diverse business climate for small and large firms and the rapid advancements in AI are why we are putting more of a focus on this sector of the industry in 2024. Our inaugural AEC Small Business & Entrepreneurship Forum in Atlanta on May 21 will bring the greatest business insights and strategies for the firms we focused on in this article. Additionally, it is strategically positioned next to the AI & AEC Tech Summit from May 22-23 in the same location. With an incredible lineup of industry experts, we hope these two events will elevate the industry as we give some special focus on these areas. If you are interested in learning more, click here. Just two-and-a-half days could make a huge difference for you and your firm! Chad Clinehens, P.E. is Zweig Group’s president and CEO. Contact him at cclinehens@zweiggroup.com.

CHAD CLINEHENS, from page 1

how to start making critical business investments to continue growth. Not growing is not an option, unless a slow death is your preferred route. 2. Firm valuation. Smaller firms also tend to have higher valuation multiples. Firms in this category post a $98,900 valuation multiple per full-time employee versus $89,909 for all other firms. Driving value should be the top objective of firm owners, however, like everything, there are tradeoffs. As values increase, it can be more challenging to internally transition ownership as it becomes more expensive. If the firm does not have at least a 20-year financial model of future transitions, many can find themselves in a situation where there is not enough time or funds to keep the firm owned internally. Thus, many smaller firms tend to be targets for larger acquiring firms or private equity groups looking for firms that don’t have other options. 3. Recruiting and retention. This is one of the greatest challenges for a lot of smaller firms right now. Disparities in compensation and the immense resources of larger firms is creating an extremely lopsided competitive market. The challenges in finding good people have never been greater and small firms are feeling it. Running a smaller AEC firm and being an entrepreneur is more challenging than ever as the race for talent has created new and unbalanced dynamics between large and small firms. As outlined in this article, the rewards are significant and the opportunity to drive change and improve the competitive position of these firms is also greater than ever. Here are a few things to keep in focus as you navigate today’s business climate in our industry: 1. Focus on growth while maintaining agility and flexibility. Growth is essential to every business. “Grow or die” is a real thing, especially today. Growth is a critical strategy for recruiting and retaining staff. Remember, opportunities for career growth and development are important to all of your staff. Have a strategic plan that outlines a revenue growth plan, recruiting and retention plan, and a bureaucracy-free framework to accomplish goals while maintaining agility and flexibility.

AEC SMALL BUSINESS & ENTREPRENEURSHIP FORUM + AI & AEC TECHNOLOGY SUMMIT The 2024 AEC Small Business & Entrepreneurship Forum is connects leaders of small firms to discuss the unique challenges of managing and growing a small business in the AEC industry. The one-day event will comprise keynotes, panel discussions, roundtables, and breakout sessions, all focused on the needs of small businesses. Stay an additional day-and-a-half for the AI & AEC Technology Summit. This event provides valuable insights into technological developments on the technical and business side of running an AEC firm of any size. Click here to learn more!

THE ZWEIG LETTER APRIL 19, 2024, SPECIAL ISSUE

OPINION

Your plan isn’t strategic

D espite good intentions, one of the most common pitfalls in strategic planning is the lack or absence of growth strategies, let alone being intentional and strategic about them. The hidden, yet telling, signs that your AEC firm’s plan is neither strategic nor growth- driven.

Growth strategies are like part and parcel of a strategic plan in which the ultimate value and impacts are driven by a firm’s ability to both clearly articulate and robustly execute its growth strategies; however, the growth imperatives could also be hazardous to strategy if they do not result in superior profitability and/or ultimately undermine competitive advantage. Deciding on what/where/how to grow requires making choices and trade-offs in competing – to choose what not to do; strategic choices must be fitting enough to achieve growth goals (quantitative and qualitative), and growth initiatives must preserve and reinforce strategic positioning. That said, what are some hidden, yet telling, signs that your firm’s plan is neither strategic nor growth-driven? ■ You have a strategic plan, but “something” is missing. Many CEOs of AEC firms would agree that a growth-driven mindset is a non- negotiable attribute and attitude in defining who should serve on their “first team” to move their companies forward, but not too many top leaders exemplify that same growth mindset

when it comes to crafting and executing their external growth strategies for their firms, resulting in a strategic plan being too internally-focused with senior leaders paying less or no attention to external strategic issues. As such, it is almost always too late – especially for growth-driven leaders and firms – to start developing commercial strategies after operational and/or financial goals are established. The lack or absence of focus on external opportunities often turns out to be a pain point for the CEO (as well as some senior leaders) and keeps them awake at night because their gut feeling is telling them “something” is missing from their current plan – and these feelings are certainly diagnostic due to various external factors including market indicators, competitive landscape, client centricity experience, and/ or stakeholder expectations. Quick tip: if you’ve dabbled in strategic planning before, you may immediately think about undertaking a SWOT

Ying Liu, MBA, LEED AP BD+C

See YING LIU , page 4

THE ZWEIG LETTER APRIL 19, 2024, SPECIAL ISSUE

“Why are we working on what we are working on?” “Are we moving the needle in our success metrics or are we working on it because it’s the status quo?” No doubt improving operational effectiveness is a necessary part of management, but it is not strategy; firms that have been confusing the two have come to realize that operational effectiveness cannot define the overall growth direction or drive strategic decisions. In fact, many firm leaders have been frustrated by their inability to translate operational gains into sustainable profitability or breakthrough results, without a well-defined growth strategy in the first place. ■ Your TOP talent is drifting and feels aimless. Note how the word “TOP” is capitalized to differentiate from an average performer. It is almost a cliché to say that recruiting and retention has been one of the biggest challenges in the AEC industry – allow me to take a second to introduce Zweig Group’s ElevateHER® program, a commitment to help recruit, retain, and engage the best minds in the industry. ElevateHER® brings AEC professionals together, from across the country, disciplines, and org charts, to join forces to develop and disseminate actionable plans that aim to solve the recruitment and retention crisis in the industry via the lenses of diversity, equity, and inclusion. From a strategic standpoint, securing top talent can be a huge differentiator in positively impacting a firm’s growth trajectory. Top talent is wired to be dissatisfied with a “good enough” approach as they often possess a unique set of skills and perspectives to push the boundaries of conventional ideas to drive unprecedented growth. In a strategic plan, developing a compelling people and culture strategy is a must, but if the plan does not help satiate the needs and wants of your top talent at all levels of the organization to inspire them to go that extra mile, you are running the risk of losing your star performers sooner than expected as they are often the first ones to be the ambassadors of a truly strategic growth plan (or if there is a lack thereof, they are also the first ones to notice it). Overall, strategy is the context of why you are doing what you are doing. What differentiates the best strategic growth plans from the rest really comes down to the firm’s genuine willingness to support, challenge and collaborate with each other in making choices and tradeoffs in investing, competing, and winning – the essential definition of a compelling strategy. The work required to effectively craft and execute a firm’s growth strategy is no simple task; it is no surprise that many firms try to oversimplify it, confuse it with operational efficiency, or dilute it to be reactive to market demands. Undeniably, the challenge of developing or reestablishing a clear growth strategy is often primarily an organizational one and depends on leadership. Reach out to me if you need support or would like to chat further. Ying Liu, MBA, LEED AP BD+C, is a strategy advisor with Zweig Group. Contact her at yliu@zweiggroup.com.

YING LIU , from page 3

analysis – particularly the “opportunities” and “threats” buckets – as a potential solution to brainstorm and analyze external macro trends; better yet, there is a more helpful and relevant framework called PESTLE analysis to perform such exercises. More likely than not, that “something” includes the missed growth opportunities that could have helped them accelerate/maximize top-line revenues for their firms had they been more intentional and strategic about their commercial strategies (hence, a “growth plan” with external focus that helps refine and shape a firm’s operational and financial strategies, and not the other way around). “What differentiates the best strategic growth plans from the rest really comes down to the firm’s genuine willingness to support, challenge and collaborate with each other in making choices and tradeoffs in investing, competing, and winning – the essential definition of a compelling strategy.” ■ Your strategic plan is not really strategic but more of an operating plan. While it is important to ensure that formal mechanisms governing how employees get work done (structure, processes, systems, and incentives) are in place, these internal factors should serve as growth enablers to help fuel external growth opportunities, not just satisfy the core or improve the status quo. Many firms fail to distinguish operational effectiveness from strategy. While both are essential to superior performance, the two agendas are different. The operational agenda entails continuous improvements where there are no tradeoffs; operational leaders must demonstrate relentless efforts to achieve best practices through constant change and flexibility. In an operational review meeting, your team should be asking questions like: “What are we working on?” “Are we on target?” “How do we ensure everyone is on the same page on the status of a project or initiative?” On the other hand, a strategic agenda is about defining a unique position and making clear trade-offs to build or enhance your firm’s sustainable competitive advantage; strategic leaders must demonstrate constant discipline, strategic continuity, and clear communication. In a strategic plan review meeting, your team should be asking questions like: “Are we working on the right stuff?”

THE ZWEIG LETTER APRIL 19, 2024, SPECIAL ISSUE

FROM THE FOUNDER

I f you have worked with as many AEC firm owners as I have (and Zweig Group has) over the past 40-plus years, the stark differences in how entrepreneurial firm owners think versus small business owners think would be very apparent. Entrepreneurial firms adapt better to a changing environment, are better places to work, and build significant value over time that can be harvested. Entrepreneurial vs. small business thinking

Entrepreneurial firms grow. They adapt better to a changing environment. They are better places to work. And they build significant value over time that can be harvested. Let me illustrate some of the specific differences below: says growth is required. Yes, profitability is important, but growth is where the value of the business and excitement is, and cannot be sacrificed or rationalized away. Small business thinking says profit is most important because it has an immediate effect on how much money the owners can extract from the business in the short-term. ■ Thinking about growth. Entrepreneurial thinking

Everyone should be a part of it and it should be something that actually guides daily decision- making. Progress toward goals is serious stuff. It’s not just an academic exercise that is done some years when there is time, and sits on a shelf when done like small business thinking requires. ■ Thinking about innovation. Entrepreneurial thinking says having “new” is a requirement and they are constantly trying to add new skills, services, and offerings. It requires constant experimentation and they insist that that actually happens. Small business thinking says “stick to your knitting” and don’t worry about pushing yourselves to evolve. ■ Thinking about people. Entrepreneurial thinking says you have to invest in your people. Low

Mark Zweig

Thinking about business planning. Entrepreneurial thinking says planning is crucial.

■

See MARK ZWEIG , page 6

THE ZWEIG LETTER APRIL 19, 2024, SPECIAL ISSUE

ON THE MOVE WARE MALCOMB

NORTHEAST

and to continue Ware Malcomb’s strong relationship with CREW Network,” Godun said. “Since its establishment in 1989, CREW has provided a valuable platform for women in the commercial real estate industry to exchange best practices, foster new connections and advance their professional growth.” Godun joined Ware Malcomb in 2015, and recently was named director, sustainability, to develop and lead the firm’s sustainability-focused service offerings. She is a registered architect in the states of New York and New Jersey, a LEED and WELL Accredited Professional and a Fitwel Ambassador, dedicated to advancing the knowledge and practice of wellness and sustainable design in the built environment. She has worked on numerous sustainable projects and participated at both the national and local levels of the US Green Building Council, Godun received bachelor’s degrees in architecture and fine arts from the Rhode Island School of Design. Van recently started as the President of the AIA Architects League of Northern New Jersey, an AIA component covering Northern New Jersey. He has served on

the board of trustees for the past four years with more than 600 members. As President of the Architects League of Northern New Jersey, he will be involved in overseeing of the chapter, which includes public relations, programs/ events, scholarships, education of associate members towards licensure, communications, legislation and serving as a liaison between the state and national efforts. Additionally, Van will be focused on recruiting, member engagement and implementing new initiatives for the year. “I am honored to have been chosen as President of the AIA Architects League and to return as a section trustee for AIA New Jersey,” Van said. “It’s a privilege to carry on the legacy of this distinguished organization. This role offers me the opportunity to contribute to its rich 96-year legacy and it also presents a chance to enhance Ware Malcomb’s visibility within the AIA community and the broader industry.” Van joined Ware Malcomb in 2021 as a senior project manager and was promoted to regional operations manager.

LEADERS INDUSTRY ASSOCIATION PRESIDENCY ROLES Ware Malcomb, an award-winning international design firm, announced two leaders based in the firm’s Newark office have been sworn into presidency roles of local industry associations. Erica Godun, director, sustainability, is president of the New Jersey Chapter of the Commercial Real Estate Women Network for the 2024 calendar year, and Sean Van, regional operations manager, is the president of the AIA Architects League of Northern New Jersey. SECURE Godun has been an active volunteer and board member at CREW NJ for eight years. Ware Malcomb professionals have been actively involved with CREW Network for more than 20 years and, in that time, several firm leaders have served on CREW chapter committees and boards. The firm regularly sponsors the association at the national level as well as more than a dozen regional CREW chapters and events. “It is a great personal honor to work with my colleagues on the board of directors

be on the table as a possibility, even if they aren’t flush with cash to make a deal. They have a strategic plan and know how they want to grow, but are also creative and responsive to opportunities that present themselves (opportunistic). Small business thinking says there’s no point to consider M&A – it’s only for the “big firms.” Plus, “Who has time for that?” ■ Thinking about performance metrics. Entrepreneurial thinking says that firm performance metrics are like gauges on a machine. There are many to be monitored and they can help management predict what is going to happen before it actually does. They also believe the more eyes there are on those gauges the more likely things won’t go out of control. Small business thinking says the only metrics that are important are utilization and cash basis P&L, and the owners are the only ones who need to see those “gauges.” Everyone else should keep their heads down and work. Am I making my point here? There really are some fundamental differences in entrepreneurial thinking and small business thinking. And that “thinking” makes a huge difference in what ultimately happens with your business. Mark Zweig is Zweig Group’s chairman and founder. Contact him at mzweig@zweiggroup.com.

MARK ZWEIG , from page 5

turnover and relationships are crucial to the company’s long-term success. People are valued and not treated as if they can be easily replaced because they cannot. Because people are so important, entrepreneurial thinking says some employees could actually make more money than some principals. Small business thinking says people need to be good order-takers. They should do whatever they are told and their purpose is to free up the time of the principals. They should always earn less than the owners. And if they don’t like something, “too bad.“ They can find a new job. ■ Thinking about marketing. Entrepreneurial thinking says marketing is crucial to the company’s success. It is an investment in the firm and not an expense to be minimized. It has to be funded good times and bad, and good marketing can make a huge difference in the firm’s long-term performance. Small business thinking says marketing should only be funded if the company “can afford it.” The real (but probably unspoken belief) is that marketing doesn’t really do much but you are supposed to have it (so they do). But it is a cost to be minimized in any case and less important than design and production. ■ Thinking about mergers and acquisitions. Entrepreneurial thinking says mergers and acquisitions should always

THE ZWEIG LETTER APRIL 19, 2024, SPECIAL ISSUE

OPINION

Kindling for growth

Zweig Group experts share their insights on the unique challenges and opportunities faced by small, entrepreneurial AEC firms.

M ore than five decades of experience in AEC industry leadership and expertise were on display during Zweig Group’s recent Fireside Chat Webinar. Using the format of a classic fireside chat, Mark Zweig, founder and chairman of Zweig Group, and Chad Clinehens, president and CEO of Zweig Group , explored topics and questions centered around the unique challenges and opportunities specific to small firms in the AEC industry. In anticipation of Zweig Group’s 2024 AEC Small Business & Entrepreneurship Forum , coming to Atlanta May 21, the pair discussed resources and opportunities that will help small, entrepreneurial firms navigate the complexities and challenges of the AEC industry.

Luke Carothers

The event’s moderator, Chad Coldiron, director of development and a principal at Zweig Group, set the stage for the discussion, outlining responses from small business owners within the AEC industry pointing toward the need for more tools and resources. Clinehens opened the discussion by pointing out that, within the wide-ranging AEC industry, there are a massive number of firms that could be considered small businesses. However, according to Clinehens, after discussing some of the challenges and opportunities specific to small businesses in the AEC industry at last year’s ElevateAEC Conference, he came to understand that the challenges associated with defining what it means to be a “small” firm or business stem from a lack of resources, which was part of the inspiration for Zweig Group’s AEC Small Business & Entrepreneurship Forum in May. Building on these

ideas, Zweig also spoke to the importance of firms understanding and being clear about their plan for the future. By clearly defining goals and strategies, Zweig believes small businesses are able to put themselves in a much better position to take advantage of opportunities – despite their size. Another headline topic during the conversation centered on the unique challenges small businesses in the AEC industry face – particularly when it comes to today’s hyper-competitive landscape. Zweig pointed out that, in this landscape, small firms can struggle to compete when it comes to resources such as working capital. However, facing these unique challenges, he again reiterated the importance of being clear about company goals for the future, including around firm

See LUKE CAROTHERS , page 8

THE ZWEIG LETTER APRIL 19, 2024, SPECIAL ISSUE

this line of thinking hampers a firm’s vision of growth. Instead of using excess capital to improve or expand the company, this mindset focuses on paying off significant debts as quickly as possible. Clinehens also said the return on investment per dollar is higher now than it has ever been, which he believes creates the perfect opportunity for capital investments in growth. Zweig extended this further, pointing to the fact that return on equity in the AEC industry is similarly at a historic high. In fact, return on owner’s equity – pre-tax, pre-bonus – for small firms within the AEC industry is currently at 47.3 percent compared to the rest of the industry at 43.2 percent. Under these conditions, both speakers were quick to point out the current opportunities for investment in long-term growth. Throughout the hour-long webinar, the pair covered topics ranging from recruitment and retention to the manager- producer dilemma and everything in between. One thread that binds the challenges and opportunities facing small firms in the AEC industry is the need for more discussion and connection. As the AEC industry continues to work toward solving the major challenges of the future, it is important that small firms understand that there is strength in numbers. By engaging other small businesses in conversation, we can work together to Elevate the Industry. Consider attending Zweig Group’s AEC Small Business & Entrepreneurship Forum to join the conversation about the unique opportunities and challenges associated with being a small firm in the AEC industry. Learn more here! Luke Carothers is Zweig Group’s senior content manager and editor for Civil+Structural Engineer Magazine . Contact him at lcarothers@zweiggroup.com.

LUKE CAROTHERS , from page 7

growth. Clinehens continued this thread, pointing out that this plays out in areas such as recruiting and retention where larger firms with more resources can afford to pay higher rates with a long-term goal in mind. According to both Zweig and Clinehens, small firms in the AEC industry need to think creatively to overcome these unique challenges, and they underscored the importance of talking with other small business owners to gain insight into potential solutions. Continuing the discussion about recruitment and retention, Zweig emphasized the importance of selling the benefits of working in a small business to potential employees. He pointed out that, oftentimes within larger firms, there is a tendency for new employees to get “pigeonholed.” On the other hand, the experience of working at a small firm can often be much more rewarding on a personal and professional level. By selling the benefits of working in small firms, such as being able to work on a wider variety of projects, these companies can better compete to recruit and retain future employees. To effectively sell the benefits of working in small firms, both speakers placed an emphasis on building culture. When it comes to building a company culture that effectively promotes growth as well as recruitment and retention, Clinehens emphasized the opportunity to be bold and clear. Particularly within smaller AEC firms, he pointed out that it’s significantly easier to be bold in terms of vision because you are only worried about getting a small group to buy into your vision. Both speakers shared a common sentiment that the AEC industry is more risk-averse than other industries, which Clinehens said plays out with a number of firms putting an oversized emphasis on being debt-free or low-debt. He said

THE ZWEIG LETTER APRIL 19, 2024, SPECIAL ISSUE

OPINION

Your own worst enemy

If you don’t identify and address your firm’s problems, you could increase the measure of risk while decreasing value.

T here is a four-letter word floating around out there that’s probably the first that comes to mind when someone is determining whether an investment is worthwhile. Guessed it yet? If you haven’t, then I’ll tell you: It’s risk.

Anyone with a pile of money looking to invest does not generally do so without first assessing the riskiness of an investment, the likelihood of receiving a return on that investment, and the level of risk present to determine how much return will be required. People usually think of big, publicly traded companies when investing, and do not put as much emphasis on returns when dealing with private companies. In many cases, people investing in closely-held firms tend to look at it more from the perspective of lifestyle than a formal investment. That is, they see the “returns” more along the lines of independence, setting one’s own schedule, and discretion with money management. When it comes to valuing private company shares, the valuation exercise requires the development of rates of return and firm owners should expect not just a return of investment, but a return on investment.

A majority of private company valuations are performed under the premise of fair market value as defined in IRS Revenue Ruling 59-60. This is the ruling most commonly prescribed as a guide for the valuation of closely-held companies and their securities – the price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both having reasonable knowledge of the relevant facts. Revenue Ruling 59-60 goes on to enumerate several factors for consideration, including the earning capacity of the business. Enter the income approach. The income approach to valuing a business uses a financial return stream to develop an indication

Tracey Eaves

See TRACEY EAVES , page 10

THE ZWEIG LETTER APRIL 19, 2024, SPECIAL ISSUE

TRANSACTIONS ATWELL CONTINUES GROWTH IN FLORIDA WITH ACQUISITION OF BANKS ENGINEERING, EXPANDING ENGINEERING, PLANNING, AND SURVEYING SERVICES Atwell has acquired BEI Engineering Group, LLC, doing business as Banks Engineering, a 90-person firm providing civil engineering, planning, and land surveying services. The acquisition of Banks Engineering continues to strengthen Atwell’s resources and capabilities in Florida, specifically in Fort Myers and Port Charlotte. The terms of the transaction were not disclosed. Banks Engineering has provided Florida with civil engineering, planning, and land surveying for more than 30 years. Founded in 1992, Banks Engineering has supported private sector work for a diverse range

of clients throughout the state of Florida. The firm provides professional expertise at every stage, from initial concept to project completion and beyond. “Banks is excited to join the Atwell family,” said Tom Lehnert, president of Banks Engineering. “Banks Engineering and Atwell share similar values, and the merger will allow us to expand our services to better meet the needs of our clients and provide new opportunities for all of our team members. We look forward to supporting Atwell’s growth in Florida and the Southeast Region.” “We’ve worked with the team members at Banks Engineering for years and have firsthand experience of their excellent work and commitment to clients,” said

Ron Waldrop, senior vice president at Atwell. “We have added the outstanding professionals at Banks Engineering to our company because we want to continue investing in this market for the benefit of our clients and the success of their projects.” Atwell has significantly expanded its geographic footprint, service offerings, and capabilities through organic growth and strategic acquisitions over the past few years. The acquisition of Banks Engineering follows Atwell’s most recent acquisitions of Summit Engineering, a civil engineering and land surveying firm in Heber City, Utah, and Mead Gilman & Associates, a land surveying firm located in Woodinville, Washington.

■ Competition. What are your strengths and weaknesses when compared with the competition? ■ Management quality and depth. Do you have depth in your bench or is there a heavy reliance on only a few top players? ■ Diversification. Are you diversified in size, geography and customer base? If your firm relies upon a handful of clients for most of its revenue, the upward impact on risk is substantial. To demonstrate the influence that a rate of return has on value, assume that a firm has net cash flow to equity of $500,000. That is the cash flow available to the shareholders which is free of working capital requirements and capital expenditures. Also assume that the rate we are using is inclusive of the company-specific risk premium and long-term growth has been accounted for.

TRACEY EAVES , from page 9

of value for the interest under consideration. In doing so, the appraiser must develop a discount rate that is the proxy required return for the hypothetical buyer. There is more than one technique for developing a discount rate, but I want to focus on the build-up methodology to demonstrate how the risk level present in a closely-held company can have an impact on value. A good rule to remember is a high level of risk equals a lower value and lower risk leads to higher values. In the build-up methodology, the discount rate is “built-up” from empirical financial risk components derived from the public markets. In today’s economy that rate is around 15 to 17 percent for net cash flow to equity, or slightly higher if the appraiser determines that a size premium rate from the smallest of the small companies is warranted. One additional component is necessary to account for the fact that your closely-held firm is likely much different than a company traded on an exchange. This last component is called the company-specific risk premium because it is specific to the subject business being valued. The specific company risk premium is of primary importance to you as a firm owner or principal because this is where the rubber meets the road in terms of driving firm value up or down. Take a minute to run down this list and ask yourself where you think you might stand: ■ Financial condition. How do you stack up against industry guidelines? When’s the last time any financial analysis has been done in your firm to determine performance levels such as liquidity, receivables collection, working capital, and debt burden, among others? ■ Asset risk. AEC firms have a significant amount of value wrapped up in intangible assets such as reputation and client base. Intangibles are high-risk assets that can erode quickly unless consistently nurtured. What are you doing to ensure and sustain a strong value for your firm’s goodwill?

Net cash flow to equity:

$500,000 $500,000 $500,000

Rate:

20%

23%

25%

Value indication:

$2,500,000 $2,174,000 $2,000,000

Based on the concluded rates, the spread in value indications is $500,000, or an entire year of cash flow! Now, I know that no one likes “leaving money on the table.” Spending some time understanding your firm’s risk drivers and addressing those on the high end of the scale could very well be time wisely spent. I am always pleased to talk with firm owners who are thinking ahead to an exit strategy and want to learn more about improving firm value. With time and sustained focus, problem areas of any firm can be corrected, and that should improve the measure of risk and increase value. Tracey Eaves, MBA, CBA, CVA, BCA, CMEA is a member of the valuation consulting team at Zweig Group. Contact her at teaves@zweiggroup.com.

THE ZWEIG LETTER APRIL 19, 2024, SPECIAL ISSUE

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