5
FROM THE FOUNDER
The urge to merge?
T here is a lot of talk about buying and selling AEC firms. We refer to it as the business of “mergers and acquisitions.” While there is plentiful information on buying and selling, there really is very little information out on how two AEC firms can merge. Mergers may be rare in our industry, but they could be the perfect vehicle for two or more firms that want to combine forces and grow.
In fact, mergers in our industry are pretty rare. It’s usually a private equity group buying an AEC firm, or one AEC firm buying another AEC firm. But a true merger? Rarely happens. Yet, a merger may be the perfect vehicle for two or more firms that want to combine forces and grow. Here is one example of a basic deal structure that would allow two like-minded AEC firms to merge – one larger than the other, the smaller of the two having two principals – one of whom is ready to retire: The two companies in our example are an $8 million revenue AEC company and a $2 million revenue AEC company. Let’s say each is valued at 75 percent of revenue. The larger of the two we will call the “acquiring company” and the smaller of the two the “selling company.” The two companies could combine (do a merger) and then an internal buyout of the selling firm principal who wants out could be effected. Mergers are done by agreeing on a value for both the
buying company and selling company. Sometimes an appraisal is done of each company by the same agreed-upon appraiser, and other times this is just a negotiation. Back to our example above, the $8 million revenue acquiring company is valued at $6 million, and the $2 million selling company is valued at $1.5 million. One way to do this merger is for the two companies to combine and form a new company, and the owners of the acquiring firm would now own $6 million/$7.5 million, or 80 percent of the new company, and the owners of the selling company would now own 20 percent of the new company. Another way to handle it would be for the less valuable of the two companies to simply trade their ownership in their current company for a smaller percentage of ownership in the more valuable company, without forming a new entity.
Mark Zweig
See MARK ZWEIG, page 6
THE ZWEIG LETTER FEBRUARY 26, 2024, ISSUE 1526
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