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TZL: How often do you valuate your firm and what key metrics do you use in the process? Do you valuate using in-house staff or is it outsourced? TM: We run an in-house valuation at the close-out of each quarter using Zweig Group’s Z-2 Formula. That score blends revenue, net profit, EBITDA, backlog, equity, and staff size. It always comes out more conservative for us than other metrics do, but we like to keep it that way. “I knew there was a market for an archaeology-only firm that lives, breathes, and bleeds problem solving rather than esoteric research. So PaleoWest gestated in that kind of nourishment.” TZL: To date, what’s been one of the firm’s greatest challenges and how was it solved? TM: Cash has always been tricky. When I launched, I met with at least eight banks. None of them understood what an archaeology firm does. (“So, let me get this straight ... grandmothers hire you to look for dinosaurs in their backyards? I’m sorry, but our credit committee has asked that you leave immediately.”) We were fairly well capitalized with my savings, but had some early success in landing big, multi-state projects that were expensive to field, with payment 90 or more days off. I recall spreading my credit cards across my kitchen counter, deciding which ones to draw cash out of to make a few payroll cycles. We went through a period with a factoring company, the kind that legally takes ownership of your accounts receivable, cuts out their fee, and sends you what’s left. That was expensive, but necessary for funding our growth. Eventually, banks warmed up to us when we had a few years of solid numbers under our belt. We generally take a conservative approach to cash management, with the owners only getting paid after the staff is bonused and a large sum is set aside as retained earnings to fund our growth. Still, though, the cash monster always looms in the dark. TZL: Ownership transition can be tricky, to say the least. What’s the key to ensuring a smooth passing of the baton? What’s the biggest pitfall to avoid? TM: We’ve had our PaleoWest Transition Program in place since last year, and, so far, it’s going terrific. I’ve got seven of the top professionals in our industry taking over the firm from me over 10 years, plus a pipeline of younger buyers waiting in the wings as they develop their careers at PaleoWest. Creating a team of entrepreneurial types who are also collaborative is the real key. I’ve got colleagues much older than me who either can’t transition their firms or have tried, failed, and had to buy it back from employees who were the wrong types to own it in the first place.
decided to join my firm at the start of the Great Recession. It was a little nerve wracking, but she helped transition us into the safe harbors of federal contracting just when we needed it. She’s the only one of us with a business degree, and she’s still our chief administrative officer. My only daughter is a software engineer who has never had an interest in the business. TZL: Artificial intelligence and machine learning are potential disruptors across all industries. Is your firm exploring how to incorporate these technologies into providing improved services for clients? TM: Yes. The centerpiece of our project delivery system is an AR-like workflow. Data is collected digitally in the field and synched continuously into a cloud database. That database then learns to “write” our reports as fieldwork is proceeding. So, when our project director finishes a month of fieldwork, instead of having a month of writing in front of her, she has just a couple days of clean-up before the report is ready. Besides getting reports to clients quicker than other firms can, we also minimize the under-employment of our best leaders by getting mired in tedious tasks. TZL: Are you using the R&D tax credit? If so, how is it working for your firm? If not, why not? TM: Yes, we got turned onto it by our CPA five years ago. We do much more R&D than other archaeology companies, as far as automating our project workflow and building back-end databases that improve our business efficiency. It really improved the game for us financially when we learned that we could take an annual tax credit for that kind of work. It’s one of those situations where I’m leery of the legislation as a citizen, but happy to take advantage of it as a business owner. “It was audacious and absurd, but we pulled it off. The client had their clearance early, and we even earned an early completion bonus from the client. That, there, is PaleoWest.” TZL: How do you handle a long-term principal who is resting on his or her laurels? What effect does a low- performing, entitled principal or department head have on firm morale? TM: I hope that’s not me! We’re a meritocracy and I always impress on employees that we have no “Ivory Tower” positions, no tenure, and we’re all on soft money. We’ve driven some underperforming big dogs out of the firm, and I don’t recall ever regretting it. I like feeding the vegetables in our garden, not the weeds.
COMING SOON: 2021 VALUATION SURVEY REPORT With the survey data included in this report and Zweig Group’s exclusive Z-Formulas, the 2021 Valuation Survey Report of AEC Firms is the definitive resource to value an industry firm. Zweig Group’s Z-Formulas can be used to quickly calculate how much an AEC industry firm is worth. Simply input seven factors: staff size, net revenue, backlog, EBITDA, profit, book value, and interest-bearing debt, for a rough value for any industry firm. Click here to learn more!
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THE ZWEIG LETTER FEBRUARY 8, 2021, ISSUE 1378
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