How Not To Approach An Acquisition Target 12 Feb 2025, 9:32 pm

As anyone whose ever been involved in an M&A process knows, spending time on an M&A deal is a costly and time-consuming endeavor for both sides. While M&A is a great way to bring on new talent and penetrate new markets and geographies, it can also be a great way to waste people’s time if the front-end communications are not planned out and executed correctly. With that said, let’s discuss a few ways I’ve seen in my experience as an AEC M&A Consultant that virtually ensure your discussions with acquisition targets go nowhere.

• Having the same discussion over and over: You’d be surprised how often I get on calls between two firms that are considering joining forces and the acquiring team has all but forgotten all the past communications and information sharing that we’ve done with them. This often shows itself in the acquiring team asking questions that have been discussed in previous calls or asking about data that has been explained in an email. I get that we’re (especially AEC principals) all busy and have lots of information to process each day, but spending 15 minutes prior to a call to re-familiarize yourself with where the conversation is goes a long way in showing the sell-side that you care about the initiative beyond just the financial gain it will bring your firm.
• Focusing solely on the financial aspects: As I started to touch on in the last bullet, focusing solely on the financial aspects (financial performance, enterprise value, compensation, etc.) of a seller’s firm will almost certainly turn them off about joining forces with your firm. Think about it: The sellers have spent their life building a firm of which they are proud and that often bears their name. They are able to provide their team with jobs that allow them to put food on the table, their clients with solutions that fit their needs and solve their problems, and opportunities for young, hungry architects and engineers to progress in their careers. To reduce all this work and effort to simply a number is essentially telling the seller, “I see what you’ve built here as a commodity. The only value in your firm is how much money it can make me.” While this line of thinking may be understandable with large 500+ FTE companies or other industries where revenue and profits are not proportional to staff size, it ignores the fact that the AEC industry is completely dependent on the people that work within it. Neglect the cultural aspect of doing a deal at your own peril.
• Being inflexible with consideration structure: Coming into an introductory M&A discussion with a fixed deal structure in your head is a recipe for wasted time. Every firm is different and as such, the goals of each owner seeking to sell often vary. While it is a safe assumption that many sellers are looking to retire soon and take some chips off the table, it is worth asking and letting the seller spell this in his/her own words. You might find that some are just looking to take the “management/owner” tasks off their plate so they can spend more time doing the things that they really enjoy, such as business and client development, mentoring staff, design work, etc.  If this is agreeable on your side, the seller may very well be open to staying longer than expected and being paid out over a longer term, which may prove beneficial to your firm as well. While we often jokingly compare M&A discussions to dating, this comparison is more accurate (especially in the lower middle market) than one might think. Like dating and ultimately marriage, a successful union requires a shared sense of values, principles, and most importantly, goals. It is common knowledge that partnerships based purely on the monetary gain afforded to one person often end poorly, so why would it be any different in an industry that is so people-centric?

At The Coxe Group, we specialize in working with clients who are focused on the long-term cultural and operational aspects of M&A as we believe this is the only way to ensure that the synergies and growth goals discussed and forecasted during the process are actually realized. A statistic that many M&A professionals like to ignore is that 70% of all M&A deals fail or fall short of expectations. While there are many reasons for this, you can drastically improve your chances of falling into the 30% of deals that do create value by starting the conversation in the right way. 

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Unionization Isn’t All It Appears 27 Dec 2021, 3:13 pm

Hugh Hochberg, December 27, 2021

The recent news that the employees of a firm whose work has been highly respected since the firm’s formation 25 years ago voted to unionize may appear to be an issue of employees versus management.  A deeper dig indicates that there is more to the story.  This article is not about that firm (SHoP), its leadership, management, or staff.  It is an article about two separate factors that have contributed to widespread employee dissatisfaction in architecture firms:  quality of leadership and architects’ willingness to undervalue their work by accepting embarrassingly low fees.

Start with the obvious:  Employees in architecture firms, particularly in low- and mid-level positions, are underpaid relative to their education (and expense thereof) and the responsibilities they accept in their roles.  Compensation has risen in recent years, including during the ongoing pandemic and fueled by increases in backlogs and firms competing for talent, with demand greater than supply.  Simply economics tells us that increased demand elevates price, in this case, the price of talent.

Architects have demonstrated and amazing willingness to prove wrong the concept of supply and demand.

As will be noted below, when it comes to compensation from clients, architects have demonstrated an amazing willingness to prove wrong the concept of supply and demand.  They do this by accepting low fees even as the demand for architecture services is increasing.  As evidence, many firms note that their billing rates do not cover the cost of labor and overhead, plus a reasonable profit, particularly on fees for time-based contracts.

Further adding to employee dissatisfaction in architecture is that peer level talent in other fields is higher when education and experience are compared.  Adding to the compensation concerns is the notion “we do this because we love it…irrespective of the uncompensated time we spend”.

The longstanding aspirational, and romantic notion that the practice of architecture draws on the love, passion, commitment, and talent of people aspiring to enter the profession doesn’t cut it anymore.  In today’s world and today’s economy, a different reality prevails:  You can’t afford to love if you can’t afford to live.

The underlying cause of dissatisfaction that encourages unionization clearly falls on the shoulders of the profession and those who lead or manage architecture firms.  In July 1990, the United States Department of Justice (DOJ) filed a consent decree about price collusion to which the AIA agreed.  The AIA at the time had about 54,000 members (which has grown to 95,000 today).  All were bound to the decree with the result that since 1990 architects are more likely to strive for lower fees than their competitors.  Apparently winning the project is more important than delivering it successfully for the client and for the firm.  Firms that make a habit of taking work at marginal fees more frequently produce safe work that isn’t likely to reflect innovation and exploration.  Analogically, a prospective buyer of a Chevy Tahoe SUV at $50,000 (which is a fine vehicle) is not likely to give serious consideration to a more innovative Bentley Bentayga SUV, priced upwards of $160,000.

For decades until 1990, architects had fee schedules that listed fees by project type, project size, project scope, and other factors.  DOJ declared these fee schedules to be collusion in violation of the Sherman Act.  That the AIA agreed so readily at the time was not in the best interest of the profession and now, thirty-one years later, the profession still suffers.  (That said, however, fee schedules haven’t really gone away.  As one example, look at the State of Michigan fee schedule published by the state government in 2003, thirteen years after the decree.)  While there were and are numerous professions and business categories that DOJ could have attacked, it is likely that it saw architects as low hanging fruit that would succumb quickly to DOJ pressure.  The outcome proved DOJ to have been correct.

Data shows profitability in architecture firms averaged single digits (with profitability for purposes here defined as profit before bonuses, retirement plan contributions, and taxes) until the late ‘70s, when concern for profitability that would allow discretionary investment in firms coincided with the increasing use of technological tools.  Prior to that time, owners in many firms considered financially breaking even to be adequate.

When those same owners tried to sell their firms to employees to fund their retirement, they were rudely awakened when many ownership candidates resisted the price, and for good reason:  If the current leaders weren’t able to make enough compensation to fund their retirement while they were leading their firms, their potential successors were smart enough not to be confident that that could elevate profitability high enough to fund their predecessors’ retirement, enjoy adequate compensate themselves, and fund their own retirement.  This led to affordable pricing for internal transitions, with “affordability” dictated by purchase price being covered by buyers’ increase in compensation that would be adequate to fund the acquisition.

Add to the problem with funding of ownership transition was (and is) the need to have strong enough financial performance to invest in technology, training, and business development while also funding strong bonus programs and staff retirement plans.  And therein is the financial heart of the unionization drive.

Better project planning, better overhead control, and stronger talent (that is more capable, better trained, and more enthusiastic about the work) contribute to success at multiple levels (design quality, technical quality, organization culture, and profitability).  However, the easiest and most effective way to increase profitability is to increase fees relative to the effort expended.

Lowering fees as a general strategy is sheer lunacy, not only because of the loss the firm would incur, but also because the market remembers lower prices far better than it remembers higher prices.

It is oxymoronic that architects responsible for proposing and negotiating fees complain about clients’ pressure to lower fees, while at the same time readily agreeing to such fees.  An unfortunately not-to-extreme example was four firms competing for a multifamily housing project a few years ago.  All agreed that a reasonable fee would be approximately 6% of construction cost, yet the highest fee that any proposed was 4% and the firm that “won” – in reality, lost big time – proposed a fee of 2%.  Lowering fees as a general strategy is sheer lunacy, not only because of the loss the firm would incur, but also because the market remembers lower prices far better than it remembers higher prices.  Architects of such mentality have sealed their fate over and over, which brings us back to the lure of unionization.

Architects collude downward and are chagrined when they accept work at fees that they know won’t allow success on all measures, with the one most likely to suffer most being profitability.  And it is the staff of those firms who bear the brunt of marginal profitability.  If today’s owners want to avoid pressure toward unionization, they need to recognize the value of what they do and not accept fees from clients who don’t recognize that value.

Interestingly, contrary to the myth that a client needs to choose two of three – speed, quality, and price – are firms that provide all three.  Much of the work of these firms is widely admired, and the firms often enjoy profitability that far exceeds industry norms, at times over 45%.  This confirms that the myth is in fact a myth…and a self-fulfilling prophecy for firms that believe it.

Returning to the topic of “employees versus management”, I opine, based on empirical data, that the most successful firms (by multiple measures) are the ones that find how to have the least amount of management relative to the size and complexity of the firm.  In this context, management and leadership are not the same.  Management is getting the right people in the right place at the right time doing things in the right way with the right tools and systems.  Leadership is defining vision and goals and enthusing people to go there.

It is a truism that good management complements good leadership, while excessive management covers leadership inadequacies.  Hence, a firm with strong leadership needs less management.  From a financial perspective, excessive management increases overhead expenses, so it is not surprising that firms that pride themselves on the strength of their management in response to inadequate leadership (although such firms are unlikely to recognize or admit the reality) achieve and maintain moderate but not outstanding profitability.  And some of those same firms are breeding grounds for dissatisfaction that leads to unionization.  There isn’t unionization precedent in architecture to know its effect on such things as collaboration, although we know that people collaborate better with people they know better and like better, and they collaborate less effectively with people with whom they have fundamental philosophical differences.  It would be interesting to know how various categories of people voted – which of course we can’t know due, appropriately, to secret ballots – but it is reasonable to think that more entrepreneurial types and more creative types voted against.

Effective leadership engages with and supports people in the organization, strives to help people advance their careers, assure they have a healthy and not oppressive work environment, and refuses to accept clients who undervalue the firm’s work.  Certainly, employee concerns warrant serious recognition in the unionization conversation, but without addressing the larger and rarely stated concerns about leadership and fees, the profession should expect more efforts to unionize.  We have worked with firms to achieve these ends, and staff in these firms experience less discontent – because they have more opportunities and are fairly compensated for the value of their contribution – and are able to focus their efforts on advancing their careers, improving their firms, and elevating the quality of their projects.

© Hugh Hochberg, 2021
The Coxe Group Inc.

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How to retain staff – Engineering, Architecture and Construction 2 Sep 2021, 12:48 pm

They say the great resignation is upon us.  That seems to be true for some, but not others.  What is it that some practices are doing that is achieving a high level of retention during “the great resignation”?

Why Retention if You and not Them

Simon Goodhead of The Coxe Group spoke to ACEC through the national webinar education program on this topic in February 2021 anticipating what was coming around the corner.  The talk was based around organizational behavior and the key aspects of why people disengage with a firm, why their job performance may decline, and what that cost is to an engineering and architecture firm.  Fundamentally, it is the firm leadership.

The podcast that followed the presentation (here) takes the 90 minute presentation and pulls the entire presentation to 34 minutes.  Why not take a listen and see what resonates for you?

With the cost of an employee disengaging and eventually leaving (either by choice or termination for performance) the expense can be immense.  When viewed over the entire firm, the cost is likely to reach close to 100% of the firms average salary.  In this instance, cost truly means an expense with no revenue – it takes the firms profit.

The Cost of Attrition 

Let’s look at an extreme example.  Consider this – if you reduced a 401k plan that saved the firm an average of $5,000 per employee for your 50 person firm, you see a saving of $250,000.  If that saving caused your attrition rate (self-selected departure or termination for underperformance) to move from 5% to 15% (that’s a shift from 2.5 people on average to 7.5 people), that will likely cost your firm $350,000, a drop in profit of $100,000 by trying to save $250,000.

How we Help

Two of the many things The Coxe Group has provided our clients over the years are these:

• A view of what is coming around the corner – we are always looking forward and helping our clients understand what they may want to do now to accommodate what is going to happen.
• A deep capability in organizational behavior – our industry is based on people. Whether they are architects, engineers, or contractors, it all starts with our identity, our leadership, and our people.

Get in touch if you want to understand more about retention and organizational behavior.

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Why M&A Deals Fail – ACEC buy-side sell-side Recap 30 Jun 2021, 11:52 am

In June The Coxe Group’s Simon Goodhead provided a national webinar to ACEC titled: Why M&A Deals Fail – How Organizational Behavior and Leadership Cause Deductive Deals.  With Architecture and Engineering M&A buy-side & sell-side prevalence, many are considering their first transaction, or having already completed a transaction in the past with marginal success, are now looking to move forwards with another.

The question then becomes, with such a big step and investment of time and money, can we avoid failure, or a mediocre transaction?  How do we make sure success is achieved?

Many consider financials as the key driver – this is probably the first mistake.  Financials are important, but without a strategy in place, an authentic reflection on who your firm is, or deep consideration of your people and values, the transaction will likely end up being deductive.  What is adding to the difficulty is your people see the failed transactions in the industry (often without the true information backing up their perception of failure).

We have achieved tremendous success guiding buy-side and sell-side transactions.  The question then becomes this: why do we achieve so many successful M&A transactions for architecture and engineering practices?  The answer is, as expected: it’s complicated.  Here are a few things that we look for to achieve success, avoid red flags, and guide our clients:

• M&A Strategy development – external and internal alignment with market considerations
• Personal and values alignment – focus on values (and culture for colocations)
• Suiters meet the majority of priorities and point of the transaction
• Target size is a reasonable percentage of total volume
• Mindful of what sellers will gain (look for fairness)
• Mutual benefits for both parties
• Integration considers
  • Financial
  • Technology
  • HR
  • top line synergy
• Variation in success/failure
  • What drives the variation
  • Define success

Contact us to find out how we can help you in the development of your M&A strategy, and what can be done to aid your success.

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Merger and Acquisition Engagement Example: Buy Side Services 26 Jan 2021, 4:20 pm

SSOE Group, Inc. approached The Coxe Group to develop an acquisition strategy, create profiles of desired firms, identify targets, facilitate communication between SSOE and those firms, and assist in negotiations that culminated with SSOE’s acquisition of Stevens & Wilkinson. The strategy developed by The Coxe Group incorporated the vision and goals of SSOE, considered the overall values of the firms involved, and led to the consummation of a transaction that met the needs of all parties.

“Simon and The Coxe Group provided SSOE with a much broader view of possible candidates than we would have uncovered on our own. This allowed us to be more selective and to find a firm that fits very well in terms of our growth plans as well as our culture. The integration has been very positive due to the process and preparation implemented as part of the acquisition.” Cathy Myers, COO, SSOE Group, Inc.

Taking a consultative approach to Merger & Acquisition services, The Coxe Group has advised on successful transactions throughout the 54 years of the firm’s existence. The success rate exceeds the industry average. Focusing on the architecture and engineering industry, The Coxe Group provides deep insight as both practitioners and consultants to determine the right partnering of firms. Whether buying a practice, merging, or selling, The Coxe Group approach will lead to a superior conclusion.  Contact us to find out more.

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Designing to Survive – The Washington Post Article 16 Jul 2020, 2:54 pm

From a strategy standpoint, the reliance on “basic services” and a delivery or service approach that doesn’t explore ideas with a client may not allow the ideas in this article to be successful.

Technology is changing the way projects are delivered, and provides a greater need in early design stages to explore solutions.  How firms approach client’s in the future and introduce ideas for design may need some additional resources than the traditional basic services as well as consideration of the strategic positioning of the firm. Architects will need many tools in their tool box that are simply not available in “basic services” assuming that they are aware of the tools at all. We return to the adage “you don’t know what you don’t know.”

The other aspect around this topic is the idea of value propositions, and being able to articulate the value proposition in terms that align with the firm strategy and the client’s mindset.

AIA Atlanta posted this from The WP Magazine. Here are a few quotes in case you don’t have time for the full article:

• “[architects] imagine it, let’s figure out how to get there.”
• “The profession is focused on being hired to solve problems…” Yantrasast says. “We can do all that very well… But we have not really been deep in our mission.”
• “[Building are] machine[s] as [a] metaphor has been on the way out for a few decades now, but its replacement — the building as a living organism — has been slow to gain widespread acceptance.”
• “I’ve come to believe that breathing and the access to clean air is a fundamental issue,” Murphy says. “Breathing is an architectural and spatial problem.”

#aiaatlanta #AIA #thecoxegroup #design #architects #architecture #strategy #valueproposition

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Why Training Project Delivery Efficiency Matters 1 Jul 2020, 7:40 pm

What strategic training The Coxe Group has been doing over the course of the lockdown? Mostly tools and tactics for efficiency related to project delivery.

Why is efficiency important? Let’s do the math. For an average week:

• Three meetings in a week start 5 minutes late because someone is late. 15 minutes/person.
• One meeting goes 15 minutes long because of poor meeting management. 15 minutes/person.
• Emailing back and forth on three topics between two people takes 4 minutes per email. It takes 5 emails to resolve. There are three of these pieces of communication. 60 minutes/person.  A phone call would be 5 minutes per communication. 45 minutes of lost time/person.
• Poor delegation causes work to take longer and require corrective action. 30 minutes per person.

Four common issues and a total of 95 minutes of one person’s time. For a US firm that equates to nearly 4.3% utilization lost in one week. Let’s assume that average week across a year.

For a 25 person firm, with an average bill rate across the firm of $120/hour, with a generous PTO policy of 5 weeks/year, that equates to $245,750 of lost revenue opportunity. Or for a firm of average profitability, firm nearly $37,012 of lost profit opportunity. That bottom line impact can be very important to a firm in times of uncertainty.

Solving this for clients has been a big focus! Cheers, The Coxe Group

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AEC Future due to COVID-19 7 May 2020, 4:17 pm

Here are some forward-looking thoughts from Hugh, some of which surfaced in the Architectural Record interview:

1. The success that many firms are experiencing in the work-at-home environment will provide more opportunities and flexibility as remote working becomes recognized as a way to do good work, to work efficiently, and to enable alternative life-work balances.
2. Similarly, companies and institutions will look for more ways to capitalize on working remotely.  Some future projects will be smaller since there will be fewer people there at once, and this will be particularly true when concerns about social distancing lessen.  Until that happens, fewer people will require more space to keep separated.  Workplace planning and design will continue, in the post-COVID-19 era, to challenge conventional functional and design parameters.
3. Communication technologies, including how practitioners in all design disciplines, will evolve to enable more effective remote communications with clients, consultants, contractors, and other players in the process.
4. Projects that serve discretionary desires – hospitality, entertainment, and leisure – will come back slowly, perhaps after an initial surge.
5. Bricks-and-mortar retail will continue to decline.
6. Distribution and delivery companies will expand, as will the need for facilities.
7. Industry based in the US will expand, reflecting societal anxiety over imports from Asia and a nationalistic desire to decrease dependency on imports.  A downside of this is that increased nationalistic mentality will increase tensions globally.  However, this increased tension will serve to increase the need for US industrial facilities.
8. The airline industry will take a long time to recover, and when it does, post-recovery airline experiences will continue to differ from pre-COVID-19 travel.  With more distancing on planes, fares will increase with decreased passenger load, which will in turn reduce travel by that large segment of travelers who are price sensitive.

If you want to find out how we can help you navigate your strategy execution, check out our services,  or contact us directly.

Cheers, Simon.

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Covid-19 Market Disruption 30 Mar 2020, 2:16 pm

To all our Architectural, Engineering, and Construction colleagues around the world:

We at The Coxe Group have been very grateful to have interacted with so many of you over the last several weeks.  The speed of your response to the pandemic, your prioritization of your people, and your client service have been a wonder to behold.  We are especially grateful to firms that have been willing to share their approaches to this crisis.

As we have identified to you all through our conversations, this type of economic turbulence can be extremely unsettling for any practice.  Thankfully, many of you have prepared in the ways we have discussed, and now, with your people as safe as you can achieve and your clients starting to think about the future after the pandemic, we are getting to the point in time to consider the way you deploy your pre-prepared and pre-funded strategies.  Here are some things to consider:

• Start with the upturn in mind. The economic downturn, which we are already experiencing, will deepen first through Q2 of 2020, and, considering current projections at the time of writing, spring back aggressively in Q3 of 2020 and Q4 of 2020.  With such a return of market vitality, how will you deliver your projects for your clients?
• Conserve cash. For two years, we been suggesting that you double and even triple your cash position to allow you to stretch to the six-month mark.  That should not mean spending continues at the same rate, but it does mean making strategic initiatives and operating investments to strengthen the firm.  Look to trim variable costs, and even fixed costs such as rent (talk to your landlord) during this period.  Remember though, being too extreme with this measure may put you at a significant disadvantage when the upturn comes.
• Focus on strong leadership. The number of leadership development assignments in which we have been involved has been tremendous over the past year.  Now is a time for emerging leaders to deploy those lessons learned for your people.  Don’t allow the desire for stronger management cause a weakening of leadership.  This is a time to manage the near term and lead for the longer term.
• Consider your choices. Where will you be successful in your markets both during the crisis and during the upturn?  How will your project yourselves to achieve that success, especially when capacity to deliver designs may be a key differentiator in the upturn?  What skills and staff will be key to that delivery?  How will you maintain high retention when other firms will be looking to grow their staff levels and secure work?
• Stay relevant with your clients. Your clients right now are in the same position as you.  That will change as movement restrictions loosen.  What methods and tactics will you use to stay in contact with your clients and show them you understand their position?  When we discussed marketing management strategies in a downturn, many of the same rules apply in this instance, only with a twist.  Be cautious though, since at the present time, your clients will have their own things to deal with, so be mindful of their needs.

Two reflections from this crisis.  First, the availability of your clients who are part of our client perception work on your behalf has been tremendous.  So for those folks with work in progress, the data should be rich.  The second is, those who are looking to add to their firms through acquisitions or have recently acquired, the conversations that are occurring are thoughtful and rich in discussions on how those new partnership will flourish after the crisis eases.

Great job everyone.  Take care of yourselves, your families, and your people.  We are available if you want to talk, and we will be back in the skies soon.

Warm regards,

Hugh Hochberg, Simon Goodhead, and The Coxe Group Consultants

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Leaders should inspire and influence 9 Mar 2020, 7:52 pm

Leaders should inspire and influence. Something easier said than done.

If we fix our leadership style and expect those we lead to bend to our will, not only will we fall foul of the Platinum Rule (treat others as they want to be treated), but also find those following us thinned out to only those who are inspired by our chosen leadership style. That will not result in the high quality engineering or design we look to achieve.

Instead, if we flex our style, using our authenticity, we are more likely to inspire those we lead, create followship, and influence our people to achieve great results.

There are many facets to achieving performance and commitment with those we look to lead. Holding a honest mirror to our leadership style and methods can be hard. Even when provided with constructive feedback we tend to argue points based on our gut, a feeling, or small data sets. There are many tests and tools you could try, the simplest test of that mirror is to look at those you inspire and influence and ask: “can I expect my people to do what it takes to succeed in my absence?” If the answer is “yes”, you can have confidence your self-assessment may be a good assessment.

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