2024 M&A Industry Update
Throughout the years, our team has completed multiple acquisitions. All have focused on delivering positive outcomes for employees, clients, and our combined businesses in close collaboration with the firms' owners.
Since joining our team two years ago, Trevor Garfield, Director of Mergers and Acquisitions, has been involved in our organization’s successful partnerships with Peloton Land Solutions and O’Dell Engineering. In his role, Trevor is responsible for sourcing, underwriting, negotiating, and executing our acquisition strategy. Before joining our team, Trevor worked in the energy and infrastructure private equity industry at EIG Partners and Juniper Capital after beginning his career in investment banking. Trevor received his B.B.A. in Finance from Texas A&M University.
In this article, Trevor provides insights into the M&A industry and the trends he sees in the coming year.
Q: You’ve attended several industry events this year and talked with lots of experts in the M&A industry. What key takeaways and trends do you anticipate for the remainder of the year and into 2025?
The themes remain consistent—the engineering services industry is growing. The growth is largely due to the energy transition movement, infrastructure funding (IIJA), and digital advancements. Further adding to the growth is the strong housing demand due to an affordability crisis that broadly outweighs rising interest rates, particularly in the Sunbelt. We are seeing these macro-themes, among others, drive demand for AEC services to all-time highs.
Well run businesses, like Westwood, are seeing strong operating margins, strong balance sheets, and diversified growth. As a result, the sector’s attractiveness to external investors is high and demand for AEC firms is skyrocketing; the M&A industry is very competitive right now. Most experts agree demand tailwinds and sustained higher valuations will last through 2025.
Can you give insights on anything that surprised you in 2024?
One of the most shocking things I’ve seen this year is “Death by a Thousand Cuts: Scope Creep” from AEC Advisors. The graph details that, at a median, 15% of all project costs across all firms are attributable to scope creep, but firms are only billing the client for 86% of those incremental costs, or 13%. This means that 2% of every dollar billable to a project is written off annually by firms in the AEC industry. That is a lot of operating margin being sacrificed in the context of our scale and others.
When we look at potential partners, we look first at the organization's leadership and culture. This chart is a great illustration of the different types of operational cultures we see. For example, imagine a firm that attributes 20% of their project's costs to scope creep and only bills for 70% of those costs. On the other hand, imagine another firm with only 10% of the project's costs attributed to scope creep while billing 95% of those costs. The difference between these two hypothetical firms is 5.5% of the pure operating margin!
How is our team responding to the current climate of the M&A industry, and how does the team plan to continue its success into the new year?
In November 2023, I wrote The Impact of Cultural Fit on Mergers and Acquisitions. In this article, I commented that the team’s approach to mergers and acquisitions will always focus on delivering positive outcomes for our employees, our clients, and the combined businesses. To that end, our approach to the current M&A climate is “business as usual;” we will continue to prioritize culture and leadership without exception.
Over the next few years, I anticipate inorganic growth will drive our team to expand into new geographies, offer new services, and provide new opportunities for our clients and employees. I said it in November before we acquired O’Dell Engineering, and I still believe it today: this is a fantastic organization to be a part of, and we are fortunate to be here at the ground level. It’s going to be fun to see where we go. There is a lot on the horizon to look forward to.
