Engineering Influence from ACEC
Episodes
Monday Sep 28, 2020
Monday Sep 28, 2020
Matt Reiffer and Dan Hilton from ACEC's advocacy team joined Engineering Influence to preview two upcoming webinars of importance to our member firms:
September 30, 2020 at 1:30: Changes to NEPA Implementing Regulations and the Potential Impact on A/E Firms and Clients
October 8, 2020 at 1:30: New Cybersecurity Requirements Create Significant Responsibilities and Liabilities For Federal Contractors: What you Need to Know to Ensure Compliance
Monday Sep 28, 2020
The Engineering Health Quote from the ACEC Life Health Trust
Monday Sep 28, 2020
Monday Sep 28, 2020
Engineering Influence welcomed back the ACEC Life Health Trust to talk about the new Engineering Health Quote service that helps small and midsize engineering firms save money and time when searching for health insurance. Find out more here.
Also, the 2020 ACEC Fall Conference early bird registration ends September 30th. Act today to save $100 on your registration for this first ever virtual event! Learn more about the event program and register here.
Friday Sep 11, 2020
The Ins and Outs of Choosing Insurance with the ACEC Life Health Trust
Friday Sep 11, 2020
Friday Sep 11, 2020
John Krebsbach with ACEC Life Health Trust joined the podcast to recap the August 26th webinar, Health Insurance 101 and discussed the many options offered by the Trust to help engineering firms take care of their employees.
Transcript
Host:
Welcome to another edition of Engineering Influence a podcast from the American council of engineering companies brought to you by the ACEC Life Health Trust. And today we are featuring the life health trust. I want to introduce John Krebsbach. He is the director of sales for the Trust. And recently the Trust just finished off our R3 sponsored webinars series. It was the final in a series of webinars that have been sponsored kind of as a service to members in response to COVID-19. And the webinar took place on August 26, then it's available online. We'll link to that in the show notes, but really the webinar focused on insurance plans and something which is I'm sure, a mystery to many people who are very busy running their firms, very busy, making sure that their employees are happy and may not have the direct exposure to what insurance plans are meet up above or why it's important, or how do you choose one. So having John on the show is great today, because he can kind of expand on what was discussed in the webinar a little bit, but also give some good information about insurance plans. So John, thank you and welcome to the show.
John Krebsbach:
Hey Jeff, thanks so much. Appreciate you and ACEC National having me today. You know, I, I'm always really excited to have opportunities like this, Jeff, to provide the value of the ACEC Life Health Trust to all ACEC member firms and prospect firms. But thanks for having me today. My name is John Krebsbach. I'm the national director of sales for the ACEC Life Health Trust, a little background I've been with the trust for just over two years and prior actually spent over 10 years at United Healthcare. And most of my time at United Healthcare, believe it or not was working with the trust. So I've I've been around the program for quite some time.
Host:
Yeah. And the Trust has been around for quite some time as well. I know a lot of our members are familiar with it, but for those who aren't, I mean really it's a 55 year anniversary this year for the Trust. And can you go a little bit more into kind of what the trust is focused on, what the mission is and why it's so important and tailored for the engineering consulting industry?
John Krebsbach:
Yeah, absolutely. And thanks for, thanks for calling that out. Like you said on May 1st, actually May 1st of this year, the ACEC Life Health Trust celebrated 55 years of supporting ACEC member firms. And we're, we're extremely privileged to continue that role. It's, it's clearly stated in our mission, which, which we feel is very simple. You know, we're the ACEC Life Health Trust is here to provide healthcare benefits, solutions, and services to support the business objectives of ACEC member firms and the health and wellbeing of their firms, employees and family members. You know, I think you could argue the ACEC Life Health Trust, Jeff, is one of the biggest benefits of being an ACEC member.
John Krebsbach:
You know, I also, we believe our vision along with our mission, our mission is very compelling, you know, with, so well, I'm sure we'll get into it here. With all of our programs, medical, ancillary value added services, we, we really feel we can establish the consulting engineering industry as one of the healthiest industries across the U.S.
Host:
And you the trust, I mean recently right as the pandemic was kind of hitting its peak did something for its members, which was very beneficial. And that was that $10 million loyalty credit. What was that?
John Krebsbach:
Yeah, that's something that myself and rest of the associates at the Life Health Trust are very proud of, you know, this, this is an example in my opinion, Jeff, that just screams our mission in really being there for our member firms. So, you know, back earlier this year, when, when everything was going on the board of trustees Pat Fayen, president of the ACEC Life Health Trust approved, like you said, over $10 million in a loyalty credit that was given back to all of our member firms as a one-time invoice credit on August 1st. So we're, we're very excited to have the opportunity to give back to our member firms in that loyalty credit. And again, a piece that really lives by our mission of being here and giving back to our member firms.
Host:
Well, that's great, John, and I know that the trust has done a great job trying to keep members informed about different aspects of insurance and the services that the trust provides. And you've done a number of webinars for ACEC in the past. And of course the one that just happened recently on the 26th of August was how to buy insurance 101. Go a little bit into what was covered in that webinar, you know, for our members that that is available online on acec.org and the education area of the site, you can go back and see that on on demand, but what was, what was the main focus there and the big takeaways?
John Krebsbach:
Yeah, you're right. It was really how to buy insurance one-on-one piece. You know, insurance costs are among the top three expenses that a business takes on each year. And you know, what, what may have seemed simple in the past, Jeff with limited options has now become at times confusing as far as what plans and programs are available out there for each state, for these businesses. So the webinar from last week, which you referenced, allowed us the opportunity to break down the steps, to really understand how to purchase the right specific insurance plan for your firm.
Host:
And one of the things that I know was covered was, was what makes up an insurance plan. And I I'm guilty of this. I, you know, don't pay as much attention to this as, as I probably should. And I don't really spend time thinking about how plans and premiums are calculated and really what goes into them. Can you go a little bit into how those plans are and the premiums are constructed?
John Krebsbach:
Yes, absolutely. You know, you're looking at roughly four categories when it comes to insurance premiums, you know, those, those four different buckets that we're looking at are you know, we look at the expected medical and pharmacy claims for a specific firm. There are obviously administrative expenses which include taxes and fees. You have a profit risk margin, which is really looking at the amount of risk which I can kind of get into here a little later of how much the employer wants to pay. And then at the end of the day, it's really trying to figure out the premium, what is the per member per month pricing? You know, I think it's, there's a huge benefit. Jeff looking at the ACEC Life Health Trust in that we have multiple plans and programs available to ACEC member firms. You know, we're not just locked within one specific plan design.
John Krebsbach:
So we really have the ability to quote fully insured through United Healthcare. We have our, which was talked about last week on last week's webinar, the select level funding program, which utilizes Meritain the TPA and Aetna as the network on the ACEC select level funding plan. This plan is available in 33 of the 50 States. And then we have our, our advantage plan, which is available to firms that are typically over 100 employees in size and are currently self-funded or looking to move self-funded. So, you know, now all these programs aren't necessarily available in all states. But like I said, Jeff, there, there are many states where you could technically request a proposal for all three of these programs, which again, I think is just a huge benefit of the life health trust,
Host:
That scalability, right? It's that ability to be able to go and say, you know, how big is your firm? What are your needs? You know what exactly absolutely. You know, what's the level of covers that you want to have and how you want to structure that you guys can really focus in and design a plan that meets the needs of the firm.
John Krebsbach:
Absolutely.
Speaker 2:
So as it goes with, with insurance, I mean, I know you mentioned like, you know, the fully insured or the fully, the fully insured versus self-funded what are the big differences between those two?
John Krebsbach:
Right. So, you know, I look at what let's look at all three fully insured, level funded, self-funded. And again, I really encourage the listeners to refer back to last week's webinar because that really gets into the, into the weeds on each three of these funding types. But you know, for today's opportunity, Jeff, you know, I like to look at it from on a scale, you know, low risk to high risk, you know, fully insured is really non non-refundable premium, right? The, the insurance company assumes all the risks there. So there's low risk and low reward. Then you move into, as you get further on you know, the scale to higher risk, you know, you look at level funding, it's kind of right in the middle where the employer assumes some of the risks. And then self-funded is obviously the opposite of fully insured from a it's more of a high risk, high reward set up.
Host:
Now John, I know during the webinar the focus was put on the trust select plan and you went into some detail about what that plan offers for our listeners. Can you go into a little bit about about what was discussed about that?
John Krebsbach:
The select level funding plan, you know, you're looking at a handful of key, key advantages you know, really attentive to service. We have a dedicated customer service and account management team that's available to answer any the firm and broker questions to meet their specific needs. Like I mentioned earlier, it's the select level of funding plan utilizes Meritain as the TPA and, and it's on the Aetna network. So it's a very broad national network. The Aetna choice POS 2 is, is the specific network, Jeff that that's on. So thousands of hospitals as well, as more than 75,000 pharmacies nationwide when it comes to that broad national network. And then when you're, when you're looking at, you know, specific plan design options, we have over 80 plans in that product portfolio that are your traditional PPL plans. And then we have over 30 of our, of the plans within that product portfolio that are our more high deductible health plan options for health savings, qualified health savings account type plans.
John Krebsbach:
And, you know, lastly, again, just as far as availability goes the ACEC select level funding plan is available in 33 of the 50 States. And for listeners feel free to go to ACECLifeHealthTrust.com where you can find really those key advantages that I just listed off and an availability map of where that is available. And again, like I mentioned on last week's webinar, when it comes to the 33 of 50 States, that just means that your, your site - your headquarter location needs to be in one of those 33 States. But if you find that your firm has offices standard across the country, that may land in one of the non 33 of 50 States, you can, the, the entire firm can still take advantage of that ACEC select level funding plan.
Host:
Hmm, that's important to note, I also noted that, that on the webinar it was discussed that there is, you know, risk protection for firms with the select plan that the firm kind of decides on what they want to set their premiums to be. And that means that they don't have that risk of paying at the end of the year. Right. So if the claims come in or the firm actually gets that money back, they're not on the hook for that.
John Krebsbach:
Absolutely. That's and that's a fantastic point and one to call out because we don't typically see that, Jeff, in the open market with other arrangements. So yes, our ACEC Select Level Funding Plan essentially has two options. We can look at an aggregate only where all of the group claims roll up to one aggregate account. The second option, which is just an enhancement here recently is the individual stop loss where we can put in based on state ruling, state regulations, anywhere between 10,000 and 50,000 individual stop loss. And really how I look at it is you're just, you're buying that extra protection for your group. So you know, anything that is left over in that surplus in that claims fund at the end of the contract period, whether it's with either option yes, that that firm gets that entire amount back. The ACEC Life Health Trust does not keep that money. So really an amazing opportunity for firms to keep their costs down and in and enjoy that savings. And like I said, you typically don't see that amongst other arrangements across the country where you'll see a, a share of that cost 50/50, 70/30. So again, the firms get that entire amount back.
Host:
So, that's good to know number one, number two is, you know, with the variety of options that plan and the others present for members. I mean, it's kind of a, it's a lot of options to choose from. If I'm a firm CEO or, you know, if I'm in operations at a firm and I'm trying to out, okay, how do I navigate this? Can you go on a little bit into how the trust works with firms to kind of identify what they would need to select a plan that adequately not only covers the employees that they have, but also creates an environment where they can attract talent and, and retain the talent that they have?
Speaker 2:
Yeah, absolutely. I mean, we're, we're very open to all groups reaching out to us. You know, a lot of our business, we work through broker channels. So, you know, for listeners please feel free to reach out to us directly for any questions that you have around the plans and programs that we have. You can work through your broker and we're more than happy to connect with your broker again, on the programs and plans to really sit down, look at, look at maybe what, what you, as, as a firm are currently on where you want to go into the future. You know, we can, again, to my point earlier, it's, it's a huge value of the ACEC Life Health Trust to be able to look at different funding options and not just be locked into one. And again, if you're in any one of those unique States, we, we may have the opportunity to look at multiple options for you and you know, find out which one's the best fit and put our best foot forward.
Host:
And with 55 years of history behind you, I imagine that you have that institutional knowledge of what works best and what states and how similar firms similar sizes kind of navigate this. So I imagine you have a lot of historical information to be able to assist clients with making the right decisions.
John Krebsbach:
Absolutely, absolutely. We can absolutely look at you know, again, based on a firm size what firms of that size are typically electing within the trust. Yes, we can look back at that and really help paint a clear picture for these, for these firms.
Host:
I know, we went into the kinds of different plans that are out there and available with the levels of risk levels of coverage. But I know that the trust also offers a number of value added services with all the plan that they offer. What are some of those additional services that, that clients can take advantage of to plus up their plans?
John Krebsbach:
Yeah, Jeff, you know, this, this goes back to our vision, you know, in my opinion of really establishing that consulting engineering industry is the healthiest industry across the U.S. So, you know, with that, our member health and wellness is such a high priority, which is why we invest in and also offer, like you had said our value added services. So again, it's, this is not a, a stop to look at the health insurance plans, but you know, real quick, we have partnerships with United Healthcare and guardian when it comes to the ancillary benefits. So we're talking dental, vision, life, disability and then our value added services. These are again, very important. Our designed wellness program is our specific wellness program designed by engineers for engineers. There are three different levels of design wellness all of our ACEC Select Level Funding firms that move over will be automatically put into our basic program.
John Krebsbach:
And really Jeff, what it is, is based on the group's participation engagement, they can work, work their way up the ladder, if you will and receive different incentives for both employees and spouses. And then, you know, one of the other value added services, which I would argue has been a very hot topic of conversation is our design virtual care program. You know, a statistic that I think the audience will not be surprised with is telemedicine has the utilization has doubled since the pandemic started. So again, a very important very valuable added service that we provide with everyone that, you know, is maybe a little weary going into the doctor with everything that's going on. This is a service that includes 24 seven, three 65 tele-visits and then just recently we've added some enhancements. We have a behavioral health service back care dermatology and expert medical services that are embedded into the design virtual care program. And then we also have a design advocate service, kind of a patient advocacy tool, and then benefit solver, which is an enrollment and eligibility software solution. So for the HR audience out there, that's a program that could really take a huge burden off their plates.
Host:
That sounds like something, you know, especially, I just recently had my first ever video conference doctor's appointment where it was just strange, almost like a zoom call with the doctor, but, you know, every week, you know, so dispersed and working remotely, you know, having access, if you're a smaller firm and you have a program that allows you to have your employees engage in telemedicine that's a big benefit because that's the kind of thing that, you know, the big, you know, bigger firms definitely have. And the same with the enrollment eligibility software, that, that that's something that will speed the process for HR managers at, at smaller midsize firms. So those are, those are all value adds that I can see actually that, you know, adding value to an engineering firm.
John Krebsbach:
Absolutely. I mean, the, the, the trust, you know, one of our values is innovation and we are constantly looking at new upcoming value added services that are, that are going to bring value to our ACEC member firms. Again, back to emission, we are, we are here to serve the ACEC member from population, their employees and families. So we will, we will continue to look at new, up and coming latest and greatest services that we can bring into our portfolio to continue to add that value a lot like the design virtual care program and the others.
Host:
Absolutely. That webinar is up online for everybody to look at it goes into much more detail that was took place on the 26th. And it's again, it's the title of that is How to Buy Insurance 101. Really encourage all of our members and listeners to take a look at that webinar and get a little bit more of a deep understanding of the offerings that the trust provides member firms, especially when it comes to selecting coverage and selecting a plan. John, you know, for, for our conversation here, you know, kind of just going over these broadly, is there anything that we missed that you want to make sure that our members know?
John Krebsbach:
No, I don't think so. Jeff, you know, I think just the one thing I would ask is, you know, first off for the audience, you know, just that the ACEC Life Health Trust really values and appreciates the opportunity to serve those that are participating in the life health trust. You know, we have roughly 1,500 firms, Jeff that are taking advantage of the ACEC Life Health Trust. There's just shy of 4,000 firms across the country that are dues paying members. So we really appreciate that business. And for those that are not participating in the life health trust, it does not hurt to take at least a look. There are a lot of programs out here that, you know, we, we rolled through here today. And we'd, we'd love to earn the business and take a look at that benefit package.
Host:
Well, John, again, you know, our members are pretty aware of, you can be found on the web at www.aceclifehealthtrust.com. And for you in the sales department, where can people reach out and contact you?
John Krebsbach:
Yeah, my contact information email john@aceclifehealthtrust.com, or you can simply email sales, sales@aceclifehealthtrust.com. Everything that we discussed today, Jeff is on our website, www.aceclifehealthtrust.com, including contact info.
Host:
Well, that's great, John, thank you so much for coming on the show. This is really good information, especially these days with the focus being so much on health wellness, and just living in this remote work environment here you know, having a strong insurance plan is part and parcel with that. So really appreciate you being able to go a little bit more into what the trust provides its members. And thank you very much for coming on the show.
Host:
Thanks, Jeff. And thanks for everybody listening in. Hope you all stay safe and well, and we'll talk to you on the road.
Host:
And again, this has been Engineering Influence, a podcast from the American Council of Engineering Companies brought to you by the Life Health Trust. We'll see you next time.
Tuesday Sep 01, 2020
Tuesday Sep 01, 2020
Mick Morrissey, managing partner of Morrissey Goodale, visits the Engineering Influence podcast to analyze the current state of the M&A market and offer insights and advice to engineering firm owners who may be contemplating selling their firms.
Sponsor Message:
The ACAC Life Health Trust is offering free insurance comparison quotes for all ACEC Engineering Influence listeners. During these uncertain times, every dollar counts. And we want all our listeners to take advantage of this special offer. Typically our firm medical plans offer your employees lower insurance costs, better coverage, and complementary health and wellness benefits above our competitors. Visit our website at acclifehealthtrust.com or call our sales team at (844) 247-0020.
Host:
Welcome to the ACEC Engineering Influence podcast brought to you by the ACEC Life Health Trust. The mergers and acquisitions market has been very strong in the engineering industry in recent years with Baby Boom generation owners, looking to sell their firms and buyers looking for strategic purchases. Not surprisingly the COVID-19 pandemic had an impact on the M&A market due both to the initial, rapid deceleration of the economy and now the uncertainty that pervades the market as it recovers. To find out where the M&A market stands right now and where it may be going, especially for owners who are looking to sell., we have invited Mick Morrissey, managing partner of Morrissey Goodale onto the podcast. Morrissey Goodale is a specialized management consulting firm that exclusively serves the AA and government contract consulting industries and is one of the go-to advisors for buyers and sellers.
Host:
Welcome, Mick. Thanks for joining us,
Morrissey:
Thanks for having me on great to be here. All of us at Morrissey Goodale are big fans of the podcast.
Host:
So the M&A market for engineering firms took a dip in the spring when the pandemic hit, but it has gradually worked its way back up right now. Year-over-year deals in the U.S. are off about 10%. What do you expect to see in the market over the coming months?
Morrissey:
Let me put some context on that. It's a great question. 2019 was a record year for deals in our industry, 317 deals, almost one per workday, a pretty torrid pace of activity and, really speaking to how fast our industry was consolidating. January and February of 2020 were ahead of that pace, then COVID hit and the M&A market froze in the spring, March through May deals were down about 50% year over year. We were back to 2017 levels. Things started heating up a little bit in June and July, but still way behind last year. And then boom, in August of this year, M&A just started right up again. And indeed, we're going to have one of the strongest August on record for deals in the United States. Based upon everything that we're seeing in terms of interest from buyers, based upon the fact that the consulting engineering industry and the engineering industry writ large has been remarkably resilient through this pandemic, and then given that we anticipate some sort of stimulus package benefiting the industry after the election, we would anticipate that we're going to see lots more M&A activity and an uptick in M&A activity as we head into the back end of the year here in Q3 and Q4. I wouldn't be surprised if we end up the year very similar to where we were in 2019, which was a record year for deals, or maybe 5% or so beneath that level.
Host:
You mentioned, that the engineering industry has not suffered as badly as many other industries did. A guy who owns a firm and is looking to sell, is now a good time to sell?
Morrissey:
It depends. It depends on what markets your firm is in. Buyers are looking for quality. They're looking for growth in the acquisitions that they make. They were before the pandemic and that's certainly where they're focused now. So if a firm is serving, for example, the federal market, or if a firm has particular expertise, let's say in warehouse and distribution centers, both of those markets are doing well in 2020 and are anticipated to do well into 2021. This could indeed be a very, very good time in terms of valuation and deal structure for a seller that serves those markets. On the other hand, if you're a firm that is seeing a decline in backlog or weakening in earnings, and oftentimes today, those are firms that are serving, for example, the retail market or the commercial markets, this may not be the best time to go to market. It may not be the best time to seek a buyer.
Host:
What about size? Is this a good time if you own a smaller engineering firm or a larger engineering firm? Does That have any impact on the decision?
Morrissey:
Well, it's a really interesting question, because the trend we're seeing in acquisitions for consulting engineers is that the median-size deal has continued to fall over the last several years. Now the median-size deal is something like 15 to 17 employees with somewhere between $2 and $3 million in revenues. And that's a direct result of it being so hard to find talent in this industry and that challenge hasn't gone away with respect to COVID. While there may be 9% to 10% unemployment nationally, that unemployment level is not being felt in our industry. By and large, quality people in our industry aren't getting hired at the same rate that they were before, although maybe it's a little different in terms of onboarding and hiring now with most of it being done remotely, or a lot have been done remotely, but still, talent is very hard to find and that's what's driving acquisitions of smaller firms in our industry.
Morrissey:
And that's why the median deal size continues to fall because small acquisitions are a way to get talent on board fast, instead of going through a three-month to six-month to one-year cycle of picking up the equivalent number of employees. So I'm not sure that that size is a determinant with respect to whether it's a good time or a bad time to sell. I do think though that size and we saw this pre-pandemic and we're seeing it still that size correlates with valuation. So the larger a firm is, the greater the probability that it will achieve a higher valuation when it sells than a smaller firm.
Morrissey:
If you look back a decade or so ago, right after the last recession, about one-quarter of all deals in the United States were being done by publicly traded firms, the Jacobs and AECOMs. The brand names. Since the Great Recession, the percentage of deals being done by the publicly traded firms has dwindled to about 5% of all of the deals. Over the same time period, private equity-backed firms and private equity recapitalizations of firms engineering firms in the ENR 500 have grown significantly to the point where now about a quarter of all the deals. Now, what does that mean with respect to size? Those private equity groups typically are looking to make acquisitions of firms that are generating at least $1 million in EBITDA and more commonly $3 to 5 million in EBITDA. And that speaks to firms that are generating about $10 million to $50 million in revenues, which would speak to the larger firms in the membership of ACEC.
Morrissey:
So, um, I think the market is fairly agnostic believe it or not with respect to size. I think there's a market for each size segment with different types of buyers. Again, I come back to the determinant, particularly in 2020: What is the outlook for the markets that the selling firm is serving? Are the selling firms are serving markets that are being impacted by the shift in what's happening in the larger economy? If the firms are serving commercial real estate, or they're serving bricks and mortar retail, or they're serving, for example, the cruise industry or the hospitality industry, those firms, by and large, are seeing some significant or moderate impact to their backlog into their earnings. And they're just not attractive to buyers right now because buyers are looking for quality. But for firms that are serving the federal market, which is still going strong, for firms that are subject-matter experts in particular facility types where there's great demand, such as warehouse and distribution centers being driven by the Targets and the Amazons of the world, those firms are seeing demand. And particularly for firms that have figured out how to incorporate technology and big data management, or have developed proprietary software applications to wrap into their traditional engineering business model, those firms are seeing demand.
Host:
So if I were the owner of a firm and I was not in warehouses or data centers, what would be my strategy to make myself appealing
Morrissey:
That depends on what sort of runway you've got. From our perspective at Morrissey Goodale, the industry has entered the first phase of a new reality, and most firms have got about a year we believe to figure out that new reality because we believe there's going to be a lot of pain in 2021 as state and local governments face some real holes in their budgets. That'll put real downward pressure on the market for engineering services and put downward pressure on pricing and fees. So, firms need to reposition themselves from our perspective over the balance of 2020 and beyond. If you have a backlog to do that, then the way for firms to make themselves more attractive over the next year or so is to get into the markets that are more attractive.
Morrissey:
They either do that by making key hires or making acquisitions to do so, or they need to figure out how to deploy technology. And that's either generating it internally, leasing it, or buying it off the shelf, and then customizing it to adjust their business model, to really improve their technology game. Neither of those strategies are immediate strategies that can happen in a three to six-month period, so firms need to start making those investments now. For firms that only have 30 to 90-days worth of backlog, to make themselves more attractive for a buyer, they need to really cut out all extraneous costs, need to get themselves profitable, need to connect with their clients, and need to get as much backlog as they can in place.
Morrissey:
Those are the things that they need to do to position themselves for a sale, but even in that situation, and even if they do find a buyer, firms that are serving clients or markets that are being challenged are going to find it hard to find a buyer. Again, I come back to buyers being focused on quality. They're focused on the long term. And so they're planning to allocate their M&A resources to, to quality firms.
Host:
What about selling to insiders? Is that market slow right now? Has it stopped or is it continuing?
Morrissey:
It's continuing, although we believe it's going to run into headwinds into 2020 and 2021. If you look at 9 to 10% unemployment in the nation, there's a greater chance that, somebody's spouse or partner has either been furloughed, um, or has lost their job. So, if you're a potential owner in an engineering firm and your partner has lost their job, your kid is graduating from college and can't get a job because of a 9% unemployment rate and is stuck at home with you, then it's harder to have that kitchen table conversation and say, "Hey, I need to invest a hundred thousand dollars in my company to support the ownership, transition plan," because the money just may not be there.
Morrissey:
This is what we saw in the last recession. Ownership transition plans broke down in the industry, and we saw a spike of M&A activity 12 to 24 months after the recession as firms realized that they just weren't having the capital inflows from their employees and potential owners to support the plans while they were digging out from, uh, the wreckage of the recession. So we expect to see internal ownership transition plans be challenged again over the next 24 to 36 months as we come out of whatever we're in the middle of. And in particular, when we come out of the challenges after 2021, because again, we think that 2021 is going to be a real challenge for the industry.
Host:
So in this situation with, with the uncertainty, with the potential for a bad year coming up, how do you value a company? Are they the standard valuation techniques or is there some sort of percentage allocation for uncertainty?
Morrissey:
Yeah, that's a great question. And actually there should be some sort of percentage allocation for uncertainty, Valuation is one of those professions that has a hard time in pivoting to a new reality and it is pretty much stuck on the axiom that valuations of a firm are based upon forward-looking cash flows for the entity. In a time of great uncertainty, however, forward-looking cash flows become hard to forecast. Most firms in our industry have a hard time forecasting a year anyway and beyond a year becomes challenging. So when you look at valuations done in the industry, and you look at the projections that are used for those valuations, they make you scratch your head sometimes. And also when you consider that in the middle of the year, the publicly traded firms in our industry withdrew their guidance, meaning that they weren't going to provide estimates as to what was going to happen going forward.
Morrissey:
You can see how it makes it much harder for smaller privately held firms, which are the majority of the ACEC membership to do so. The way that valuation adjusts is, the valuation folks assign a higher discount rate, which just means they put more risk into the model, and that tends to drive down valuations. So that's sort of a theoretical perspective, but that's not necessarily what we have seen in the marketplace. My contention to our team was if deals are falling 50% in the spring, then let's figure out if valuations have also fallen 50%. And what we found was it wasn't the case. In the data set of deals that were done in the spring and the data set of deals that were done in the summer, the valuations are not that dissimilar from the valuations that we saw pre-pandemic, in January and February or in 2019.
Morrissey:
So what really happened was, instead of buyers beating up on sellers and looking for lower valuations as the pandemic played out, in the first stages, buyers just kind of withdrew. And so those valuations in theory went to zero, but in reality, they kind of stayed put, because many of those deals came back online in the summer. Also, when you're buying an engineering firm, the last thing you want to do is start with an evaluation and then if things change, try to beat up on the seller and say, "Things have changed, We're only going to buy it for 50% of what we said." That's just a lousy way to start a relationship and it really doesn't help integration.
Morrissey:
So what happened was the deals where buyers felt that there was quality, they stuck with those valuations through the deal-making process. Where there was uncertainty, about half of the deals in the U.S. stopped. They just stopped. Now the deals are coming back. What we've seen in the late summer, what we're seeing in August is those valuations are pretty much picking up where they left off prior to the pandemic. So, I urge everybody listening to the podcast to take these metrics with a grain of salt and don't apply them specifically to your individual firm, but what we saw at the high end and what we're still seeing at the high end, in the upper quartile, is multiples of EBITDA in and around the seven range, seven times trailing 12 months; EBITDA multiples in the medium range of about five or north of five; and multiples in the lower quartile of a little under four and a half. So we haven't seen the valuations change that much from a real-life perspective in the marketplace.
Host:
What do you think might happen to valuations if the market does struggle next year? Do you expect to see a gradual tailing off or do you think this trend will continue?
Morrissey:
So I think what we'll see is a bifurcation of the market, actually a continued bifurcation of the market. Quality firms--firms that have got really strong backlog, firms that have got something special about them, firms that serve attractive clientele, firms that are located in a great part of the world in terms of the outlook for engineering services, firms that have proprietary offerings that they have developed and where there is demand--those firms will continue to see strong demand and strong multiples and high multiples. Generic firms--firms that are vanilla firms that don't have anything special about them, firms that are followers rather than not leaders, firms that have to sell--they're either going to find lower multiples await them with not very attractive terms or they are going to find that there's no buyer for them. That's where I think we're headed and that's where that's the market that we're in now.
Morrissey:
In 2019, there were 317 deals. Not all of those firms were getting the higher multiple. Smaller firms tend to get the lower multiples. Smaller firms tend to have fewer options and may need to sell rather than choose to sell. And when you need to sell, when you have to sell that's when the deals that are in front of you generally are less attractive. And that gets to the interesting nature of selling your consulting engineering firm. The best time to sell is when the economy is doing well, when your market you're doing well, when your firm is doing well from a financial perspective, and to do it before you're 60, because then typically a buyer is going to lock you up for three years. And so at 63, which is still relatively young given all of the advances in healthcare and science, you've got two great decades ahead of you to decide if you want to work or consult or go and sail the Caribbean. Most owners don't figure that out. And most owners end up looking to sell when the economy is not good when their markets are not good, when their firm's financial performance is weak, and when they're 65 plus, and they have lost all of the leverage that they could have had in any negotiations,
Host:
That's a great lesson, right there, I'd say for people to listen to it because that seems to me to cut right to the heart of it. But just one more question and then we'll let you go. What kind of financial arrangements are you seeing as far as how the deals are structured?
Morrissey:
We're seeing the same basic packages as pre-pandemic. So cash, notes paid over one, two, or three years, stock, and earn-outs. Pre-pandemic we were seeing more cash, more notes, more stock, less earn-outs. Post pandemic, what we've seen is buyers moving more consideration to the earn-out component and moving it away from the guaranteed components of either cash or note payments over one, two, or three years. And that I think is just an acknowledgment that, the market is less certain for both buyers and sellers, and buyers are looking to hedge their bets with the amount of money that they guarantee in a deal.
Host:
Which, given the pandemic, sort of makes sense.
Morrissey:
Yeah, I think it does, but I also think, and this is what we saw again in the last recession, there's a whole bunch of received wisdom and conventional wisdom in our industry, and that has played out in the fact that M&A has declined over last year, which is not unusual. In general, when there's a recession or a pullback in the economy, M&A does decline, and indeed, M&A was down 19% in May and June year-over-year, but now it's back to just down 10% or so. But I think, when you dig into the details, once again more and more deals are being done by these private groups. So while employee-owned firms and ESOP firms have pulled back from the marketplace, the private equity firms are still buying because that's what they do. And if you consider a mantra of buy low and sell high, while the marketplace in general recognizes the pandemic and acts appropriately, and most of the ACEC membership acts conservatively, a number of these private equity groups, who are very, very skilled buyers, are seeing this as a buying opportunity and a way to position themselves ahead of the market recovery. And I think that's something for the membership and the listeners to be aware of.
Host:
It's a good place to end. I appreciate your taking the time to talk to us about the market. Thanks so much,
Morrissey:
Thanks for having me on, I really enjoyed it. Great to be with you.