Fall brings a busy season of conferences for engineering and construction professionals, and I make a point to attend as many as I can. It’s a great opportunity to catch up with old friends and make new acquaintances. This year I had the opportunity to attend events in Chicago, Kansas City, and Las Vegas.

Sentiments in the engineering and construction markets are at an interesting inflexion point. In my 20+ years providing merger and acquisition (M&A), capital raising, and strategic alternatives advisory services to industry firms of all types and sizes, I’ve lived through multiple market cycles and the effects of the Financial Crisis. New trends have come and gone, up-and-comers (and capital/service providers) have entered and exited the market, and foreign players have come ashore and subsequently left. In short, these cycles have cycled.

We’re now at the inevitable point in the industry where the most recent growth cycle may be coming to an end. The overall construction industry has posted eight years of consistent growth. Total construction starts are projected to pull back 1% in 2019 and 4% in 2020 according to Dodge Data, and the Architectural Billings Index (ABI) is below the so-called magic 50 level. M&A activity has been robust in the sector, and earnings before interest, taxes, depreciation, and amortization (EBITDA) multiples for strong firms (especially engineering, maintenance, and services firms) remain at or above historical levels.

What does this mean for the value of industry firms and the M&A market for engineering, construction, and industrial services companies?

1. Good firms always sell for good multiples. I heard this adage before the industry slowdown in 2008 – 2009, when firms were questioning whether they should take advantage of market conditions and sell in order to avoid market headwinds. And the adage has proven true. Fundamentals in the sector create sellers who want/need to sell and buyers who want to buy regardless of where we are in the cycle. Diversification, strong management, disciplined bidding, good access to labor, and strong cashflows will always win the day.
   
   
2. Strategic and financial buyers will continue to acquire. Many strategic firms’ shares are valued above long-term averages, interest rates are low, and credit is readily available to fund transactions. In addition, domestic (and international) players continue to seek new service offerings, new geographies, and revenue scale in order to meet their internal growth goals. This is especially true if one or more of their segments is seeing growth pressure. Private equity and family offices continue to be hungry, as well. New funds emerge regularly (I can think of at least five in the past six months with interest in the engineering and construction sector), the operating partner model has grown in popularity, and our sector is viewed as a relative value compared with others. Many of these firms are no longer shying away from the traits that are characteristic of the sector (perceived cyclicality, elevator assets, percentage of completion accounting, bonding, etc.).
   
   
3. Strategic alternatives are expanding for firms seeking liquidity or growth capital. We’re seeing sub-debt, mezzanine, minority equity, simple change of control, and ESOPs continue to grow in popularity for industry firms. Owners are becoming more comfortable with these various options. The key is to work with an advisor who can objectively walk through the alternatives and to pursue the one that makes the most sense for your business.

A Jumpstart in 2020

That all being said, if you’re considering a sale or capital raise, now is an extremely good time to start the conversation. The first and second quarters of the year tend to favor new transactions, and the election in November 2020 could cause some chop in the markets for a quarter or two.

It has been a busy, exciting, and sometimes tumultuous fall season for the engineering and construction sector, and there may be clouds on the horizon in certain segments. But M&A markets remain robust, and capital is readily available.