Selling a Civil Engineering Firm

Backlog and the clients behind it

Backlog is the first thing a buyer asks about. It means signed work that has not been completed or billed. A firm with a deep backlog of design and construction administration work has a year or more of revenue already in hand, and a buyer will go through it project by project. They want to know the scope, the fee, how much has been billed, how much is left, and who the client is.

The client mix takes up much of the conversation. Municipal, county and state agency work tends to be steady and slow to leave. Many firms work from prequalified lists or on call contracts with a city or a transportation agency, and those contracts are often what a buyer is paying for. Private development work moves with the housing and commercial cycle, pays faster, and can disappear when interest rates rise. A firm with both is usually easier to value than a firm with one. Buyers will ask what share of revenue comes from the top few clients, and our post on customer concentration explains why that share affects the price.

Be ready to explain how work arrives. A firm that wins mostly through qualification based selection, where agencies pick on experience and not on the lowest bid, has a different risk profile from one that bids against ten competitors on fee. Proposal win rates, how many clients come back, and the names of the project managers who hold each relationship are all fair questions. If every relationship runs through the owner, the buyer will say so, and the price will reflect it.

People, licenses and utilization

Civil engineering is a licensed profession, and the licensed engineers are the firm. A buyer will ask how many professional engineers are on staff, who the principals are, how long each has been there, and who can stamp drawings in which disciplines. The roster of land surveyors, project managers, designers and drafters comes next, with pay, tenure and what each person bills. A firm with a strong bench of mid career engineers is more attractive than one where three senior partners hold everything and the young staff are leaving.

Utilization is how much of the staff's paid time is billed to clients. A buyer will compare it to what firms of your size usually achieve, and they will look at the multiplier, which is the amount billed for each dollar of direct labor. Overhead that grows faster than revenue gets attention. So does a pattern of unbilled hours on fixed fee projects, which usually means the firm underpriced the work.

The ownership structure of an engineering firm can be restricted by state rules about who may hold an interest in it. Rules vary by state and your attorney confirms what applies to your firm. The restriction shapes who can buy, how the deal is structured, and sometimes how long the selling owner stays. Many sales in this industry go to larger engineering and consulting firms, to employees through an internal transition, or to a mix of the two. Our post on who buys small businesses covers the typical buyer types.

Unbilled work, receivables and the books

Firms like this often have a large balance in unbilled work in progress and in receivables. Public agencies pay on their own schedules, and some hold back part of each invoice until the project closes. A buyer will analyze how old your receivables are, what is held in retainage, and whether any work was done that the client has not agreed to pay for. Write offs from prior years, change orders waiting for approval, and disputed invoices will all come up.

Revenue recognition needs to be consistent. Whether the firm uses completion based accounting or bills on a time and materials basis, a buyer will want financials that match project reports. Our guide to getting your financials ready for a buyer covers the basics. Because so much value sits in earnings that a buyer must adjust, add-backs deserve special care. Owner compensation, vehicles, family on payroll and personal expenses are the usual items.

Expect requests for tax returns, monthly profit and loss statements, a balance sheet, a backlog schedule, an aged receivables report, a work in progress schedule, payroll records, a list of licenses, certifications and registrations for the firm and its people, and a list of every active contract. They will also ask for professional liability insurance policies and a history of claims.

What has to transfer

Contracts with public agencies may need the agency's consent to be assigned. Some agencies treat a change in ownership as a change in the firm that was selected, and a few require a notice or a short review. A prequalification status, a place on an on call list, or a small or disadvantaged business certification may not survive a sale to a larger buyer. If your firm holds a certification that qualifies it for set aside work, speak with your advisor before going to market, because a sale can end that eligibility and change the value of the backlog.

Professional liability insurance is a separate point. Engineering work has a long tail of exposure, since a problem with a design can surface many years after the project is built. Most policies cover claims made while the policy is in place, so a buyer will want to know how past work is covered after the sale. This usually means buying extended reporting coverage, often called tail coverage, and the cost and who pays it are negotiated. The same applies to any open claims or known disputes.

The office lease follows the usual rules, and our post on the lease is part of the deal covers them. Software licenses for design and drafting tools, survey instruments and field equipment, vehicles, and any drone or scanning equipment should each be listed with age, condition and whether it is owned or leased. Some of these licenses are tied to the user, and some to the company.

What tends to sink a sale

Several things recur. The founder holds every client relationship and no one else has met the agency contacts. Backlog turns out to be thinner than the owner described, or heavily weighted toward one project. Receivables are old and the retainage is large. The firm's insurance history has a claim that was never disclosed. The best engineers hear about the sale and start looking elsewhere. Or the structure runs into a restriction on who can own the firm and the deal has to be redrawn.

Timing is another factor. Public agencies decide on their own calendars, and a firm holding a freshly signed large contract can sell for more than one still waiting on a decision. The sale is best planned around the pipeline, and for many firms that means preparing for a year before going to market. Our post on how long it takes to sell a business gives a sense of the schedule.

How to prepare

Bring a second and third person to every client meeting now, so the relationships belong to the firm. Put in writing the terms for each licensed engineer, including their role after a sale. Clean up receivables and close out old projects. Build a backlog schedule that you could hand to a stranger. Check your professional liability coverage and ask your insurance agent what tail coverage would cost. Review every public contract for assignment language.

When owners are ready, Business Advisors of America prepares the valuation and the materials a buyer and lender will expect, then finds buyers who fit the firm. If you are considering selling a civil engineering firm, that page shows how we approach it.

This article shares our opinion and general information. It is not legal or tax advice. Always speak with a licensed attorney for legal advice, and a qualified tax professional for tax questions, before you act.