Many architectural firms are selling at or above fair market value. There is an excellent demand for established firms as the barrier to entry remains high. Many larger firms are also purchasing smaller ones to generate a larger market share long-term. This guide discusses how to value an architectural firm and the sales process.
About The Architecture Industry
The architecture industry is a lucrative industry with sustainability and growth potential. Architectural firms offer expert planning and design services for all types of buildings and structures, including residential, institutional, leisure, commercial, and industrial buildings. Below is key information from Business Reference Guide about the architecture industry:
- There are approximately 71,000 architectural firms in the U.S.
- There was a 2.2% annual growth for the architecture industry from 2018 to 2023
- The architecture industry generates $51.8 billion in annual revenue
- The annual profit for the architecture industry is $5.4 billion
- Experts predict a sizable increase in annual growth (0.6%) from 2023 to 2028
The industry predictions differ. Of course, architectural firms are largely impacted by the construction industry. Fears of reduced construction compromise the anticipated annual growth within the architecture industry. Additionally, architectural firms that focus on LEED-certified designs should have more success in future years.
How to Value Your Architectural Firm
The first step is to determine the worth of your architectural firm. Of course, since buyers are primarily concerned with the profitability (and potential profitability) of a company, your financial information is one of the primary factors in determining value. The simplest valuation method is to use acquisition multiples (also called rule of thumb data). This takes recent sales data and averages them together, similar to the role of comparable properties in a real estate sale. The rule of thumb data includes:
- Architectural firms sold between 1.76 to 4.16 times the Seller’s Discretionary Earnings (SDE)
- Architectural firms sold between 0.38 and 0.65 times the annual net sales
- Architectural firms sold between 2.75 and 7.78 times the Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA)
Of course, you will need to know your SDE, EBITDA, and net sales to use these acquisition multiples. Also, it is important to know the many other factors your business broker will consider during a business valuation. These factors include your location, unique industry advantage, the quality and reputation of your firm and workforce, growth potential, and purpose for selling.
Sell Your Architectural Firm in 5 Steps
There is much more that goes into selling an architectural firm than simply listing it and waiting on offers. Of course, you want to sell confidentiality, which changes the marketing approach and requires having connections with the prospective buyer via databases and networks. This is why a business broker is essential. Your broker can also help you plan your strategy, negotiate the deal, and complete the due diligence process. Notably, here are the five steps you can expect during your sales journey.
- Plan your sales strategy
- Find a buyer
- Negotiate the deal
- Due diligence
- Close the sale
To help you make informed decisions about selling your business, we have provided a more detailed look at each stage of the process. We encourage you to speak directly with a business broker to learn more about how to sell an architectural firm that can provide personalized consulting based on the specifics of your firm’s situation and your personalized exit strategy.
Plan Your Sales Strategy
Your sales strategy is a way to organize the sales process for your architectural firm. This involves discussions with your business broker, attorney, CPA, and business partners. During the planning stage, you set your goals for the sale. This may include financial goals, such as the sale price. However, it may also include other goals, such as finding a buyer who will keep your existing team on staff.
The sales strategy also involves extensive preparation. You, along with assistance from your attorney and business broker, will collect all the paperwork that you will need to complete the sale. This includes (but may not be limited to) three years of tax returns, profit and loss statements, balance sheets, employee sheets, and client lists. Taking the time to prepare these documents makes the process much easier and reduces the risk of significant setbacks during the negotiations, due diligence, and closing stages.
Find a Buyer
Next, you will search for the right buyer for your architectural firm (or your stake within the firm). Keep in mind, selling an architectural firm is much different than selling other business types. Rather than publicly advertising the firm, you will do the opposite and keep the sale as confidential as you possibly can. Your business broker should understand and take serious confidentiality. They can utilize their connections and databases to find prospective buyers and receive offers.
Negotiate The Deal
If you price your architectural firm properly, then you may receive multiple offers at or above fair market value. Many prospective buyers may present certain conditions and contingencies as well. It is important to properly negotiate. A sound negotiation strategy helps ensure you receive the most for your sale without driving away potential buyers. Your business broker should handle the negotiations and contingencies for you. They should remain in close communication with you throughout the process as well, keeping you informed of each offer and helping you narrow in on the buyer that helps you reach all of your goals (not just the financial goals).
Due diligence is not the best process in the world for the seller. However, this is a necessary step in the sales process, and it is the final step before the deal is closed. During due diligence, the buyer has the opportunity to review all financial information and any other aspects of the business the buyer feels they need to verify before signing the purchase agreement.
Your job as the seller is to provide the buyer with everything they need. This includes financial, legal, and organizational processes. The buyer may also want to learn more about the daily operations of the architectural firm and may even request a walk-through of the office and on-site observations of your current projects.
Close The Sale
The sale closing is exciting as this is the final step of your business sale (and possibly your exit strategy). However, do not celebrate too early; you still have some work to do. There are certain documents you need to bring with you to the closing. Your business broker can walk you through precisely which documents you need. It could include a copy of your lease, license, and insurance policy (among many other documents). Of course, you will be reviewing the purchase agreement as well.
The business transfer begins or continues during closing. This may involve switching insurance policies to put it under the buyer’s name, notifying employees, and fulfilling other transfer obligations. Lastly, the payment is sent to you after the final signatures are attained for the purchase agreement.
Plan and Execute Your Exit Strategy With Sigma Mergers and Acquisitions
Now is a great time for many architectural firm owners to sell. If you have an exit strategy or are in the planning stages, then contact our team here at Sigma Mergers and Acquisitions to get the sales process started. We have helped hundreds of business owners sell and achieve their exit strategy goals.
Scot Cockroft is the Owner & President of the #1 ranked Business Brokerage, Business sales and M&A firm in Texas. Scot has been named Named Deal Maker of the Year by Dallas Business Journal.
He is committed to a “different” type of business brokerage firm, one that is NOT about a sales pitch but, rather, results! In short, a business brokerage firm that is committed to performance-based compensation. Scot believes in these principles as well as a candid honesty with clients. His candid style often takes buyers and sellers by surprise, but is often what assures successful connections between the two.
Feel free to reach out!