Business Conditions That Affect the Valuation of an Engineering Firm
Determining the value of an engineering firm is a complex assignment. Valuers need to consider several business conditions when assigning a value to a firm. There have been several studies that show the certain conditions are more primary than others in the valuation process of an engineering firm.
These are the three more prominent conditions:
1) Market sector exposure (private vs. public). Engineering firms that have clientele from both the private and public sector tend to have more resilient and less volatile revenue charts. Naturally, they tend to have a higher valuation than an engineering firm that would have only private sector clients despite having higher volume of work.
2) Client concentrations or submarket concentrations. Similar to the market sector exposure, the client concentrations is critical in the valuation process in the A&E industry too. If an engineering firm has three quarters of its business with one particular developer in a major city, the impact on the firm revenue as a whole is tremendous say if the contract is broken for any reason. Hence the final valuation would take into consideration this challenge.
3) Management strength and depth. It is common in the engineering industry to see firms with management that is led by one or two individuals. Firms that have a management team consisting of more key members and a more structure hierarchical structure where successors have been identified have lower risk associated with them and, therefore, higher valuation.
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