Design services companies typically start small (some exceptions when it concerns management buy-outs) and natural growth is a slow process as it requires hiring and training of engineers based on/driven by the revenue stream of the company. Growth of business is tied to growing the team and it is not always easy to find the engineers. Some design services companies have started to establish offices in locations such as Egypt and Vietnam, driven by the proximity to good universities and a steady stream of bachelor and master engineers. Such paths are viable when the company has sufficient resources to ensure the training of incoming talent as well as the establishment of the company culture in the new location (not something to be taken for granted).
The drive for growth is based on two fundamentals in the design services business: (1) More stability through more customers and (2) More stability through a broader set of markets. As any business knows, depending too much on a single customer or even a single market makes you vulnerable to major variations, either because the customer decides to change course or because a single market gets hit by a major change. For that purpose, growing the design services requires a careful strategy as well, not just “more is better”.
Growing design services through an acquisition strategy is an interesting approach and, often less complex and challenging as assumed by Management Teams. Financial support for a thorough “buy-and-build” strategy is more easily available with a variety of financial partners interested in participating in a growth plan. These parties can range from the regular Private Equity (PE) players to banks and family offices. There are usually a number of minimal financial requirements that need to be met before engaging with financial entities, apart from, of course, a thoroughly devised growth strategy and the accompanying execution.
We have been part of the preparation and execution of numerous M&A strategies, and it goes without saying that developing a good strategy is the foundation of a solid buy & build. Developing is not just paper but takes active market research and sample (anonymous) engagements. The sequence of acquisitions is important as is the time to ensure that the post-acquisition integration planning is properly managed and completed for each acquisition. For a design services company, an acquisition must cover several fundamental rules, both financial and strategic. Executing the strategy according to these rules ensures that time and money is not wasted but builds according to the 1 + 1 = 3 rule.
One of the challenges that comes with design services is the cyclical nature of the services business. When the economy tightens and corporates are watching their operational expenses, the first step will be to halt any external contracts/contractors which are not deemed absolutely essential.
Whereas the earlier (staircase) model is a good approach in scaling up revenue and creating new revenue streams, the foundation of the company is still based on the service model: headcount continues to be the main driver (typically up to 60-70% of revenue). In terms of (enterprise) valuation the additional revenue streams, however, will already make a significant difference.
Design services companies typically start small (some exceptions when it concerns management buy-outs) and natural growth is a slow process as it requires hiring and training of engineers based on/driven by the revenue stream of the company. Growth of business is tied to growing the team and it is not always easy to find the engineers.