When contemplating the future of their practice, many architecture and engineering firm founders imagine a career without retirement. Interestingly, the reality is that most firms typically last about 30 years, aligning with the average work span of their founders. Meaning, most firms don't extend into future generations of owners.
Neglecting succession planning can lead to firm closure when founders are ready to retire, rather than owners having a financial exit or passing the firm onto future leadership. While not always a bad outcome, closing up shop still does require advance planning. More importantly, this means many firm owners are giving up on significant value by closing their businesses rather than looking to sell and be compensated for the years of dedication and sacrifice they have put into growing their businesses.
It is important for architecture and engineering firm owners to understand all of their options and strategically plan for an ownership transition. Even if you are just starting a firm, or retirement seems a long way off, it is worth planning for this inevitability now.
Understanding Firm Ownership
Risks and Benefits
Firm ownership comes with distinct advantages. These can include increased empowerment, autonomy, flexibility, control, and also the potential for financial rewards. Yet, it is essential to recognize the accompanying risks to these benefits. Owners often can find themselves in situations where they must forgo a paycheck or need to invest personal resources to sustain the firm, especially during economic downturns or delayed client payments.
Such scenarios necessitate difficult choices, often prioritizing the firm’s stability over personal financial gain. Additionally, prospective owners should be aware of the heightened sense of responsibility, time commitment, and effort involved in ownership. Once you start a business you are responsible for it's health. This can often mean long hours, and having to take on tasks that remove you from the work you love and the reason you got into the architecture or engineering professions to begin with.
Knowing the risks, and pitfalls of being an entrepreneur, it is important to plan for a good financial return on your investment of time and resources. Ideally the firm you are building has value that can grow over time and lead to a good return on investment when you are ready to retire.
Pathways to Ownership
There are many pathways to ownership - from starting a new firm, joining an existing partnership, or buying an established practice.
For many, the path to ownership starts with buying into ownership of a firm they currently work at. Firm owners identify people that have the skillset and the interest to take over the practice. These future owners then purchase shares from all or some of the existing partners. This typically manifests by redirecting bonuses or profit distributions toward equity acquisition over time. If anticipated distributions fall short of covering share costs, alternative payment plans may be created, potentially involving longer terms or down payments.
The aim is to devise a structure that satisfies both the buyer's affordability and the seller's financial requirements. However, profit distributions carry inherent uncertainty, which underscores the importance of consulting legal and accounting professionals regarding tax implications and ownership transfer methods.
Preparing for Leadership
Identifying Future Leaders
To ensure a successful transition, it is crucial to identify individuals who have the skill sets that are best suited to take over. Future leaders should possess an entrepreneurial mindset, have a knack for bringing in work, are respected by their peers, are interested in business financials, like mentoring and leading a team, and have the ability to manage themselves and others effectively.
Such qualities may manifest in individuals who excel in design, project management, or have technical expertise but the best designers, architects, or engineers are not necessarily going to make the best business owners or leaders. Those who combine their professional strengths with self-awareness and a positive outlook are typically the most promising candidates for firm leadership.
Owners often seek out emerging leaders who show commitment to the firm’s success through diligent work, networking, and civic involvement.
Gaining Leadership Experience
To position oneself as a viable candidate for firm ownership, aspiring leaders should focus on enhancing their leadership and business development skills. This can involve learning from established firm leaders, observing their interactions with clients and staff, and seeking external resources for professional development.
To help the next generation of leaders at your firm be successful, direct them to helpful books, offer to cover the cost of professional development courses and training, and mentor them in the aspects of running a business they might not experience in their current position.
Programs like CVG’s FOUNDATIONS and Goldman Sachs 10,000 Small Businesses offer valuable training opportunities for those aiming to grow in leadership roles. Direct people to these sorts of learning opportunities before they step up into their new roles as firm owners.
Strategic Transition Planning
The Firm Life Cycle
The transition of ownership can occur in various forms—internally, through mergers, or acquisitions. Regardless of the approach, initiating this process six to ten years prior to retirement is crucial. Mergers and acquisitions may necessitate the founders' continued involvement for three to five years or more, while internal transitions require time to transfer leadership, technical expertise, and business relationships.
Preparing successors often includes developing their skills in business development, financial literacy, and strategic planning. It is important for current owners to stay involved for a set amount of time to ensure the next generation is set up for success.
Structuring Ownership Transfers
Planning for ownership transitions begins with a comprehensive valuation of the firm, which can be facilitated by accountants and outside business valuators. Following this valuation, a plan for equity transfer is developed, incorporating various financial elements such as price, pace, and payment methods.
Given the challenges of outright equity purchases, many firms allow successors to utilize profit distributions and bonuses for gradual acquisition. Some will opt for transferring equity through stock bonuses, which has its own set of requirements and tax implications. If an internal transfer is to succeed, it’s vital that the plan accommodates both the future financial viability of successors and the financial needs of retiring owners.
Make sure you discuss with your business and personal accountants of all involved in the transfer, to understand the financial and tax implications of any purchase agreement.
Ensuring Fair Opportunities for Growth
CVG recommends that firm leaders carefully develop roles and titles with clear responsibilities and desired skills. Then use these to evaluate how your staff's skills and experiences are reflected in their titles and roles. Developing a transparent “Career Ladder” can help clarify advancement requirements and competencies. When your team knows what the expectations are for a role they are interested, they are empowered to search out the professional development and continued learning needed to arm themselves with the right skill sets.
While this system may not guarantee equal opportunity, it does clearly outline the paths available for employee growth. This helps with retention as well as identifies which employees may be working their way towards future leadership or ownership opportunities.
Transition Leadership
As with most design projects, success of ownership transition depends on the execution of the plan. Successors must be mentored, supported, and educated to thrive in their new roles. This takes time. Understanding changes in leadership team roles and responsibilities becomes key to transitioning leadership along with ownership. For founders, this includes adapting to changes in governance, decision-making processes, and leadership styles that may come with new firm owners.
Advance planning, realistic financial expectations, and active nurturing of capable successors are the keys to a positive and successful ownership transition process.
Want Help With Ownership Transition Planning?
CVG has assisted many firms with planning for ownership and leadership transitions. Be it internal succession, merger, acquisition, or even firm closure, CVG can help you strategize for your firm’s future.
Learn more about how CVG can help your firm here:
For more insight into Succession Planning:
Successful Ownership Transition Planning Starts With Strong Firm Financials
Firms with stronger financials, higher profits, and better data and analytics are primed for a more successful and lucrative ownership transition. Using a firm management platform like BQE CORE sets you up to navigate the transition process whether it is a merger and acquisition or an internal sale. Having clear accounting records, comprehensive reporting, automated data insights, project management processes, and a system for better invoicing and payments, helps you manage your firm and be ready to hand the reigns to the next generation of leaders. Request a demo today to see how BQE CORE can help your business thrive.
