Do you have a plan for “exiting” your firm when you retire? For many sole practitioners, the firm slowly winds down as they go into semi-retirement. But is that the way it needs to be? Today we talk with Lisa Henry, principal at Greenway Group, about ownership succession planning and ownership transition for architecture firms.
In this episode we discuss one firm that practically imploded due to the lack of an ownership transition plan. Don't let this happen to you.
We also discuss what architects can do to take a leadership role in the design process. What is the fine line between taking marching orders from the client and overstepping our bounds as our client's advisor? Find out in this episode of Business of Architecture.
In today's episode we discuss:
- Why you shouldn't wait to have a transition plan in place.
- The owner or Principal's responsibilities in preparing the firm for a transition.
- Finding your successor and preparing them to be the new leader of your firm.
- Ownership and giving your new leaders a reason to stay with your firm.
- Don't give your firm away. The importance of getting people engaged and invested in your firm's future.
- Why designers should see themselves as leaders in transforming communities and lives.
- The value of good design to the human experience.
- Valid Business Rationale – Solutions that benefit your clients and your community.
This interview is on iTunes. Subscribe above, and be a hero! If you know another architect who would benefit from watching this video, share away using the social share buttons.
Interview Transcript and Members Only Resources:
Enoch: Welcome back, Architect Nation, this is your host Enoch Bartlett Sears and this is the show where we talk about running a great architecture firm so that we can do what we set out to do when we started school, which is make the world a better place and do good design.
This show is brought to you by the Business of Architecture conference where you’ll be able to learn everything you ever wanted to know about starting an architecture firm, marketing a firm, and finding more clients.
Today, I’m happy to welcome back to the show Lisa Henry. She’s a Principal of Greenway Group. She helps architecture firms improve their business performance. So, Lisa, welcome back to the show.
Lisa: Thanks, Enoch. Great to be with you.
Enoch: Now, last week we ended up, just kind of on the tail end, talking a little bit about firm succession planning. One thing that comes to mind when I think about this is you have two scenarios: You have sole practitioners who are thinking about winding down their firm or “What’s going to happen when I retire?” Then, you have other firms that have other people who are a part of it and there is some sort of ownership transition.
Could we talk first about sole practitioners, people who are looking for an exit strategy for their firms? Do you have any advice or strategies for dealing with that kind of scenario?
Lisa: Oh, absolutely. This is really a business issue that we’ve been seeing so much more of in the last several years. The goal of ownership transition is to keep the firm intact. You know, you start a firm and you want to keep it operating smoothly in the future whether there is an occasion for change or not such as, you know, somebody retired or something happened, you want the firm to continue on.
So, the idea of keeping the firm transition planning up front, you can’t start that early enough. You don’t want to wait until it’s too late. So, the idea of keeping the firm intact during an ownership transition is just, I think, the first point of the purpose behind a transition plan.
There are firms that have just simply waited. There’s a firm that we worked with in a… It was a second generation firm. It had three Principals. They, for years, promised to sell their shares to their top employees, but they put it off. They didn’t have that conversation.
Then, the key designers who have the client relationship said, “We want a reasonable amount of this firm or else we’re going to cross over and form our own company.” They really created a lot of turmoil because they were going to leave the firm and the relationships with the Principals were really badly torn. They were not able to put that back together.
Six months of low productivity and profitability resulted from this lack of transition planning. The firm put itself in peril because they had their key people essentially walk out the door, and that’s not any place that a firm needs to see itself.
If they had started their transition planning a few years earlier, they would never have put themselves in that position. It’s really an owner’s responsibility to address this.
Enoch: Why do you think it’s so difficult or so uncommon to have a good transition plan in place?
Lisa: Well, I think it’s all about people. Current owners of firms just can’t bear to let it go. They, emotionally, want to still be the ones, kind of, running it. That’s like a big one.
Another reason why we see transitions fail is the next generation of leadership just simply hasn’t been prepared. They haven’t been given the opportunity to develop their leadership skills, even business management skills. They don’t have an understanding of the business aspects of running the firm.
You know, for all the great design education we provide students, there is not a lot of business education that goes along with that. That is a real challenge for emerging practitioners who really are a lot more independent thinking. They’re more impatient about wanting the responsibility.
For them to have some educational preparation for leadership, it’s incumbent upon the leader of the firm to give it to them. That’s honestly how I feel about it. Okay, students don’t necessarily get the business education, but when they enter in to the firm, and they aspire to stay with the firm– If a path of ownership is made open to them, they’ll stay and they will be the ones to take this in to the next phase.
The other reason why a lot of transitions don’t work out, Enoch, is the potential people who might be able to take it on, who have the leadership skills, just can’t afford to buy in to the firm. Because there is a financial commitment that has to be made as a firm is going to transition. If the firm hasn’t been funding this transition over a period of time, these younger generation employees just aren’t going to have the independent resources to buy the firm.
Enoch: When you say “funding it over time” how does that look? What does that mean?
Lisa: Funding it over time? What that means is that there is a way that’s been identified for an employee who’s been identified as a leader to buy in to the firm over time. For example, an owner will say “You’re the one that I want to have a partnership interest in the firm. That will mean you have to pay X dollars in equity.” Now, does that have to be written as a $50,000 check this year? No. It can be written as an earn-out as a proportion of that equity interest over time so that it becomes manageable for that person.
It’s not complicated. All it does is take time. If you have someone coming in to the firm and you’re going to transition it the following year, they just simply aren’t going to have enough time to come up with that kind of money as opposed to a ten-year transition plan. There’s plenty of time for that person, by virtue of the fact that they’re working in the firm, to pay in to the equity position that’s been offered to them.
Enoch: So, might there be a separate equity fund set aside that just then gets funded from the person’s salary?
Lisa: Yes. Well, depending on how they choose to do it, absolutely. Yes.
Enoch: Okay. Should that junior person decide to leave the firm, what then happens to the equity stake that they contributed to?
Lisa: Oh. Well, there are programs in place. There are ways that it can be structured so that person isn’t going to lose equity. It depends on how it’s structured. There are so many ways these things can be structured, Enoch, but I think simplistically saying that there would be an agreed upon pay out if the person ends up leaving.
I’ll tell you, if the person ends up leaving, and I know life happens that they do, that’s really the [Inaudible] of this whole model because you don’t want the person to leave. The point is when you tap someone to be a partner they really want to stick around. This is part of it. At the end of the year, as the profitability of the firm is identified, they’re going to get a piece of that. They get a proportion of the profits.
You’ve heard the term “golden handcuffs.” Eventually, that’s really what is built. I mean, the equity is built to the point that that kind of engagement and people wanting to stay is because a real financial reason to do so exists.
Enoch: Got it.
Enoch: So, in terms of from culture and getting someone to stay, what are some things or suggestions that you would give to help that happen? What are some things that a firm could do to make sure that people do stay?
Lisa: Again, primarily if we’re talking about firm leadership, having ownership in the firm is an absolute. That is a key. You just can’t blame people for wanting to stay with a company or wanting to leave a company if they don’t have a piece of it. They’re more likely to be more loyal to their own careers in that case. But, once they have equity in the firm, they start to transfer to that to- they tie their destiny more to the firm itself. That’s a real key piece.
The other key piece you mentioned was the firm culture. What is the firm culture? Is it inclusive? Is it open and accepting of that new leadership? Or is the firm a command and control, you know, ran by one person? I think those firms are going to have more and more difficulty.
If a firm is identified with one individual, having that firm be able to transition effectively is going to be more of a challenge. There are myriad of examples of some fantastic design firms that, literally, close their doors because the firm structure and the firm, itself, the reputation is tied up with one person. That may be fine for that one person, but once that person makes the decision to retire, or leave, or something worse, that’s the end of the firm. I don’t know why, but to me that’s just real… That’s too bad.
I just think that’s terrible that that is allowed to happen because some of these firms have dynamic project work under their belt, great reputation and that it all resides with one Principal. That’s tough. There’s no need for it, I don’t think, but, again, this is a question of firm culture. If that’s how the firm operates where it does, in fact, reside with one guy or one person, then you can see that there’s a real difference in the firm culture as a result of that.
Enoch: Yes. Let’s talk about sole practitioners, if we may, Lisa. Say, there’s a sole practitioner or there’s no bench, there’s no line up in terms of leadership at the firm. It’s a smaller firm.
So, let’s say this particular firm or person is about ten to five years away from when they want to retire. What are the things that they need to be thinking about right now so that they’re not crunched up against that deadline without anyone to pass the torch to?
Lisa: Well, they need to be thinking about who and how they could open it up so that they are able to identify individuals. Ideally, transitions can occur from the inside, but firms also transition to people on the outside. They end up being sold.
But, a firm that is looking to… A sole practitioner who wants to keep the life of the firm going needs to consider how he’s going to prepare. Ten years is great. Five years is, you know, not as great, but it can certainly be done in five years. Preparing one’s successor is part of an owner’s leadership responsibility.
If they do have talented people working for them, they need to identify what are those skill sets that those individuals have. Create some kind of a transition plan, a leadership development plan with that person, and expressly articulate that to that person so that it’s not a mystery – that they know that they’re on that track.
The owner, sole practitioner, needs to not look… They don’t necessarily have to look at people who have the exact same skill sets as they do. There are a lot of new leaders that may be at the firm that have great skills. They might not duplicate the current owner’s skills, but they do have strengths around professional practice in marketing particularly. That person might just be tapped for a potential transition role because they do have skills that compliment the rest of the team, compliment the owner, but they’re not necessarily duplicating the owner’s skills.
Lisa: Yeah. It’s just keeping your finger on the pulse of the people that work for you.
Enoch: Okay. Just speaking about the sole practitioners, based upon what you just said, I’m seeing two alternatives. The first one, they’ve set aside money for retirement and they go in to retirement and they earn money off their retirement. Maybe they do some projects here and there to pay the bills.
Lisa: Oh, yeah.
Enoch: The other one is they, ten years out, they start looking for a talented person with leadership potential, and try to get them in to position to carry on the firm.
Enoch: Now, with that second scenario, what are some ways of structuring that in terms of buy-out? Let’s give our listeners some specifics here in terms of some ideas of how you’ve seen this work. How can a buy-out be structured fairly and what kind of revenue can a retiring Principal expect?
Lisa: Okay. When an owner has identified a potential leadership partner that’s coming up, you know, the next generation leader, they really need to set up the financial issues in terms of really making it realistic that they set small increments for that person to buy in over time. It would behoove them not to wait until the last moment and then, you know, come up with a big number that is just not going to be possible. So, that’s why early planning becomes a real key element in that because you can set the increments, the financial increments, small enough to make it realistic.
They absolutely need to get payment directly. They can’t give it away. That’s just not going to get the… This is all about skin in the game, Enoch, and having the people engaged.
They say, give it away. It just isn’t valued. That’s just really true. Then, having, you know, some way of valuing a firm really does become a part of the conversation. Most owners have placed a value on the firm that may be… They’re proud of it. They might be unrealistic about the value, but you’ve got to be looking at how the firm is going to be valued. Make it realistic, and keep the sale of the firm and its valuation as simple as possible.
A lot of firms use book value, which is basically coming right off of their balance sheet. These are the financial steps that need to be taken. They need to set increments over time, small enough so that people, their designated leaders, can plug in to this process, and they need to have a price established for those increments and keep it very simple.
Enoch: Okay. Lisa, I’d like to transition over and talk about a subject that you’re passionate about which is using design to change the world for the better and how architects can apply this to their work. Can you tell me a little bit about your thoughts about how design can actually impact the world?
Lisa: Yes, of course. I would love to. I think that in all of our hearts, as designers, we all know this. We all know the power of design to transform communities, to transform lives. It was Winston Churchill – a guy that I read. I just love historical figures. Winston Churchill said, “First we shape our buildings, and then they shape us.” I think that is just so true.
The effect that the built environment has on people, it just cannot be overstated. Buildings are the evidence of our culture. They are what we leave behind and informing next generations of what we value, what is important to us, and why is expressed in the buildings that we build.
Designers as leaders demonstrate the value that good design can have on the human experience. We know that we’re not only designers of environment, but we’re designers of situations. We design organizations, and relationships.
The design professions, I believe, will increasingly be the headlines of the future because it’s such a powerful… It determines human behavior. Businesses, I believe, need to have more design perspective brought in to their organizations. Unfortunately, leadership is something that is not built in to the education of designers whether it’s explicitly stated or whether it’s felt intuitively.
I think we’ve all been in situations that we’ve seen design as a profession that’s dominated by clientele. Unlike a lot of professions like medicine, like attorneys, and academics, designers tend to do what our fee-paying clients tell us to do. This is pretty widespread.
Enoch: Well, what’s the alternative, Lisa?
Lisa: The alternative is that our profession… The problem statement is that as a profession, not seeing oneself as a leader has consequences. So, the alternative is to develop leadership as a profession, as individuals within the profession, and hone those leadership skills.
We need to find ourselves recognizing that the preparation as a designer poises us for leadership. We’re already good at seeing things in context. We’re already conversant in Arts, and Sciences, and Humanities. We already see that environmental awareness is critical to the process of building buildings and has a consequence in the future of the planet.
Designers understand the limits of technology. This is an issue that we’re poised to be leaders. We just have to take our place as leaders in the community and take our place as leaders in businesses. I don’t mean just designing on a drawing board, but we have to just get more involved in helping to lead companies, and helping to direct our clients to solutions, and stand by them.
Enoch: What does that look like? How can architects be leaders and take leadership roles?
Lisa: Again, being part of community leadership programs, being part of generating policies not only within one’s community, but on a national level. Policies that are related to… Anything with having to do with Health and Safety, of course, we need to be in all conversations around Health and Safety.
The professions in our country that are really impacting, that are really driving agendas on a global scale, are professions that are developing policy. Architecture certainly has a voice in that. Design professionals need to really be present and accounted for in policy discussions in the local community and to understand that in the development, real estate development process, they are not just responding to what the developers want. They need to be in the conversation to impact what is being delivered to communities, the communities that we are going to be living with for the next hundred and more years.
So, I think stepping up and making oneself a part of just your local community policy discussions. Zoning, certainly, that’s huge; being part of conversations around the built environment’s impact on climate change. These are areas where the design profession has such a role, and responsibility, and point of view to take this in to… It’s just part of the duty of being a design professional. I think it’s really an important aspect of being recognized as a leader.
Enoch: Lisa, hopefully, we’ve inspired some of our listeners to take leadership roles in whatever way that they feel that they’ve driven towards. So, thank you for that.
Lisa: I hope so. This is something that is important to me and I would really like to see designers’ judgments not be subordinated or determined by the wishes of a client who might not be as informed as the designer themselves.
Enoch: Well, I know a lot of architects feel that because the clients hold purse strings that their job and their duty are to do exactly what the client wants.
Lisa: Yeah, that’s a problem, but that really isn’t the case. That really isn’t the case. I would challenge the designer to resist that and to root their decisions, and their presentations on solutions, and valid business thinking, and justification of those decisions on the basis of knowledge, and frames design solutions in terms of that basis and knowledge. I think that’s part of it.
Enoch: Do you have any suggestions, Lisa, for tactfully presenting an alternate solution to a client as opposed to just, you know, doing exactly what the clients want whether or not that’s right?
Lisa: Yeah. I use an acronym. I invite everyone to consider. The initials are VBR. It’s called VBR – Valid Business Rationale. Honestly, I find that if you can root your solutions based on valid business rationale, there isn’t a client that won’t get it. There isn’t a client that won’t get it.
We talk about cost-saving. The costs of the project today may be X, but over time, the incremental cost of a project, you know, pays for itself. So, if improvements and high efficiency energy systems or higher performing materials were used in a project, the valid business rationale for paying a higher cost today is that these process or these products will last over time, and giving the reasons why this system will save energy, why this particular layout and these materials will help generate more healthy interiors to keep people healthy, and really get down to the research.
The research to justify cost is out there. I so often hear that “We can’t demonstrate improvements in productivity.” “We can’t demonstrate this.” The fact is you can demonstrate it, but it takes research. I invite all of us to be more rigorous about doing research and using it to quantify the solutions that we come up with. It’s valid business rationale. It works every time.
Enoch: Thank you, Lisa.
Enoch: Do you have any parting words for our audience?
Lisa: Well, I would just like to say that we have an opportunity to make a difference in the world. A lot has been written about our planet and our civilization, and that the 21st century is going to be a real determinant of where we’re going to go.
I don’t believe I’m overstating it, Enoch, to say that our success will depend on designers becoming the organizing discipline of the future. That will happen only when our professions become, our people become better leaders. So, I wish everybody the best in that.
Enoch: We need to do it. Thank you. Thank you for being on the show, Lisa.
Lisa: My pleasure. Glad to meet you and all the best to your audience, Enoch.
Enoch: Thank you very much.