You Might Just Lose It All!

Not only is ignorance not bliss, it isn't a legal defense. The call began like this: “Let me tell you what I've been dealing with; I need some perspective...” A 30-year industry veteran had sold a firm when the economy tanked to another entity as part of its vertical acquisition strategy. The deal sounded good on the surface: it was to have brought the firm the capacity to play on a larger scale, and the owner the ability to step back into sales, which he enjoyed.

Fast forward to the present, with the honeymoon over. The new firm's Board of Directors have met only three times in two years. This board member has little (if any) knowledge as to the fiduciary responsibilities and liabilities of the company. My questions begin: "Is your license on the line? If so, where? Have vendors and those with whom you have relationships been paid?" I could have gone on, but my queries stop when I learn that the firm does not carry Directors and Officers Insurance. D&O is liability insurance payable to the directors and officers of a company, or to the organization(s) itself, as indemnification (reimbursement) for losses or advancement of defense costs in the event an insured suffers such a loss as a result of a legal action brought for alleged wrongful acts in their capacity as directors and officers.

Ignorance is not an excuse for a board member responsible for the goings on in their company. I point out that the upside potential in the form of a leadership role with "exposure to play on a broader scale" comes with what appears to be a downside, calling into question the sustainability of this relationship. In this case, the best news is that the one year employment agreement has already been completed and a decision is pending on whether to extend it or leave. My advice to this former firm owner, and to anyone else in this situation? Seek legal counsel. Otherwise, you might just lose it all!

Karen Compton, CPSM. Karen Compton is principal of A3K Consulting (Glendale, CA), a business development and strategic planning firm specializing in the architecture, engineering and construction industries. Ms. Compton is also the founder of Industry Speaks™, a web-based business-to-business portal that connects AEC firms with experienced consultants, provides peer reviews of consultants, reports on key industry trends, and publishes expert reviews of professional courses and books. Contact her at kcompton@a3kconsulting.com.

What's the End Game for a Lifestyle Practice?

I took a long summer break to refresh and rejuvenate. During my time off, I reflected on a variety of issues, including the challenges that our industry faces. As I sat on a beach overlooking the ocean, I was struck by the number of firms that had run into difficulties while seeking to be merged or acquired. It wasn't until I began to peel the layers of the proverbial onion that I realized the source of these difficulties. They had run lifestyle businesses and now wanted someone to pay for it!

What do I mean? A lifestyle business or a lifestyle practice is a firm established for the purposes of supporting the partner’s or owner’s lifestyle. In short, it is a personal piggy bank. The opposite of a lifestyle practice is an equity business. An equity business is one in which the business exists to provide a profit and long-term corporate strength to its staff and its clients. Don't get me wrong...there are thousands of lifestyle practices out there that do well alongside thousands of equity businesses, but you need to know which of these you are or want to be.

Why? I prescribe an arduous path forward when a firm owner calls me and says they want to sell their business because they don't have the internal capacity for the next level of leaders. Often, part of the reason they lack such capacity is that the firm has been run as a lifestyle business for 20 years. It takes a significant amount of time and effort to change direction.

Staff aren't naive. They may not know a lot about "buying equity" in a firm but they know enough not to invest in someone's personal piggy bank. Junkets, expensive "client lunches,” spouses or siblings "working" without defined outcomes or expectations, running personal expenses through the business or showing annual losses to avoid taxes are all signs of a lifestyle business that staff will not invest in. More importantly, they are all signs of a poor investment (i.e., acquisition or merger).

Know your end game. If your long-term play is to position your firm for a merger or acquisition, you'll need at least five years to clean up your financial house and to position your potential emerging leaders for a transition. If you hadn't thought about it before now...now is the time.

Karen Compton, CPSM. Karen Compton is principal of A3K Consulting (Glendale, CA), a business development and strategic planning firm specializing in the architecture, engineering and construction industries. Ms. Compton is also the founder of Industry Speaks™, a web-based business-to-business portal that connects AEC firms with experienced consultants, provides peer reviews of consultants, reports on key industry trends, and publishes expert reviews of professional courses and books. Contact her at kcompton@a3kconsulting.com.

The Relationships That Matter

AEC firms focus on relationships. Architects are focused on owners. Owners are focused on contractors. Subs are focused on primes. But sometimes we lose sight of other relationships that require just as much nurturing as those that drive our sales. Those are the relationships that drive our businesses.

A client told me she wasn’t ready to sell her firm just yet. She was thinking about it, but she had a “long time to go.” The truth was her horizon wasn’t that far away—three years, five tops! As ridiculous as it sounded, I said to her, “Then now is the time to start looking for this firm you’d like to buy you.” She looked confused. I went on, “The best time to find a husband is when you don’t need one. And, the best time for you to seek an acquiring firm is when you don’t need one. If you wait, you’re going to end up with the abusive, drunken guy left at the bar at last call.” I’m pretty direct, and my analogy gave her pause.

“But where do I find my ‘husband’?” she asked. The truth is, we have changes to meet our future business partners at every turn: at conferences, trade shows, pre-proposal meetings. We often chose to ignore them until we need them, and then we are unable to articulate who they would be. Business partners are much like mates.

Find partners with whom you share a value set. An attorney friend commented to me that so many firms she represents in transactions claim that “fit is important,” but when the chips are down all they really look at are the assets. We both agreed that this is short-sighted. If assets and portfolio are the only criteria for evaluation, but values and cultural fit don’t mesh, we can be assured of only one outcome: the mid-level leadership will eventually leave. Why does that matter?

We’ve all been asked to list individual(s) who worked on a project in our portfolio. But if the mid-level leadership has left, the experience you will point towards won’t exist. In short, you “bought” projects on a page, but that’s really not what you paid for. It’s important to value not just the numbers and projects, but the people who made them possible. Which brings me to my final point (for now):

Define new goals to achieve together. Many transactions are focused on the money. I understand why. But in order to be sustainable, partnerships must find and understand what new goals can be achieved together that could not be achieved alone. Whether it is expanding into new sectors, new services, or new ideas, the union must, like a successful marriage, define its goals and work toward them as a team.

What am I suggesting? I’m not telling you to walk up to every stranger in a bar (or at a conference) and assess them as a business partner. I’m recommending that in your day-to-day efforts to develop sales relationships, seek out compatible prospects for business relationships. While it may not be clear today what you can do together, that competitor or complementary practitioner may prove to be your knight in shining armor!

Karen Compton, CPSM, principal of A3K Consulting (Glendale, CA), a business development and strategic planning firm specializing in the architecture, engineering and construction industries. Ms. Compton is also the founder of Industry Speaks™, a web-based business-to-business portal that connects AEC firms with experienced consultants, provides peer reviews of consultants, reports on key industry trends, and publishes expert reviews of professional courses and books. Contact her at kcompton@a3kconsulting.com.