In 1993, Ralph Steinglass, FAIA, looked around at the architectural firm where he’d been a managing partner for seven years and realized it didn’t fit him anymore. Although the company was successful and he liked his partners, it was headed in a different professional direction than he wanted to go. Steinglass and his partners spent a lot of time exploring ways the firm could accommodate his interests. But in the end, despite their generosity, the architect decided it was time to move on.
Fortunately, Steinglass had taken the time to develop other leaders within the firm, and the partner who took his place was someone he’d mentored. Yet there were other matters to resolve that required lengthy negotiations. Both sides retained their own attorney to hammer out the settlement agreement. “It would have been much better if a lot of those details had been hashed out earlier, rather than in the heat of the moment,” Steinglass says. “Leaving was as amicable as one could have imagined. But that doesn’t say it wasn’t painful.”
Steinglass’ is not an isolated tale. As surely as the years fold into decades, partners will come and go, for one reason or another. And demographics are immutable. In the larger business world, as the first wave of baby boomers turns 54—prime time for a job change or second-career itch—many of them are leaving management positions to start their own companies or pursue other professional interests. Others are calling it quits and enjoying life. Architecture firms interested in longevity should view the departure of key people as an inevitable part of the cycle of change, and plan accordingly.
role play
“A partnership is like a kaleidoscope in which the partners are the big rocks,” says management consultant Barbara Nagle of Marketscape, San Diego. “Certain patterns emerge. You take one of those people out and the patterns change, particularly for the people inside the firm.” Indeed, when a partner announces the intent to leave, the first thing on the minds of those left behind is how to plug the gaping hole. If they’re losing someone who’s been a strong leader, the prospect of being without one presents some thorny organizational and emotional issues. On the other hand, the loss of a partner with less visible skills can also send the office scrambling to fill his or her shoes.
Years ago, that was the case when a top partner retired at Truex Cullins & Partners, Bennington, Vt. “He was very much the technical heart of the office,” recalls Rolf Kielman, AIA. “It was a quieter skill that’s equally valuable but somehow had escaped notice. It’s much easier to identify someone who has really strong marketing skills, or responsibility for the flow of work as it comes into the office.” Nagle notes that such skills don’t necessarily have to be replaced at the partner level. But whether the architect’s genius is in shaping the office culture, acting as the financial watchdog, or being the creative brain, it’s crucial that the company define the skills the individual brought to the team, and objectively replace them.
In order to do that, there must be a long-term standard to meet, as opposed to just doing damage control. Well before the need arises to replace a partner, Nagle recommends answering these questions: What size firm are we going to be? What kinds of markets are we going to serve? Where will we put our best creative energies? Where will we go for higher margins? “If there are no facts to fall back on,” she warns, “replacing the partner is an emotional issue, and the departure could change those goals.”
For Truex Cullins, the solution was not to put a partner in charge of the technical side of the office, but to hire and promote others whose skills in that area could be developed. In the end, the shake-up was a positive thing, Kielman says. “Technical know-how spread through the office more than it had previously.”
In the same vein, Steinglass, now a management consultant for architects, says part of dealing with partnership change is understanding that as roles shift within the firm, the practice may benefit from different styles of leadership. “Perhaps the most difficult issue is ultimately not the fact that a key partner has left, though that may seem like the real problem,” he says. More significant is whether or not one of the remain-ing partners takes on the same role of the partner who left–perhaps a very strong, controlling kind of management–or develops a more democratic style of leadership. “There may be equal pull in each direction,” Steinglass says. “It’s an internal struggle with a series of complex issues.”
exit stage right
With their business plans firmly in hand, many architectural offices are preparing for a predictable kind of departure—retirement—long before the partner’s chair is empty. Bloodgood Sharp Buster Architects and Planners, Des Moines, Iowa, sees 10 years as a healthy transition period. The firm is structured so that each partner is in charge of one of its nine regional offices, from which they are expected to groom a successor. “It’s an attitude we talk about in the firm, making sure younger people are given opportunities to grow,” says partner Doug Sharp, AIA.
Some principals hesitate to bring a young staff member into leadership discussions because they assume the person isn’t ready. But that can backfire. According to Hugh Hochberg, a consultant with Coxe Group, Seattle, the average age of architects who leave a firm to start their own company is 31, whereas the average age of architects promoted to principal within a firm is 44. “Managing that gap is critical for an effective transition plan,” says Richard Wagner, AIA, Baylis Architects, Bellevue, Wash. The company has extended its “be prepared” attitude to written standards outlining what it takes to become an associate, a senior associate, and a principal. “In our firm, being an associate means more than being here for a certain number of years,” Wagner says. “There’s a progression people can walk through.”
Ideally, Baylis thinks in terms of five to 10 years for a retirement handoff—time enough for an up-and-comer to learn how to use power, to earn credibility in the firm and with important clients, and to absorb the company culture. Such forethought also gives the exiting person a chance to scale back unwanted duties. “One of the things we’ve found is that when people start thinking about retirement, between now and five years out there’s a lot of this business they don’t want to do anymore,” Wagner says. “We make every effort to accommodate those kinds of wishes, by delegating those tasks to someone else.”
prenuptial agreement
Whether an architect is retiring or joining another firm, the breakup of a business partnership can easily become as acrimonious as any divorce. Often the partners left behind feel they’ve been betrayed. Likewise, the moment of leaving may be the first time the departing partner has looked at the written provisions for resigning—if indeed any exist. “In an organization that’s been ongoing for a while, the structure tends to protect the senior partners from those who want to leave,” Steinglass says. “A lot of bad feelings come from issues that haven’t been looked at, such as noncompete clauses and claiming credit for work, that make it difficult to earn a living.”
The easiest way to steer clear of these trouble spots is for the parties to examine the agreement at the time it’s entered into, making sure its details are fair to both sides. That’s not to say the ground rules can’t change. “The ownership agreement is, in effect, a floor that’s there if all parties do not agree to do something else,” says Bill Fanning of PSMJ Research in Atlanta. “If everyone is agreeable, you can change it either on a one-time basis or continue a new method of doing it.”
Every partnership agreement should address several issues. A particularly complex one involves what’s referred to as the noncompete clause. Each state, in fact, has its own body of laws related to restrictive covenants. According to Fanning, a fair provision from the firm’s point of view might prevent the architect from practicing the same type of architecture within a geographic area over a reasonable time period—say, up to two years. It would prohibit the former partner from co-opting any of the firm’s clients or its employees and restrict the reuse of materials such as drawings, standard specs, or details.
However, Ray Kogan, a consultant with ZweigWhite, Washington, D.C., notes that geographical restrictions can be quite a handicap for a practicing architect. And the terms are difficult to enforce legally. “You can’t prevent someone from earning a living in the trade for which they’re qualified,” he says. Alternatively, Kogan suggests creating a financial disincentive for competing. For example, if a partner leaves to do something completely different, or moves out of the firm’s range of business, he is awarded the increased value of the stock. But if he remains a competitor, he receives only the money he paid for his share of ownership.
The ex-partner should also protect himself against the possibility of being named in a third-party lawsuit, filed against the firm for work performed during his employment. “When one leaves the firm one expects there will be provisions for liability ending, but that may not be the case,” Steinglass says. “The agreement should resolve the details for both parties.” A common solution, according to Fanning, is to purchase a professional liability policy that covers past work up to the point of the person’s leaving. “The issue is who pays for it,” he says. “But it’s usually pretty cheap—figure on $600 for a one-time premium.” Then, too, a bitter battle may ensue over who gets the credit for past work. Ultimately, it’s an honor system, Fanning says. But architects have the right to claim credit for work on which they were the lead designer or manager.
the going rate
The most important piece of the partnership document—and the one most fraught with pitfalls—is the buy/sell agreement. When a firm is established, one of the first orders of business is to have an attorney outline how its worth is determined. “If there’s any ambiguity at all, that leads to trouble,” Kogan observes, adding that “the buyout period should be specific, and a function of what the company can afford.”
Even so, such documents shouldn’t just be seen as what happens at the end of the road. Manhattan attorney Larry Gainen, with Ingram, Yuzek, Gainen, Carroll, and Bertolotti, says a well-designed financial package gives the partners an incentive to work hard. “You want to create a precedent that motivates them to build up value for their own retirement,” Gainen says, “but isn’t too much of a burden on those left behind. You have to balance those kinds of issues.”
Since its inception in 1961, JBZ Architecture + Planning, Newport Beach, Calif., has been through two partner buyouts. President Don Jacobs, AIA, says it’s crucial to hire a knowledgeable tax attorney to set the ground rules, and to structure the buyout so the tax burden is balanced between both parties. “We made sure we were going down a path everyone was comfortable with,” Jacobs says.
During the most recent transition, the partner negotiated a five-year buyout plan. In the first year, the retiring architect will work 60 percent of the time.He’ll work 50 percent the second year. And a fee paid over the next three years—half for consulting and half for stock holdings—will finish up the deal. “There are a lot of standard pieces to a buy/sell agreement, but you never assemble them the same way twice,” Fanning says. “Every firm is unique in what they want out of the future, combined with how they manage their business today.”
grace under pressure
When a partner decides to leave after having invested years in a company, the ramifications are long lasting. Despite his own subsequent success, Steinglass admits to still feeling pangs about not being part of his old firm anymore. “You can’t overcommunicate in situations like this,” he says of a partner exit. “The loss can be like that of a family member. But it’s to be expected that people will leave. The best the parties can do is hear clearly from each other the changes that are needed and reach some level of acceptance, without animosity.” BSB’s Sharp agrees. “Honor the individual, even if it doesn’t meet the best interests of the firm,” he says. “Find a win-win situation. Because you’re affecting the life and future of the individual, the company, and the people still in the company.”
Cheryl Weber is a freelance writer in Severna Park, Md.
value judgements
The most common way to valuate a firm is badly,” jokes Bill Fanning of PSMJ Research, Atlanta. Some architectural firms hire a combination of experts to do the job right: a local tax attorney, along with an architectural management consultant who has an insider’s perspective on the industry. That’s because the models for law firms and accounting firms are different than for architecture firms. “Law firms sell strictly at book value with no recognition of trade name or goodwill,” Fanning says. “And accounting firms use two times their annual billings as the basis for their value, because with tax returns they have a continuing customer base.”
A good valuation looks at both net worth and income-producing ability. Fanning’s office, which specializes in architectural and engineering consulting, typically uses one of three methods for appraising a company’s worth: 35 percent of its gross revenues, one-and-a-half to two times its book value (assets less liabilities), or five times its annual profits. Even if the partners work out exacting formulas for determining shareholder value, though, the firm is endangered if they can’t come up with the cash when one of them leaves or dies unexpectedly.
According to Joe Riley, director of financial services at Met Life, Oakland, Calif., there are four ways to fund a buy/sell: using cash profits on hand, borrowing, making installment payments, and using life and/or disability insurance. “Most good buy/sell agreements will have a paragraph covering disability of one of the partners,” Riley says. The insurance is a prudent purchase particularly when there is a large age discrepancy between junior and senior partners.
