By Martin E. Prendergast, MBA
Gray, Gray & Gray, LLP
Architects and engineers are adept at working with their clients to create and implement a vision for the future. However, when it comes to preparing for their own future, many A&E firm partners can be slow to make plans. That can lead to complications in firm succession and business continuity.
An exit strategy for a partner is often just a hazy idea of someday selling their stake in the firm to other partners, or perhaps merging with or selling to another firm. The process is frequently delayed until the partner is ready to retire. That’s too late. By the time you are at or near retirement age, the value of your firm is likely to have dropped dramatically, for a number of reasons.
First, with a principal on the cusp of walking away from the business, you can expect a drop off in business continuity and client retention. Learning that a key member of their team is retiring, clients may act in their own interest prior to your actual retirement, affecting the market value of your firm. This serves to diminish your buyout, as well as diluting the value to any partners who remain active.
Another problem that may develop if you wait too long is attracting new partners. Bringing aboard competent, ambitious young architects or engineers with an eye toward grooming them for succession is difficult if they are going to be forced to wait an extra ten or twenty years to assume control of the firm. More lucrative and responsible positions are sure to lure them away, leaving you with a less-than-ideal staff to carry the load. The result is a firm that has less value, leaving you with a reduced buyout and declining retirement income.
What is the solution? The best time to merge your architectural or engineering firm is well before you and your partners are ready to retire. Making the move when you are in your late 40s or early 50s can put you in a much better position for a successful exit.
A sale or merger at this point in your career makes good business sense. Linking with another firm can result in an expanded scope of services and access to new markets and new revenue. The danger of clients leaving the firm diminishes, and you may actually increase the opportunity to secure larger clients and attract more experienced team members.
A merger or sale at this age is not a retirement, but an investment in your future. Although your short-term income may be affected, you are making an important investment in your exit strategy.
Aside from business considerations, a sale or merger at an earlier age offers many personal benefits. The change can create an exciting challenge that may revive flagging interest in the field. Yet you are still close enough to retirement that you can maximize your income for several years before stepping down. As a partner in a larger firm, you are also much more likely to earn a healthy income after retirement, as the firm continues to generate revenue.
The best mergers occur when a partner makes a move well in advance of projected retirement age, while they are still active in the business and eager to achieve even more success. A smart transition made at a relatively early age can pay off handsomely at retirement time.
Martin Prendergast is a Manager in the Architecture, Engineering & Design Practice Group at Gray, Gray & Gray Certified Public Accountants and Advisors in Canton, Mass. He can be contacted at (781) 407-0300 or at mprendergast@gggcpas.com