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How to become a Principal

sandrock

I'm about ten years into my career and have a goal to become a partner someday. Just curious how others here became a partner/principal? 

Did you work hard and become a valuable asset to the firm, then promoted to a principal?  Did you have to wait and buy out a retiring principal?  Did you just buy into the firm?

I'm sure it all varies by firm and everything is different, I'm just trying to get an idea, do I need to have a big chunk of cash or can I become principal by working hard and being a good architect?

thanks.

 
Jul 10, 18 10:52 am

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Non Sequitur

There is most certainly some sort of financial investment required.


Jul 10, 18 10:55 am
eeayeeayo

In some cases you can buy into the firm gradually, essentially by being bonused a percentage each year over a period of time.  In others you'll need the "big chunk of cash".  In many cases it's a combo of those two.  You'll never just be "promoted" to principal - there needs to be a financial agreement, valuation of the firm, etc.  The other option of course is to start your own firm, on your own or with others.

Jul 10, 18 10:56 am

Start your own firm.

Jul 10, 18 11:25 am
tduds

Either buy-in or generate revenue. 

Jul 10, 18 12:05 pm
thisisnotmyname

Having a network of clients who will hire you for projects is usually an important consideration.  

I would suggest modifying your dream to: becoming a partner some OR  starting your own firm.

Unless you are in an organization with a clearly defined promotion system, the partnership thing can depend on a lot of timing and economic factors that are usually beyond your control.

Jul 10, 18 12:13 pm
archi_dude

When I was younger, I thought I could get rich quick by learning how to trade stocks. Needless to say should have just put my money into a index fund. However, after learning about evaluating a company based on fundamentals, management, product and financials, most architecture firms are literally the worst investment ever and the pyramid scheme of “buying in” is just that in most firms, a pyramid scheme. Unless your talking about an AECOM, I would never put money into a traditional design firm.

Jul 10, 18 12:14 pm
5839

Most firms aren't a true pyramid scheme, as that would require doubling the number of partners in each generation, which quickly becomes untenable. It's more of a Ponzi scheme - the principals aren't multiplied in each generation, they're just replaced, and each generation pays for the one that came before it, and everybody's happy until the returns stop coming in. It's only a bad investment if you end up being the last generation - so if you do buy in, start grooming the youngster who will one day buy you out.

Threesleeve

Some firms have enough partners that they might be pyramid schemes.  Years ago before my state let firms have names other than those of the partners, our receptionist had to remember 10 names every time she answered the phone.  These days the firm has more than 20 partners.

thisisnotmyname

A firm in my past had a crew of sad little "partners" with 1 & 2% stakes in the company. The majority partners with 25%+ stakes treated them like dirt.

chigurh

a AE firm I heard about had a bunch of people buy into his already failing company...2008 hit and the main principle hit the road with the remaining cash and left everybody else with the debt...f-ed over a lot of good people.

whistler

I agree with the comments above, don't buy into a firm.  Be a "rainmaker" and bring in the clients.  Once you have a reasonably steady stream of clients that come to you then partner with a really good management partner to "run " the office ( assuming your skill set is better at bringing in clients ) or vice versa, if you are better managing the office side of things find a designer / charismatic type to bring in the clients and open your own shop.

Jul 10, 18 3:07 pm
chigurh

most firms are small, incestuous, one or two person firms and they don't want partners.  The flip side is these large corporate firms with 100 partners and that seems like a total shit show as well.  Good luck bringing in a project into either one of those situations...the small guys will try pay you off with a finders fee or some other menial offer to make your partnership ambitions go away and the large firms you aren't going to have the political connections, pull, or or resume to land a profitable project for them.  At which point you gotta ask yourself if you have the skills, balls, and start up money to go out on your own...

Jul 11, 18 5:44 pm
tduds

Medium-sized firms exist.

Justin Turdo

I was given an option to buy in.... I did not see the value and in reality would rather have my money tied up in real estate. Company can go belly up and what actual assets does an architecture firm have? My money would just vanish. What am I actually buying? I’m so happy I didn’t make this mistake as I felt i was getting forced into ownership and back away from the golden handcuffs. Start your own firm... if your name isn’t going to be on the front door I saw forget it.

Jul 12, 18 1:17 am
RickB-Astoria

If you want to be a firm principal, you usually have to come via "merger" of an established firm as some architects do to "buy into" another. In any cases, it is seldom in any business (especially incorporated businesses) that you can become principal without buying ownership stake (corporate shares). These would be defined in corporate bylaws. 

You can become principal a lot easier and a potentially less expensive by starting your own firm because "principal" in practice is often synonymous with owners. They usually an alternate way of you are a board of directors of a corporate entity or in the case of LLC, a board of managing directors which is often ran by the members of the LLC either as directors or as members. If you establish an LLC as manager-lead, then only individuals listed as managing directors direct the day to day. This can be some of all members but also non-members. In practice, it is to allow some members of LLCs to have no day to day managing role. Say, someone who has an ownership stake but doesn't want to manage the day to day.... a retired architect (for an example). Corporate firms can work similarly. 

When you own the firm such as starting one and run it's day to day operations of the business.... YOU ARE THE PRINCIPAL. If you have co-owners then you are one of the Principals.

Start your own by doing (in no absolute order): 1) File and pay to establish a business entity in the state and local taxes. 2) Set up a central bank account for the business other than your own personal bank accounts and DEPOSIT starting capital. 3) set up your "office" in your own place to conduct business not inside your current employer's. Have your own equipment for the business.


OTHER THINGS... RAMBLINGS.... TLDR below:

Starting capital should be enough to cover expenses of getting your business going which can include necessary equipment, business cards to hand out (not your employer's business cards but one you have specifically created for YOUR business). ALWAYS OPERATE YOUR BUSINESS WITH YOUR OWN EQUIPMENT AND LOCATION SEPARATE FROM YOUR EMPLOYER. 

You should have starting capital for your needs for the first 6 months which should cover any rent and expenses until you get work going. Some may suggest more but you should be getting these things lined up but before you officially open doors..... you're generally expected to leave your current place(s) of employment because to run a business properly during start-up phase, it is an overtime job. Not full-time. Over time. You have to basically run the day to day work of the business for clients 40 hours a week and spend another 20+ hours a week taking care of the administrative matters. It's usually a 60+ hours a week kind of commitment. Especially in start-up phase. Until you ramp up on employment. If you start up with a business partner or two, the division of labor might be able to help keep commitment to about 40-50 hours a week for each of you. It really depends on the start-up and what they are doing. In some cases, it's consistently over-time but you can spread it over 6-7 days a week instead of just 5 days a week. 

In any case, it is a lot of work. You have a lot of work involved. 

The take away if, you want to have a little nest egg. I can't tell you how much to set aside for start up but you can mitigate the cost. It doesn't have to be huge but you need to dot all your i's and cross all your t's to do it legally correct. This doesn't mean you have to rent a business location for the business but you need a working location to conduct business. If it is just you, the cost would be lower. If you have business partners, you may need an actual commercial space rented for use as an office. This can be a relatively small location and should be at first. Upgrade later when there is money and a need. The better you can hit the ground running with work, the better off but there is the possibility to not be getting work right away. 

Architecture business isn't the kind of business commonly funded by venture capital investment or crowd-funding unlike say..... technology start-ups. You need to get paying clients quickly or you're screwed..... usually.

PS: I'm not suggesting you start your own practice but that is one option. Otherwise, you are likely to be expected to buy into the established firm such as buying out the ownership stake of someone who is retiring or otherwise passing away and buying that interest. It isn't something generally given unless the principal is the only owner and is retiring and wants to hand over the business so he or she can retire. Even that would likely come with some cost not just handed over freely but part of a transition plan.


Jul 12, 18 4:27 am
Featured Comment
sandrock

thanks everyone, these comments really help! Sounds like in general it's not a good investment.

Jul 12, 18 4:59 pm
RickB-Astoria

I'm not going to say it is or isn't a good investment. I don't have enough information for that assessment but it isn't likely to be something I'd put a whole lot of money at stake (even if I had it) for it. Especially if all you want to do is be in charge of your own designs and procuring of client and be in the function of principal and having your name on the "door" of your business and all (signage). There is a lot less expensive way to do that. Architecture businesses rarely survive past their founding members. I won't say they don't but of all the firms that exists, it starts and ends with the founder unless you really make it a corporation with a name and asset (like intellectual property) and value to be something that can be venture capitalized of otherwise similarly invested.... such as a firm that does its own R&D. If the firm had a software product with a valuable IP that is created that is valuable to architecture abroad.... then maybe. Most architecture firms that even makes their own software is doing that for themselves not for making a product they can sell and make money on while it serves them. If there was even a valuable software IP then maybe it might be worth investing in ownership stake of. Just owning a copy of Revit doesn't really count, in my book. Do they have patents? Do they have a valuable trademark? Do they have registered copyrights? What is the value of their intellectual properties? Have they done a valuation of such assets? Do they have real estate? If so, what is the value? (These all are rhetorical questions that I don't want spoken on a public forum like this) If I was going to buy into an architecture firm, I would want to do a due diligence of assessing the value of assets and liabilities (short term and long term). The same things I would do for an asset purchase agreement or corporate acquisition whether in part or in full. Most firms are not that valuable other than human resource and whatever cash in the bank accounts. If you buy into a firm, you are buying into the company's assets and liability. In a sense, you're doing a partial firm acquisition by buying 'shares'. The question is, will the net value of the shares you buy significantly increase in value that when you sell your shares when you retire, that it will be a substantial amount of money for retirement. Will it be a good retirement investment? Most likely, not. The firm has to grow and become valuable like Microsoft from 1970s to early 2000s. Now, of course if you buy into Microsoft today, it won't grow explosively. It is now plateaued so growth is more aligned with inflation. You won't be able to invest $1,000 today and in 30-40 years sell out and get $100 Million to a Billion dollars.... not with typical architectural firms or any kind of consulting business that depends on providing services to individual clients. You just don't make big money that way. Unless your firm grows 2 to 3 magnitudes of an order or more in 20-30 years, I don't think you are going turn your buy-in price of becoming a principal of an existing firm into the kind where your investment into the firm returns 1.5 to 2.5 magnitudes of an order upon retirement even with inflation's impact taken in that you can cover the last 20-30 or so years of your life in comfort and somewhat luxurious/well to do... living conditions.

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