Curious about how small- to medium-sized firm owners decide how many people to let buy into the company. For example, if you started with 2 or 3 partners, and eventually grew to 10… isn’t that financially worse for the original owners? Or is adding partners more about adding people who are committed to the long term success of the office?
In many respects, when there is too many employees. Think, overall human resources (employees and business partners as the labor force).
Think from a project management perspective and consideration of utilization rate, financial resources in the accounts, and projected income based on your account receivables, and so forth. Keep in mind that partners in a firm has a responsibility of procuring work. You need work and those income. Unlike employees, business partners are not absolutely required to be paid salaries with the same level of mandatory sense. They may get paid with the firm gets paid from the work of the firm. You carve out of the billing the portion that goes to the project team members. If they are business partners, they get their cut out of the project financial receivables for their time similar to an employee. Additionally, after all is paid, depending on business entity types, or such, the business may send money the firm collected with some percentage to retained for overhead expenses. What ultimately is net profit after all expenses paid including taxes, some part of that net profit may be disbursed to the partners (and employees as bonuses).
In a good working environment, you want to think of everyone from the perspective of long term investment and develop a good culture that encourages long term committment. Any business partner should already be considering their role in the partnership in a long term perspective.
I am considering adding partners to my business including architects. Technically, they be called LLC members in the LLC unless I establish a subsidiary to the LLC that is incorporated that is dedicated to the function of architectural services. The decision on business partners is no quick process. It is a careful process. There are several facet to the business plan that matters. Each business partner brings something about them and what are they passionate about and what kind of projects they can bring through their connection and experience. While I may deal with residential and light commercial, a business partner might have connections for schools & colleges, another for multi-family housing, and so on. It reflects what we would do as a practice. What services we provide. The clients we seek out and do our services for. There is a lot to consider.
The number of partners in the firm is not as critical but there is importance to not have deadbeat partners that do nothing and just sit on their ass. Partners that brings in work and works well in the local context is an important part. Getting clients that are quality clients is important. That skill is important. It is a business decision not all that unlike mergers. You must have some sound business strategy in this respect. Yes, it is a business and a professional practice.
I will simply say, from a long ago conversation with an aia gold medal winner: have an odd number of partners so you can actually make decisions. just saying.
odd numbers is how most organization sets up number of board of directors. This is business decision but what is important is that the odd number makes decision motions either pass or abstain with fewer situations where decisions are locked up because 50% say yes and 50% say no. While not 100% of the time, odd numbers sets it so there would be as little situations where it's only half. Requiring a majority decision. Meaning it would only be a hung vote going no where when a member is not present so that person be a non-vote. In business, members could possibly make decisions without carrying a formal meeting and just send their decision or vote in some form on whatever needs an agreement. As Gregory said, is implying, it actually makes decisions easier. Yes, it can still be challenging at times so I am not saying it is easy.
Adding partners should be done when the current and projected ongoing financial performance for the firm makes it feasible. There should be enough money consistently coming in to pay everyone at the appropriate level.
A situation where original partners have to markedly reduce their compensation to bring in new additional partners is rarely a good idea.
The number of partners that is considered “too many” varies greatly depending on individual values, cultural norms, and personal preferences. What may be too many for one person could be perfectly acceptable for another. It is up to each individual to determine their own comfort level and establish boundaries in their relationships.
I've seen firms with an upside down pyramid structure, where there are actually more Associate Principals/Principals/Directors than junior staff. How that works financially I have no idea - perhaps mid-career staff are enticed to stay through promotions corresponding salary increases - but in terms of day-to-day work, you wind up with the few junior staff shouldering a lot of drawing work while the many senior staff struggle to divvy up limited management roles.
Nov 20, 23 9:23 am ·
·
natematt
Just how top heavy an office can be also depends a lot on the kind of work you do.
In a small firm, I can see the heavier number of partners to employees where they might have 1-2 employees but 3 to 5 partner. However, as firms frow, the number of employees should increase faster than increase in number of principals and there should be more employees compared to firm principals in established firms beyond the small firms. Small firms, often start-ups, will not have employees or maybe one or two because the firm principals are also the firm's production and employees might just be an administrative assistant and maybe a receptionist. This makes it easier for fledgling firms deal with payment and firm principals are basically paid from account receivables from billed work and so forth and not be bound to the pay every two weeks when work is somewhat irregular. As money becomes more steady, then payout is more steady and adding employees to form project teams whose labor is 75% or more in terms of utilization rate to billable work. This would make firm be more competitive with more efficient utilization rate.
For a firm of 50, I expect the number of principals being 5-10 and 40-45 employees. Of course when it comes to firms that are incorporated, the firm owners may also be deemed employees under certain areas of law but that's the point of the discussion. I can understand up to 20 principals with 30 employees for a firm of 50 but that's the upper end for principals (partners/owners) to employees ratio for firms of more than 10. This is my observation and that makes some sense to me.
There are exceptions and that depends on how the firm is set up. Is the firm an employee-owned partnership where they are partners after say... a year of employment or upon licensure. I can see that can result in firms having a higher percentage of partners to that of plain employees with no ownership interest.
How many Partners is too many?
Curious about how small- to medium-sized firm owners decide how many people to let buy into the company. For example, if you started with 2 or 3 partners, and eventually grew to 10… isn’t that financially worse for the original owners? Or is adding partners more about adding people who are committed to the long term success of the office?
In many respects, when there is too many employees. Think, overall human resources (employees and business partners as the labor force).
Think from a project management perspective and consideration of utilization rate, financial resources in the accounts, and projected income based on your account receivables, and so forth. Keep in mind that partners in a firm has a responsibility of procuring work. You need work and those income. Unlike employees, business partners are not absolutely required to be paid salaries with the same level of mandatory sense. They may get paid with the firm gets paid from the work of the firm. You carve out of the billing the portion that goes to the project team members. If they are business partners, they get their cut out of the project financial receivables for their time similar to an employee. Additionally, after all is paid, depending on business entity types, or such, the business may send money the firm collected with some percentage to retained for overhead expenses. What ultimately is net profit after all expenses paid including taxes, some part of that net profit may be disbursed to the partners (and employees as bonuses).
In a good working environment, you want to think of everyone from the perspective of long term investment and develop a good culture that encourages long term committment. Any business partner should already be considering their role in the partnership in a long term perspective.
I am considering adding partners to my business including architects. Technically, they be called LLC members in the LLC unless I establish a subsidiary to the LLC that is incorporated that is dedicated to the function of architectural services. The decision on business partners is no quick process. It is a careful process. There are several facet to the business plan that matters. Each business partner brings something about them and what are they passionate about and what kind of projects they can bring through their connection and experience. While I may deal with residential and light commercial, a business partner might have connections for schools & colleges, another for multi-family housing, and so on. It reflects what we would do as a practice. What services we provide. The clients we seek out and do our services for. There is a lot to consider.
The number of partners in the firm is not as critical but there is importance to not have deadbeat partners that do nothing and just sit on their ass. Partners that brings in work and works well in the local context is an important part. Getting clients that are quality clients is important. That skill is important. It is a business decision not all that unlike mergers. You must have some sound business strategy in this respect. Yes, it is a business and a professional practice.
I will simply say, from a long ago conversation with an aia gold medal winner: have an odd number of partners so you can actually make decisions. just saying.
So 1, one is the number? ;)
odd numbers is how most organization sets up number of board of directors. This is business decision but what is important is that the odd number makes decision motions either pass or abstain with fewer situations where decisions are locked up because 50% say yes and 50% say no. While not 100% of the time, odd numbers sets it so there would be as little situations where it's only half. Requiring a majority decision. Meaning it would only be a hung vote going no where when a member is not present so that person be a non-vote. In business, members could possibly make decisions without carrying a formal meeting and just send their decision or vote in some form on whatever needs an agreement. As Gregory said, is implying, it actually makes decisions easier. Yes, it can still be challenging at times so I am not saying it is easy.
According to my ex-wife two is too many.
Adding partners should be done when the current and projected ongoing financial performance for the firm makes it feasible. There should be enough money consistently coming in to pay everyone at the appropriate level.
A situation where original partners have to markedly reduce their compensation to bring in new additional partners is rarely a good idea.
The number of partners that is considered “too many” varies greatly depending on individual values, cultural norms, and personal preferences. What may be too many for one person could be perfectly acceptable for another. It is up to each individual to determine their own comfort level and establish boundaries in their relationships.
Well it depends. Are you looking to be a throuple? Be ENM? Throw orgies? Context is important.
When you are unable to conjugate.
I've seen firms with an upside down pyramid structure, where there are actually more Associate Principals/Principals/Directors than junior staff. How that works financially I have no idea - perhaps mid-career staff are enticed to stay through promotions corresponding salary increases - but in terms of day-to-day work, you wind up with the few junior staff shouldering a lot of drawing work while the many senior staff struggle to divvy up limited management roles.
Just how top heavy an office can be also depends a lot on the kind of work you do.
In a small firm, I can see the heavier number of partners to employees where they might have 1-2 employees but 3 to 5 partner. However, as firms frow, the number of employees should increase faster than increase in number of principals and there should be more employees compared to firm principals in established firms beyond the small firms. Small firms, often start-ups, will not have employees or maybe one or two because the firm principals are also the firm's production and employees might just be an administrative assistant and maybe a receptionist. This makes it easier for fledgling firms deal with payment and firm principals are basically paid from account receivables from billed work and so forth and not be bound to the pay every two weeks when work is somewhat irregular. As money becomes more steady, then payout is more steady and adding employees to form project teams whose labor is 75% or more in terms of utilization rate to billable work. This would make firm be more competitive with more efficient utilization rate.
For a firm of 50, I expect the number of principals being 5-10 and 40-45 employees. Of course when it comes to firms that are incorporated, the firm owners may also be deemed employees under certain areas of law but that's the point of the discussion. I can understand up to 20 principals with 30 employees for a firm of 50 but that's the upper end for principals (partners/owners) to employees ratio for firms of more than 10. This is my observation and that makes some sense to me.
There are exceptions and that depends on how the firm is set up. Is the firm an employee-owned partnership where they are partners after say... a year of employment or upon licensure. I can see that can result in firms having a higher percentage of partners to that of plain employees with no ownership interest.
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