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becoming a partner- buying into a firm....

jbirl

Ok, since I am not outright business savvy, I was having lunch the other day with an old schoolmate, and he mentioned that 'rumor had it' he was on a short list at his BIG firm to buy-in, become a partner, whatever ya want to call it. So I said, "That is cool.....but....what does that really mean?" And he said, "I'm not really sure other than I would get a chance to buy shares", To which I asked, "How much is a share? How many do you need to buy? Is there a minimum? Is it alot?...." He stopped me and said, "I have no clue dude."

So, does anyone know, in a general sense, how this works?

Or, alternately, how you even assign value to a firm in order to buy-in or just plain old buy it???

 
Oct 31, 07 7:56 pm
Bloopox

To sell shares the firm has to have an independent valuation done to establish what the firm is worth. It's based on the revenues from the past several years, the current assets, the projected worth of the project backlog, the value of the firm's assets, and various other factors. For a large firm that already has multiple partners the valuation is usually easier to do and more accurate. With a smaller firm it's a little more subjective. How many shares to sell, to whom, how many shares any one person can own, how many shares per year can be acquired, etc. are all specific to the firm. Some firms bonus the shares to the employees - in other words the firm is giving an amount of money to the employee as a bonus, with the agreement that the employee turns around and pays all of it into the firm. Different states have different laws regarding who can own shares in an architecture firm, and how much ownership they can have.

Oct 31, 07 8:13 pm
quizzical

first of all, this is a question to which there is not an easy answer. so, don't expect to grasp the issues from one or two simplistic posts here.

value in design firms can be an elusive concept. it usually derives from some combination of a) physical assets - such as real estate, furniture, equipment, etc. owned by the firm, and b) financial assets - such as bank accounts and investments owned by the firm, and c) the earnings history and potential of the firm. Obligations owed by the firm - such as bank loans and accounts payable - must be accounted for and reduce the firm's value.

Most firms of any sophistication have a well defined shareholders agreement that spells out how that firm's shares will be valued and how share transactions take place. It can be very complex, even in smallish firms.

Peter Piven wrote a good book a few years back (part of The Architect's Essentials series - published by John Wylie I think) with a title something like Ownership Transition for Design Firms. Buy this book - it's a great primer on all the questions you, and your friend, may have.

Good luck.

Oct 31, 07 9:34 pm

to paraphrase Peter Priven's lecture on this subject (I also endorse the book), 'bonusing the shares' is the most typical way and that the buy-in takes several years to fully vest. Say the share of the firm is $100k and you're slated to get a $20k bonus, then it will take 5 years to purchase the full share. Another path is via a company backed loan to provide the capital. It is rare that you are expected to go into your own savings/pocket for the buy-in amount.

Oct 31, 07 10:40 pm
Living in Gin

Maybe this is a dumb question, but what does it typically mean to be an "associate" of a firm? Sort of like a Partner Lite? I've worked in a few firms that have associates and senior associates, but I've never really understood how it all ties into the corporate structure of a firm. This is stuff they never teach you in studio.

Oct 31, 07 11:00 pm
rfuller

Bloopox, quizzical, lehrman, all get 10 cool points. Me and my friend Dan are always having to explain basic business principles to all our friends in school. I'm glad to see I have other business savvy peers here on the 'nect.

Oct 31, 07 11:32 pm

there was a related article in architectural record earlier this year... it covered a number of case studies of how firms are planning for succession as partners retire... it is definitely worth a read...

Nov 1, 07 8:24 am

LIG, i think that it probably varies by firm... but for the most part i think that your description of "partner lite" is pretty close... one of the sessions in the conference that i just attended last weekend was about getting on the partner track... one of the panelists described the set up of his firm as something like this... there are 3 senior partners that have 20-30% of ownership each... he is a junior partner with 14% ownership... and then there are 2 associates that have 2-3% each... i would guess that the associates are probably bonused additional shares in the company on a regular schedule so that by the time the senior partners are ready to retire the younger guys will have most of the ownership...

Nov 1, 07 8:30 am
jbirl

Thanks, its one of those things that is not taught in schools, and that is rarely, if ever, discussed in the office. I always had the idea of just going off on my own or with a partner or two...

And LIG, that has always been a Q I had too- the whole associate vs. partner thing.

I will def. get the Piven book and give it a read.

Nov 1, 07 9:09 am
treekiller

associate often means you get extra vacation along with greater profit/loss sharing. ie the more junior people get their bonuses before you do. if there is nothing left, tough luck, if there is more then expected you get bank.

Jbirl- it is taught at some architecture schools, but over half my classmates skipped the lectures (guess they won't ever run a firm).

Nov 1, 07 9:38 am
evilplatypus

Remember also that buying in also means buying out someone else's position many times, and you may ask yourself, " Why are they selling, what do they know that I dont"? To the risk goes the reward.

Nov 1, 07 10:48 am
jbirl

i may stand corrected- i did have professional practice and it was probably mentioned and i was probably asleep. I recall the content to be more about types of firms, organizations of firms in terms of production, design and work output, but we did not get into talking about partners other than if you were to start a firm, not in an established firm. Also marketing, contracts, the AIA, ethics, etc... but I don't recall a "making associate/ partner" lecture.

and lectures from outside people were almost always about design and their philosophies regarding it...

Nov 1, 07 10:52 am
Bloopox

In most firms an "associate" is not an ownership position. What it does mean varies hugely from firm to firm - with some firms calling all of their employees "associates" (which avoids all of the issues with what to call unlicensed people on business cards, but also gives "associate" about the amount of prestige that it has when Subway uses it in "Sandwich Associate"), and other firms reserving this for someone with 10 or 12 years tenure with that firm who is seen to be on a partner track, and all sorts of firms in between... I worked in a firm that gave the title to anyone who had been there 5 years and/or got licensed, and another firm where "Associate" was really short for "personal CAD drafter to a Senior Associate".
Most of the time it comes with some level of benefits. When I became an associate in one firm I got more vacation, a raise, and guaranteed bonuses, while in another firm I just got an office and a parking spot and was no longer expected to take turns answering the phones.

Nov 1, 07 11:28 am
aquapura

Mostly titles are meaningless unless it's in context to a specific company. These days the corporate world is passing out VP titles like candy. They make low level employees feel special and helps keep salaries low. I've seen many architecture firms do that with the "associate" title. Principal still carries more weight, but I've heard of that title getting polluted as well. Recently heard of a Principal of CAD Coordination or Job Captain in my book.

Nov 1, 07 11:29 am
emaze

"Dwight Schrute, Assistant to the Regional Manager"

Nov 1, 07 12:10 pm
jbirl

The title thing can be ridiculous-

Nov 1, 07 2:20 pm
chicago, ill

At SOM for instance, "associate" title meant you weren't getting paid for your overtime hours anymore, so your "promotion" would effectively reduce your pay by 25% to 40% for the honorific. "Associate" and higher level titles are mostly meaningless titles that may convey no further authority to influence firm policy or direction then "drafting person". There are even many different degrees of "partner-level" position titles which determine whether you have any actual influence over the firm and its distribution of profits.

Nov 1, 07 2:47 pm
farwest1

I thought it was "Dwight Schrute, Assistant....Regional Manager."

Nov 1, 07 3:04 pm
farwest1

As I was told by a second-tier partner in my last firm, where I was associate (and shortly before I left):

"The difference between you and me is that I can make decisions for the firm. You only have the ability to enact those decisions."

Nov 1, 07 3:06 pm
5toolplayer

Hi

What have people seen as the typical 'bump' in salary when becoming a junior partner (i.e. someone who would acquire say 2-3 shares of a firm)?

Thanks

Jun 30, 11 10:49 pm
file

2-3 shares out of 100, or 2-3 shares out of 1,000,000? Are you paying cash for the shares or were they passed along w/o cost? Do your day-to-day responsibilities undergo a material change? Will you be responsible for providing personal guarantees on the firm's debt? All of these questions - and more - influence what might be 'typical'.

Jul 1, 11 6:14 am
cajunarch

In many firms ownership and yearly salaries do not correlate - you can be given the opportunity to "buy-in" or "bonus-in" ownership of firm's shares and your salary not be part of the conversation (even though sometimes it would since this opportunity usually is part of a promotion). 

Never forgot, ownership = risk AND reward - if firm has a bad year or has to buy out a senior partner, you can be in a situation where you owe firm at the end of the year

Jul 1, 11 7:51 am
DPT

What about using your own capital to buy in to someone else's firm because you like what they're doing?

Jan 25, 20 9:49 am
midlander

look up the history of NBBJ... it's more common and quite normal for large firms to buy out smaller firms as a way to expand. AECOM and a few other AE firms have done this over the last decade or two. Pure architecture firms seem less likely to follow this growth model, either because they see organic growth as more valuable or recognize the difficulty of extracting value after buying an architecture firm.

sameolddoctor
One’s gotta be really stupid to invest in an architecture firm, that rarely makes over 8% profit annually, and is so subject to the whims of the market. Invest elsewhere....
Jan 26, 20 3:58 pm

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