What is the best way to allow buy-in of ownership shares into a small architectural practice?
1. Does a model exist?
2.How are ownership buy-in shares calculated?
Any feedback would be most appreciated.
3tk
Aug 1, 23 2:43 pm
The transition model I saw at a small firm was a buy-in where a portion of a buyer's retirement contribution went toward the purchase, lasting 10-15 yrs for full buy-in [ie, if they were contributing 15% into a 401k, they might split 5% into 401k and 10% buy-out]. I believe the share and firm value was established with lawyers and accountants, looking at value of portfolio, current revenue, liabilities [debt/insurance/project liabilities], future growth. There may have also been some sweat equity and/or value given to work brought in aswell.
Chad Miller
Aug 1, 23 3:54 pm
I can't speak to what is 'typical' just what my firm dose. We're a 12 person firm.
My company has class A (voting) and class B (non voting) shares.
All shares of the company are equal. If you own 1% of the shares you get 1% of the profit. There are no weighted shares, ie no one gets paid before anyone else. Class B shares don't have vote in how the firm is run.
We are allowed to purchase a set amount of class B shares at the same time each year IF the managing partners agree to offer it. Class A shares are only offered to specific people if and when the managing partners agree to do so.
The price of a share is determined by an independent audit of the firm, it's value, it's assets, and it's ability to make money.
I hope this was helpful.
mightyaa
Aug 1, 23 9:09 pm
When I did this a long time ago.... You can get a audit done to establish the value of the shares. It's sort of based on billings, firm history, and future potentials. Once you know what the stock is worth and how many shares are available, you have options on the 'vehicle' for stock transfer.
Like direct purchase. Another might be shares instead of bonus. Another could be automatic paycheck withdraw over a set time. For me, since it was a family firm, it was tied to the tax free gifting maximums and the transition occurred over several years. Also estates, escrow, and so forth for set aside stocks.
However it's done, it needs to work within the corporate laws and tax laws. I know our corporate charter had the process in place, but we also knew at some point there would be a transition of ownership as well and planned for it... plus my Dad's old partner sort of ripped through wives and they learned how to protect the stock and firm from divorce settlements...lol
There are business transition accountants/attorneys out there to help. That's where you should start.
archanonymous
Aug 2, 23 3:21 pm
Hard to believe any architecture firm is worth anything to anyone other than the founder.
What a racket.
Chad Miller
Aug 2, 23 3:30 pm
That's like saying you're surprised that any business has any value other than to the founder.
There area earnings worth and asset worth.
msparchitect
Aug 3, 23 10:32 am
It is actually possible to run a profitable business in architecture. Not everyone has the mentality of a university professor.
archanonymous
Aug 3, 23 3:29 pm
I didn't say anything about being profitable, but beyond the desks, the chairs, the office equipment... what is there? Relationships, and a pipeline of maybe 6 months of future work.
That ain't worth shit.
whistler
Aug 2, 23 4:40 pm
As a small corporation the value in the firm lies mostly with the principle and their good will / experience /connections etc. Any small firm is essentially a bunch of desks and computers and an archive. The people in a small firm rarely are long, long term employees ( occasionally though ) so buying into the small firm is challenging to value. IE when the principle leaves where's the value, I would argue the value is the principle himself, not what's remaining. For a principle to sell the office is likely not a huge financial gain, and if there's a lot of money in the firm then it might be better for the principle to keep the firm and consult independently and use the corporate entity as tax shelter over a longer peiord of time. The taxes paid on the sale would wipe out tons of financial gain that could be used by the principle over many years of retirement.
However, the digital archive and desks do have value to those who remain as the office can rely on those old files / systems / formats to continue to be profitable even after the principle leaves. The argument is that the new members of the firm can continue to go after similar scale projects and be profitable from day one vs having to start from scratch where they have to create all new formats / specs / assemblies that had been built up over years and honed from many years of use. going back and doing garage renovations is no way to continue on once you've done large MF residential / commercial projects assuming the new firm has some strategic alliances with old clients who trust and can support them in their new form.
Chad Miller
Aug 2, 23 5:25 pm
I guess the question is what do you consider small? I ask because we're 12 people and when the previous owners retired and sold the firm it was independently valued quite high.
whistler
Aug 2, 23 6:15 pm
I would consider 12 to be mid-size actually ... I think of small as in less than 7! With 12 your ability to work on some good size projects with a decent level of diversity could potentially be quite good. Under 7 you are a bit more limited.
Chad Miller
Aug 2, 23 7:08 pm
Interesting.
I personally think a medium sized firm is in the 25 person range.
I'd say with a 12 person firm your maximum project size is around 80,000 sf / $60 million of moderate complexity. You're able to do one of these sized projects a year but they won't require all of your firms staff for more than 4 months out of the year.
Any larger or more complex and you need to devote the majority of your staff to just one project for the majority of the year. This will lead to workflow issues when the large project is over. Layoffs That or your work 80 hours a week and create burnout. Quitting. Either way you lose good people and the firm suffers.
mightyaa
Aug 3, 23 12:34 pm
Honestly, you are somewhat correct that there is a lot of value in just the principal alone. What I ran across after the transition from my father to me was that our primary repeat clients were really his network (and age) developed over 30+ years. So as those people retired like my father, more and more of clients and those relationships disappeared.
While we made efforts to establish me, it just felt like I was always left in his shadow. I just didn't have that tight personal relationship with those clients. I mean they worked with me, but it was more of a business relationship whereas my dad they also formed friendships (part of that is also generational gap). And when those clients sold their firms, the new owners were more about establishing themselves with a changing of the guard... so they brought in new consultants rather than continue to work with the prior bosses people (and often also let go many of the old management internally)..
whistler
Aug 3, 23 2:23 pm
Yeah that's what I see in our Consultants / Trades etc. people retire or move on and as much as I like to use the same team when I can, it changes and I have to find new folks who I can trust and work with. I expect that others would feel the same about me too. I have tried to delegate projects to staff to manage and run so that the clients/ contractors call them instead of me but ultimately my name is on the stamp / letterhead / drawings... people not in the know somehow expect I do everything.. haha!
msparchitect
Aug 3, 23 10:31 am
From 2018...
bowling_ball
Aug 3, 23 3:14 pm
What in the world is this actually trying to convey? Of course larger firms employ more people and bring in more revenue. What am I missing?
Chad Miller
Aug 3, 23 5:59 pm
I think there needs to be a further breakdown of the 10-49 category. 10-20, 21-30, and 31-49 employees? I think that the ability to take on larger and more complex projects can change significantly in each each of the three groups.
What is the best way to allow buy-in of ownership shares into a small architectural practice?
1. Does a model exist?
2.How are ownership buy-in shares calculated?
Any feedback would be most appreciated.
The transition model I saw at a small firm was a buy-in where a portion of a buyer's retirement contribution went toward the purchase, lasting 10-15 yrs for full buy-in [ie, if they were contributing 15% into a 401k, they might split 5% into 401k and 10% buy-out]. I believe the share and firm value was established with lawyers and accountants, looking at value of portfolio, current revenue, liabilities [debt/insurance/project liabilities], future growth. There may have also been some sweat equity and/or value given to work brought in aswell.
I can't speak to what is 'typical' just what my firm dose. We're a 12 person firm.
My company has class A (voting) and class B (non voting) shares.
All shares of the company are equal. If you own 1% of the shares you get 1% of the profit. There are no weighted shares, ie no one gets paid before anyone else. Class B shares don't have vote in how the firm is run.
We are allowed to purchase a set amount of class B shares at the same time each year IF the managing partners agree to offer it. Class A shares are only offered to specific people if and when the managing partners agree to do so.
The price of a share is determined by an independent audit of the firm, it's value, it's assets, and it's ability to make money.
I hope this was helpful.
When I did this a long time ago.... You can get a audit done to establish the value of the shares. It's sort of based on billings, firm history, and future potentials. Once you know what the stock is worth and how many shares are available, you have options on the 'vehicle' for stock transfer.
Like direct purchase. Another might be shares instead of bonus. Another could be automatic paycheck withdraw over a set time. For me, since it was a family firm, it was tied to the tax free gifting maximums and the transition occurred over several years. Also estates, escrow, and so forth for set aside stocks.
However it's done, it needs to work within the corporate laws and tax laws. I know our corporate charter had the process in place, but we also knew at some point there would be a transition of ownership as well and planned for it... plus my Dad's old partner sort of ripped through wives and they learned how to protect the stock and firm from divorce settlements...lol
There are business transition accountants/attorneys out there to help. That's where you should start.
Hard to believe any architecture firm is worth anything to anyone other than the founder.
What a racket.
That's like saying you're surprised that any business has any value other than to the founder.
There area earnings worth and asset worth.
It is actually possible to run a profitable business in architecture. Not everyone has the mentality of a university professor.
I didn't say anything about being profitable, but beyond the desks, the chairs, the office equipment... what is there? Relationships, and a pipeline of maybe 6 months of future work.
That ain't worth shit.
As a small corporation the value in the firm lies mostly with the principle and their good will / experience /connections etc. Any small firm is essentially a bunch of desks and computers and an archive. The people in a small firm rarely are long, long term employees ( occasionally though ) so buying into the small firm is challenging to value. IE when the principle leaves where's the value, I would argue the value is the principle himself, not what's remaining. For a principle to sell the office is likely not a huge financial gain, and if there's a lot of money in the firm then it might be better for the principle to keep the firm and consult independently and use the corporate entity as tax shelter over a longer peiord of time. The taxes paid on the sale would wipe out tons of financial gain that could be used by the principle over many years of retirement.
However, the digital archive and desks do have value to those who remain as the office can rely on those old files / systems / formats to continue to be profitable even after the principle leaves. The argument is that the new members of the firm can continue to go after similar scale projects and be profitable from day one vs having to start from scratch where they have to create all new formats / specs / assemblies that had been built up over years and honed from many years of use. going back and doing garage renovations is no way to continue on once you've done large MF residential / commercial projects assuming the new firm has some strategic alliances with old clients who trust and can support them in their new form.
I guess the question is what do you consider small? I ask because we're 12 people and when the previous owners retired and sold the firm it was independently valued quite high.
I would consider 12 to be mid-size actually ... I think of small as in less than 7! With 12 your ability to work on some good size projects with a decent level of diversity could potentially be quite good. Under 7 you are a bit more limited.
Interesting.
I personally think a medium sized firm is in the 25 person range.
I'd say with a 12 person firm your maximum project size is around 80,000 sf / $60 million of moderate complexity. You're able to do one of these sized projects a year but they won't require all of your firms staff for more than 4 months out of the year.
Any larger or more complex and you need to devote the majority of your staff to just one project for the majority of the year. This will lead to workflow issues when the large project is over. Layoffs That or your work 80 hours a week and create burnout. Quitting. Either way you lose good people and the firm suffers.
Honestly, you are somewhat correct that there is a lot of value in just the principal alone. What I ran across after the transition from my father to me was that our primary repeat clients were really his network (and age) developed over 30+ years. So as those people retired like my father, more and more of clients and those relationships disappeared. While we made efforts to establish me, it just felt like I was always left in his shadow. I just didn't have that tight personal relationship with those clients. I mean they worked with me, but it was more of a business relationship whereas my dad they also formed friendships (part of that is also generational gap). And when those clients sold their firms, the new owners were more about establishing themselves with a changing of the guard... so they brought in new consultants rather than continue to work with the prior bosses people (and often also let go many of the old management internally)..
Yeah that's what I see in our Consultants / Trades etc. people retire or move on and as much as I like to use the same team when I can, it changes and I have to find new folks who I can trust and work with. I expect that others would feel the same about me too. I have tried to delegate projects to staff to manage and run so that the clients/ contractors call them instead of me but ultimately my name is on the stamp / letterhead / drawings... people not in the know somehow expect I do everything.. haha!
From 2018...
What in the world is this actually trying to convey? Of course larger firms employ more people and bring in more revenue. What am I missing?
I think there needs to be a further breakdown of the 10-49 category. 10-20, 21-30, and 31-49 employees? I think that the ability to take on larger and more complex projects can change significantly in each each of the three groups.