Founders and/or other principals of architecture practices must think carefully about who will take the practice forward and what will happen to the practice after they leave.
In this regard, lawyers and financial advisors stress the importance of having in place an effective succession plan.
That raises questions about some of the common mistakes which architects tend to make when going about succession planning, important decisions which need to be made and critical elements of what an effective succession plan looks like.
On the first point, Tony Chong, a partner at Perth-based commercial law firm Lavan Legal, said one of the biggest and most common mistakes was to either not have a plan or to have a plan which was incomplete.
“The issue is, one, they don’t think about it and there is no plan or there is a plan that is quite ad-hoc,” he said. “And they need to properly execute it.”
Before looking at the legal and transactional issues associated with succession, Chong says it is critical for founders to step back and think about what they want as an outcome from the succession and how they want to take the practice forward from a leadership perspective. An important consideration in this regard revolves around whether in fact they wish to maintain ownership of the business, close the practice down or pass on management of the practice to the next generation. If passing it on, it is also important to think about what degree of decision making power, if any, they would like to retain once the transition has occurred, who they would like to lead the practice going forward, and how they are going to prepare those leaders to do so.
In terms of financial matters, Chong says it is important to think about how they are going to value the business, how the new owners will pay for it and where the working capital will come from. One aspect of valuation which can be tricky, he says, is the extent of goodwill which is included in the purchase price – much of which in smaller practices is tied to the partners and their longstanding relationships with clients. Working out how the new owners will pay can equally be challenging, he says, as many in the second generation whom founders may wish to take over the practice may be in their mid-30s and may have families, mortgages and other financial commitments.
Robert Peake, director of architecture and engineering financial and management practice Management For Design, says the transactional aspects associated with succession planning are often relatively straightforward, adding that many practices have greater challenges with the development of and transition to new leadership.
One area of challenge revolves around the need to delegate progressive levels of responsibility for design decisions and client ‘ownership’ to less experienced architects who are coming up in the practice. Whilst this can be difficult for many who may feel a degree of reluctance to cede control, Peake says this is essential lest those who would ideally be suited to taking over become frustrated and opt to leave or go out on their own if not entrusted with sufficient levels of responsibility and authority in their role within the firm (and the financial reward that can come with this).
Another area in which Peake says most practices struggle revolves around the degree of financial information they are willing to divulge and the level of exposure that potential leaders can expect to gain in the preparing for the transition.
This applies particularly to the commercial aspects of running and building the practice. He says this can be a consequence of the cyclical and project-based nature of architecture and the inherent instability of financial performance. There can be a reluctance amongst the incumbents to share this key financial information with potential purchasers, particularly when many architects by their nature are not excessively focused around profit.
In terms of decision making, Peake says it is important for founders to think about how much information they should be sharing and the degree of exposure which they would like to afford to those who will take over. It is also important to think about the time frames over which the succession was set to take place and whether this would happen over one, two or even five years.
When looking for those who will take over, Peake cautions against a tendency on the part of many to necessarily go with the leading designers. Whilst such people may be excellent from a technical standpoint, he says they may or may not necessarily be the most suitable to direct the business from a business perspective. Indeed, he says that on many occasions, those who are most suitable to take over will indeed stand out and will possess important characteristics such as accountability and responsibility, a desire to grow and develop, an ability to innovate, an ability to develop strong client relationships and an understanding and appreciation of the commercial and financial issues associated with running a practice.
Furthermore, he says, it is ideal to look for a degree of balance and diversity within the leadership team with regard to gender, culture and work-life balance.
Finally, there is the question of when succession planning should commence. Peake says this should happen no later than after the first five years of practice. He says he has come across practices where partners have been well into their 50s and found they had less time to plan the transition than what they might have liked.
Chong, meanwhile, says that succession planning should in fact commence as soon as business is started. Whilst many architects may wish to continue working for decades, he says it is still important to have a plan in place to cover situations where the founder unexpectedly passes away or suffers temporary or permanent incapacitation and needs to take a leave of absence.
For architects, succession planning represents a critical part of ensuring the long-term sustainability of the practice.
With some simple forethought, the plan can be made and executed in a way which reflects the founder’s long term objectives for the business.