Monday, August 13, 2012

Final Countdown to Principal: Advice for Up and Comers

Agreeing to become a Principal (equity owner) in an A/E/C firm has lasting consequences. Don’t leap for the power and prestige without considering the deeper responsibilities and challenges.

Do Your Due Diligence. Study your firm as the prospective purchaser you are. Assess the financials of the firm like an investment. Would you invest in this company as a stockholder? Consider what customers, stakeholders, and competitors say about the firm. Choose your fellow Principals wisely. You will be “married” to them for the next 20 years or more. Get to know their visions, biases, and foibles. Do as much research as possible by yourself, but be sure to include the counsel of knowledgeable experts that you hire, in addition to those provided by the firm.

Learn How the Business Really Works. Enlist the support of a willing, able, and trustworthy Partner to be your transition guide or coach. They have information and perspective only an insider can provide. Start by examining the firm’s succession plan for you. Does it identify a cadre of future leaders including several likely to be your successor? If not, leadership development is a serious issue that needs immediate attention; and the viability of you own transition plan may need reconsideration. Speak openly with fellow Principals on matters of succession, money, raises, bonuses, promotions, hiring/firing, and policy while assessing how decisions are made and the role you play.

Understand the Deal. Read closely all documents related to becoming a Principal such as the Shareholder Agreement, Deferred Compensation Agreement, Buy-Sell agreement, Company By-Laws, Articles of Incorporation, Board Minutes, Budgets, business plans, strategic plans, and Annual Reports from the past several years. Keep a file of corporate documents current. Develop a thorough understanding of the authority, legal responsibilities, and financial liabilities you may have, including as a member of the Board of Directors or Executive Committee. Know – don’t assume – what power you will have. Documentation of how and how well the firm has performed in the past is the best available indicator (but no guarantee) of future performance. Study performance trends, and especially those that impact your compensation, such as salary, bonus, stock valuation, and dividends.

Test Your Understanding. Listen closely to people outside of your echo chamber, especially past, present, and prospective principals. Push a few buttons (advisedly) on important issues you would like to change. As a Principal it is important to know you can speak your mind comfortably. If frank conversation is not well received before you sign on, it is unlikely to change afterwards. Spend time inside the “sausage factory” of an executive level committee. Get a realistic understanding of the role into which you will be stepping. Is it more like an influential partner or simply a stockholding employee? Clearly understand any non-compete restrictions imposed once you leave the firm; these may act as “Golden Handcuffs.” If there are deferred compensation provisions, have them carefully checked by a knowledgeable tax adviser. Be respectfully skeptical of all firm valuations. Valuation methods (e. g. multiples of earnings or sales) tend to get frozen to filter out short-term noise and protect longer-term stockholders. Over time industry and firm specific trends can diverge creating large anomalies.

Search Your Soul, with Support from Your Family. Make sure you will enjoy the entire experience, accepting longer hours and sleepless nights, not just financial rewards. Only you can know for sure how you would handle a serious business downturn that resulted in no bonus being paid, or worse, a “cash call.” Although this may seem unlikely, you must be willing to take the risk. Lastly, if you cannot fully explain what it means to be a Principal to your spouse or best friend, then you do not understand the deal well enough.

Being a Principal is not for everyone. Make sure it is right for you. Yes, you can say no. Senior Project Manager or non-equity Associate is not a bad career.

PSMJ has been addressing the issue of design firm ownership transition for 34 years and is holding a Ownership and Leadership Transition Roundtable for the leaders of today's A/E/C practices just like yours – October 23-24 in Atlanta, GA. 

"Great information, puts me in a position to start the process right, should have done this 5 years ago!"

-Kim Lobdell, President, KL Engineering, Inc.

Designed for both current and prospective Principals, we'll walk through a structured, logical approach to developing practical planning tools for your firm's Ownership Transition. Click here to register now!

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