Break out of the spreadsheet mentality and build an ownership team that drives value and performance long-term.
Deciding who gets to be an owner can be one of the most important, yet difficult, decisions a leader can make. Unfortunately, part of the difficulty can be self-inflicted as most firms lack any criteria or structure to guide decisions. In fact, Zweig Group’s 2020 Principals, Partners & Owners Survey shows that only 35 percent of firms establish any specific minimum eligibility criteria for becoming an owner.
Of those that do, criteria focus on:
- Business development/sales abilities, 65 percent
- Project management experience, 58 percent
- Staff management responsibilities, 56 percent
- Professional registration/licensure, 51 percent
- Years of experience, 40 percent
- Marketing experience, 30 percent
- Education minimum, 28 percent
As you can see, most of the criteria revolve around things that can be measured in some way. As an industry, we like numbers and spreadsheets to help us make decisions, however, I would encourage firms to expand their thinking on what it means to be an owner. Consider some of the following recommendations to expand your thinking on ownership:
- Owners are your business partners. Becoming an owner should not be viewed simply as a promotion, but rather an acceptance of the risk and reward of being a business owner. Too many in AEC firms view ownership as a rung on the career ladder that must be achieved. Frankly, there are a lot of current and aspiring owners in the industry who do not have the investor temperament to be a good principal, partner, or owner. Ideal business partners understand the importance of building long-term value in the enterprise. Being an owner is not about higher bonuses and more power around the office. When viewing ownership through this lens, you are able to look beyond the basic qualification criteria that many firms use when choosing owners and focus on the attributes that drive real value.
- Owners must understand and be able to take risks. Related to the point above, being a business partner means taking smart, calculated risks that move the company forward while protecting the firm. Someone who is completely risk averse is likely to be unable to make hard decisions or take the right risks to advance the firm. Additionally, owners must understand the risk that ownership can pose to them personally. Ownership is not for everyone. For those considering ownership, they must understand the many trade-offs that come with ownership, including:
- 46 percent of principals have signed a non-compete agreement. This means that if you leave the firm under certain circumstances, you may not be able to take a job where there is a perception of competition.
- 46 percent of principals have signed a personal guarantee for some or all of their firm’s debts. This means that your personal assets are at risk if the company experiences financial stress. Many aspiring owners do not understand the risk this introduces into their personal lives.
- 30 percent of owners have their stock value tied to how they leave the firm. This means that a portion of your investment in the firm could be reduced if you leave the firm or have certain life circumstances that require liquidation. Typical conditions include leaving to compete, divorce, death, and retirement.
- Owners are needed to keep the firm going. Bringing in new owners is more than a retention tool, it is an essential financial instrument to transition the firm from one generation to the next. It is critical to maintain the capitalization of the firm, meaning that as shareholders sell back, someone needs to be there to buy the stock. To make sure that is the case, you need to create a strong internal market for the stock. The stock has to appreciate, pay annual returns to the owners, and be reasonably liquid in case the shareholder needs to sell it. To create these benefits above, you must have the type of business partners that have the ability to generate business success.
- Experience can be overrated. Using experience as a major qualifier for ownership can cause firms to overlook great candidates. Of those firms that use experience to select owners, the average career experience is 11.7 years, and of those that have minimums on experience in the firm, the average is 6.4 years. We work in a number of firms where we can identify younger staff who would be far better owners than older more experienced staff. Again, it goes back to viewing ownership through the business partner lens. There are aspiring leaders in your firm, some possibly very young, who have tremendous energy and business savvy to put to work for your firm. Empowering them with ownership puts jet fuel on their careers and their contribution to your company.
New challenges, like COVID-19, really put our firms and ownership teams to the test. Firms should consider an evolved view of ownership through the business partner lens. In the short-term, it comes down to who can we count on to weather this storm with us. During this pandemic, we need strong and determined partners to lock arms with us and make the hard decisions and take the necessary risks to ensure survival. In the longer-term, creating an ownership team that is best suited to drive performance and value offers a tremendous competitive advantage. All of this requires a strong leader at the top of the company and a lot of discussion amongst the current principal group to come to a consensus on what types of characteristics an owner of your firm should exemplify. Break out of the spreadsheet mentality and build an ownership team that drives value and performance with grit and a long-term mentality.
Chad Clinehens is Zweig Group’s president and CEO. Contact him at email@example.com.