Is Now the Time to Sell Your Architectural Firm
Decide if You Should Sell Your Architectural Firm
You’ll find that the majority of architectural firms are privately owned. There has been a push towards private ownership that has created a lot of competition for existing firms. There are tons of architectural firms out there. Big, small, it doesn’t matter. Each one could compete with you for every job you pitch for.
That competition makes it tough to operate a business. You have to scrap and claw for everything that you get. This takes its toll. Eventually, you may decide that you want to sell up and move onto something else. After all, too much focus on the business aspect takes away from the passion you bring to architecture.
Smaller firms face other challenges. Transferring the company to a new owner causes all sorts of problems. Financial performance is difficult to gauge, which makes handing over to a new owner hard. You may find that selling to an external company offers more benefits that handing over power internally. To figure that out, you need to consider several factors.
The Key Deciding Factors
You need to look closely at your company before making any choices. The following factors will affect your decision to sell your architectural firm.
Factor #1 – The External Valuation
The valuations that external groups place on your firm will often outweigh the value of any internal leadership switches you consider. This is because external buyers look at the entire history of the company. A bad performance in the most recent year can be explained if they also think about the firm’s future value.
Book value is the key. A firm may have a so-so book value in its final years of operation. But, it may have had some great years before that. External offers take those great years into account. Many times, external purchasers pay faster and create less risk than internal leadership changes.
Factor #2 – Succession Planning
How much thought have you put into who will take over your business? You may be so tied up in the day-to-day work that you place succession planning on the backburner. When it came to handing over the reins, you’ll find that you’re completely unprepared.
Here’s an unconventional strategy. Pose this question to your firm’s managers - “Who wants to take over?” A simple question, but you might not get a straight answer. Many of your staff may not want to transition into your leadership role. That makes an internal transition impossible. This will soon switch your focus to selling instead of trying to work out a short-term succession plan.
Factor #3 – Ownership Transition
Many small firms don’t have a lot of new blood in them, which makes their succession planning worse. The people in managers’ roles may have been there from the start and a lack of growth could mean few new employees to take the reins. While this means the firm has a lot of experience to draw from, it also creates barrier to entry for young professionals in the firm.
There may be no young people available to take your role. Haphazard performance in your final years may also mean the youngsters you do have can’t buy shares in the firm. They have less power and fewer financial resources, so they can’t buy shares from older leaders.
Factor #4 – Client Demands
Mid and large-sized firms will often run into clients who want them to provide every service under the sun.
A lot of clients want an all-in-one solution. It lessens the hassle for them. Unfortunately, even large firms can struggle to provide this. A lot of big firms go the selling or consolidation routes because of client demands. They realise they can’t compete with firms that do offer everything and decide to sell as a result.
Factor #5 – Financial Performance
Your firm doesn’t have to be in dire straits for you to decide to sell. Nevertheless, a combination of larger fixed costs and increased corporate overheads could cause it to struggle. Furthermore, a lot of big companies have started competing for projects they would previously have left alone.
You may find yourself struggling to manage the business side of things. This leads to lower profits that cause your company to operate under a shrinking budget. By selling up, you give your company the chance to keep pushing forward.
Factor #6 – Ongoing Issues
Most architecture firms have a long list of clients. Each of these needs regular services from the company. Usually, that’s a great thing. However, financial issues may again rear their heads. Your firm may find itself in a position where there is plenty of demand but not enough resources to meet it.
You also need to consider your staff. Your firm has a lot of people relying on it for employment. You can’t guarantee that an internal transition will meet the needs of your existing staff. Many external buyers structure their offers so that the purchased firm maintains its staff and identify following the sale.
Types of Sale
So, you’ve decided to sell your architectural firm. Now, you need to figure out the type of sale that works best. There are three options open to you when you sell your company:
- Sale of Shares – This is a good choice for the firm’s shareholders. There can often be tax advantages and it ensures the company’s culture stays in-tact.
- Sale of Assets – A more direct kind of sale. This usually leads to the firm dissolving, but you will have some negotiating power that allows you to protect your staff.
- Merger – There are fewer guarantees with a merger. Your firm may disappear entirely. The staff has no guarantees, and the culture you created may disappear.
Your choice will depend on what’s best for your situation. A lot of firm owners prefer selling shares because they want to keep their companies alive. Selling assets offers a nice middle ground between a sale of shares and a merger. But, a merger may be something that a buyer pushes toward.
So, those are the types of sale. Now, let’s look at the process. Each sale type has similar steps that you should be able to apply regardless of your choice.
Step #1 – Getting Transaction Ready
There’s a lot of tidying up to do before you can sell your architectural firm. All buyers conduct due diligence, and you have to ensure your firm’s books are up to the right standard. An account review from an independent party will also help you tidy up your financial statements.
Firm leaders should also clear up any loans they have made to company shareholders. Even little things, like taking a car off the company books, create a more attractive proposition for the buyer.
Step #2 – Create an Internal Team
Bring the firm’s chief executive officer and chief financial officer together to form an internal sale team. That creates a central point for all communication related to the sale. It also means you have a team with experience that can negotiate the particulars of the sale.
You have to make sure this team prioritizes the sale. If you don’t, you will delay the process. Keep the internal team focused and everything runs more smoothly. But, it is important that news of the sale does not leak to other staff members.
Step #3 – Create an External Team
An external team is as important as an internal group. The external team should bring together solicitors and financial advisors who will ensure the transaction goes through smoothly.
The external team helps with all sorts of things. They help you get an accurate valuation for your firm and source some potential buyers. They will also show you a lot about the many regulations that apply to a company sale. The external team should focus on getting the sale done properly, which again ensures the process runs smoothly.
Step #4 – Find a Financial Intermediary
The ideal financial intermediary brings a great deal of experience to the table. That’s critical. An intermediary who hasn’t worked in the architectural sector won’t have what’s needed to help you sell your architectural firm.
An intermediary will help you create the firm’s Confidential Memorandum. This document outlines the important information about your firm, such as its services, who runs operations, and its main projects. You can use this document, later on, to show your buyer why buying the firm would benefit them.
Step #5 – Create a List of Interested Parties
You’ll work with your financial intermediary to create a shortlist of possible buyers. This often includes highlighting the criteria that you think you will be most important to your firm when it comes to a buyer. These may include the buyer’s size and its location. You can then use this information to go through the list and get rid of any buyers that don’t fit the bill.
Your intermediary then takes the initiative. They will contact the buyers who remained on the list and offer some key information without giving too much away. That’s key. Try to remain anonymous until you’re sure you have an interested buyer.
Step #6 – Confidentiality and Meetings
So, you’ve got a few interested buyers. What comes next? Make every possible buyer sign a Nondisclosure Agreement to ensure no news of the sale goes public. Once they do that, the buyers each should each get copies of the Confidential Memorandum so they have some more detail on your company.
The meetings follow on from there. You should spend some time talking to your potential buyers to figure out which ones are serious. It’s crucial that you bring your internal and external sale teams to these meetings. Make sure to schedule these meetings away from the gaze of your firm’s employees.
Step #7 – The Letter of Intent
If your discussions lead to a buyer wanting to move forward, you should work with your team to examine the term sheet and eventual letter of intent you get from the buyer. The final version of this document outlines the conditions that each party must meet to make sure the sale goes forward.
The letter of intent can often prevent you from negotiating with other buyers. That means you have to feel certain that the buyer you’re working with has your firm’s interest in mind.
Step #8 – Due Diligence
This is where your work in step one will pay off. Your buyer will present some documents that request access to key information about the company. Buyers often want to interview the leadership team as part of the due diligence process.
Due diligence may lead to some changes in the transaction agreements you’ve already created. That’s okay. It’s all part of the process.
Step #9 – Definitive Documents and Approval
You should receive two documents once the due diligence period ends. The Purchase Agreement covers all of the terms relating to the sale. Ensure everything in the document, particularly the schedules, are accurate. You should also receive an Employment Agreement that outlines compensation and the employment conditions that would apply to the sale. It may also have terms stating that you will not compete with the buyer in any way.
Upon finalisation of those documents, you move into the approval phase. You should find, this goes smoothly as long as you’ve followed the other steps. You can close the sale once you get approval from both your shareholders and your board. The buyer will also get approval from their board.
Step #10 – Closing the Sale
Use your closing period to communicate the sale to your staff and have a plan in place to do the same when the sale goes public.
You’ll need to address a few other issues. For example, you may have to oversee the integration of some new operations and ensure you receive consents from a few organisations. Contract assignment, professional liability, and licensure issues are all dealt with in the closing stage.
Hopefully, this information proves useful if you’re thinking about selling your architectural firm. There’s a lot to consider. You may be ready to sell if the factors mentioned apply to your firm. Make sure you’re fully prepared before moving forward.
If you decide to continue with your work, consider using ArchiStar Academy to boost your professional knowledge. ArchiStar Academy offers courses in digital design software to help architects move their businesses forward. With ArchiStar Academy, you can learn Revit, complete your 3D CAD training, or take a Maya 3D course. There’s much more besides, so contact ArchiStar Academy if you want to develop your digital design skills.
Archistar Academy offers several courses across the spectrum of digital design software. You’ll develop your skills, allowing you to create more accurate and functional models.
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Posted on 20 Jan 2020