Entrepreneurial vs. small firms

Jan 25, 2016

photo-1418225162054-0f773a996f9eThink your small firm should stay small? Think again. Here’s why you should strive for growth in your firm. Without a doubt, there are some entrepreneurial firms in the A/E/P and environmental consulting business today. That said – and I’ve written it before in these pages – just because you are privately-held and a small business does NOT make you an entrepreneurial firm. Whenever I hear a firm described as a “practice,” it immediately conjures up negative images for me. “Practice” makes
 me think of a business that revolves around one or a few God-like owners who manage
 all aspects of the business, all clients, and all design work. They are lords and everyone else there is a serf. The business exists solely for their benefit and dies when they are gone. It’s somewhat analogous to a medical practice, where there is one doctor and then everyone else is a peon. I don’t like the term. We aren’t in the “practice management” business and the clients we work for want something more than a “practice.” Yet, there are still some people out there 
who own firms and believe that they can stay small successfully. They look at how much they as individuals earn from their business and it’s more than they ever expected to make, so they are happy with it. Yet they usually would have far more potential if they were an entrepreneurial firm. Entrepreneurial firms are all about growth. Their owners want to create value in their enterprises – value that can be realized when they either individually or collectively exit from the firm. And this value is not just restricted to an external sale. It could be in an internal sale just as easily. How do entrepreneurial firms perform better than the rest of the industry? Consider the following statistics (pulled from Zweig Group’s Successful Firm Survey). These are really telling!
  • Fast growth firms (those growing at a rate of 20 percent or more for three years in a row) make an average of 16.2 percent pre-tax, pre-bonus pro t versus 9.9 percent for all firms
  • Fast growth firms have an average revenue of $133,690 per employee versus $126,840 for all firms
  • Fast growth firms make a 39.8 percent return on total assets (pre-tax, pre-bonus) versus 19.7 percent for all firms
  • Fast growth firms have a median total annual principal compensation of $290,000 versus $194,000 for all firms
  • Fast growth firms are worth a median of .59 times NSR versus .47 for slow growth firms
Let’s consider the case of two principals. They each joined A/E firms out of school and at age 40, both became principals in the companies they worked for. Principal “A” became an owner in a $5 million NSR slow-growth company (growing by 5 percent a year) and Principal “B” became an owner in a $5 million high growth entrepreneurial company (growing by 20 percent a year). Ten years later, by age 50, Principal B’s career and financial position is dramatically different from his counterpart, Principal A, in the slower-growth, not-so-entrepreneurial firm. Both owned 20 percent of their firm’s stock when they bought in. In year one, Principal A, working in the slow growth firm, earned $194,000
in salary and bonus. His ownership was worth .20 (.47 times $5 million), or $470,000. By year 10, he would be earning $301,000 annually (assuming a 5 percent annual pay increase) and his stock was worth $729,000. Over 10 years, he would earn $2.44 million. His 10-year total would be $3.169 million. Not too bad considering he still has another 15 years to work, assuming he retires at age 65 (and many of us will hopefully work well beyond that). Principal B, on the other hand, was earning $290,000 in salary and bonus the first year he became a principal in a high-growth firm. His initial ownership was worth .20 (.59 times $5 million), or $590,000. By year 10, assuming a modest 5 percent annual pay increase, he would be earning $450,000 in annual salary and bonus, and his stock would be worth $3.05 million. His total of salary and bonus earned over 10 years would be $3.65 million making his 10-year total $6.69 million. Pretty amazing considering at this point Principal B is only 50 years old and still has another 15 years to work. Do I still need to convince you of the benefits of building an entrepreneurial firm? Now you know why we will be doing a new seminar this year – Building an Entrepreneurial Firm, in a number of locations around the U.S. in 2016. We’ll start with dinner, drinks, and comedy the night before to get everyone in the right frame of mind. Then we will teach you what we have learned over the last 28 years of working with companies in this business. 2015 was an amazing year for our industry and for Zweig Group. The time has never been better to be more successful as an architect, engineer, planner, or environmental consultant. Happy 2016, All!

MARK ZWEIG is Zweig Group’s founder and CEO. Contact him at mzweig@zweiggroup.com.

Zweig Group is holding a brand new seminar on Building an Entrepreneurial Firm. More details here: https://zweiggroup.net/sandbox/seminars/baef/

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About Zweig Group

Zweig Group, three times on the Inc. 500/5000 list, is the industry leader and premiere authority in AEC firm management and marketing, the go-to source for data and research, and the leading provider of customized learning and training. Zweig Group exists to help AEC firms succeed in a complicated and challenging marketplace through services that include: Mergers & Acquisitions, Strategic Planning, Valuation, Executive Search, Board of Director Services, Ownership Transition, Marketing & Branding, and Business Development Training. The firm has offices in Dallas and Fayetteville, Arkansas.