There are a number of strategies one can employ to make lots of money in this business.
Anyone who says you can’t make serious money in the architecture and engineering business is just plain wrong. It may not come easily, and it may not come overnight, but there are a number of strategies one can employ to make lots of money in this business.
Here are some different approaches I have seen used over my 40-plus years in this business:
- Growing through acquisitions. This is probably the most common method employed today to make lots of money in this business. Here’s why – if you can borrow money at 15 percent or lower interest to buy companies that generate anywhere from 30-50 percent on invested capital, it just makes sense to do it. On top of it, the higher the growth rate, the greater the multiple of revenue (not EBIT!) a firm is worth at exit. Increase growth rate and increase value. Then there are always overhead consolidation savings in the form of cheaper insurance, top management consolidation-based staff reductions, office space savings, outside legal and accounting fee reductions, and more. So buy, buy, and buy. And if you can keep it all going the right direction, you will have a very valuable company in the end.
- Growing through mergers. I have seen this approach used several times over the years. Company A and Company B merge. Each one represents a percentage of the combined firm value, typically based on what portion of the revenue each brings to the new company created in the merger. Then they do this again and again and again. Every time it happens the owners have a smaller piece of a bigger pie. But along the path of this journey, there are (of course) overhead consolidation opportunities. And once again, you end up with a firm that has a history of a significantly higher-than-normal growth rate and resulting in a higher than normal valuation as a result. It takes someone at the top with a real growth vision who can sell that to other business owners to make it happen. And don’t forget, the bigger the firm, the higher the average salaries and bonuses are for most of top management, too. Check out Zweig Group’s Salary Reports and you will see what I am talking about.
- Staying small and specialized. This approach can also work, although less of the money will come from the value created for the business at exit, and more of it from what the owners can extract from the business annually. I have seen plenty of single- or two-owner, highly specialized firms of 30 or 40 people with unbelievably high revenue-per-head numbers that make 30 percent plus profits every year. The most extreme example I have ever seen was a specialized planning and landscape architecture firm that did $60 million a year in revenue and made a 40 percent profit three years in a row. I also saw a small specialized single-owner consulting firm with revenues of more than $400K per head. The key here is specialization, and I mean becoming really, really good at something.
- Steady consistent growth through adding specialties. There are many firms on Zweig Group’s Hot Firm List or the ENR top 500 list that have grown this way and become incredibly valuable in the process. You add up 20, 30, or 40 years of consistent 10-15 percent growth and you will build a major firm. The key is consistent growth – not sporadic growth with periodic rests, or worse, retreats. It is through being highly organized, investing in constant system improvement, making planned new market hires, staff training, really good accounting and financial management, and other initiatives that an ownership team can build a consistently growing and profitable firm that virtually prints money every year and is a valuable asset for the individual owners when they want to get out.
- Regional domination. Of all the wealth-building AEC-related business strategies listed above, this one may be the most difficult to pull off – become the big, multi-office firm that does everything for everyone in markets that are too small to attract the big guys. Yet I have seen this approach work in some of the less densely-populated areas of the country, such as Montana, Idaho, New Mexico, rural Wisconsin, and elsewhere. It won’t come quickly – it takes lots of diligence – but I have seen a number of companies grow from nothing to 200-400 people with this “do all” approach. The key here is localized talent and a service-oriented approach above all else. With the growth and scale comes value. And that value can make the owners (as long as there aren’t too many!) very wealthy.
So which one of these approaches are you using in your firm to become highly successful? None of these? Maybe you should rethink that if so!
Mark Zweig is Zweig Group’s chairman and founder. Contact him at mzweig@zweiggroup.com.