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 realty 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% pre-tax, pre-bonus profit vs 9.9% for all firms
Fast growth firms have an average revenue of $133,690 per employee vs $126,840 for all firms.
Fast growth firms make a 39.8% return on total assets (pre-tax, pre-bonus) vs 19.7% for all firms
Fast growth firms have a median total annual principal compensation of $290K vs $194K for all firms
Fast growth firms are worth a median of .59 times NSR vs .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 dollar NSR slow-growth company (growing by 5% a year) and Principal “B” became an owner in a $5 million dollar high growth entrepreneurial company (growing by 20% 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. Each of these two owned 20% of their firm’s stock when they bought in.
In year one, Principal A, working in the slow growth firm, earned $194K in salary and bonus. His ownership was worth .20 (.47 times $5 mill), or $470K. By year 10, he would be earning $301K annually (assuming a 5% annual pay increase) and his stock was worth $729K. Over ten years, he would earn $2.44 mill. His ten year total would be $3.169 mill. Not too bad considering he still has another 15 yrs. 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 $290K 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 mill), or $590K. By year ten, assuming a modest 5% annual pay increase, he would be earning $450K 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 mill., making his ten year total of $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 US 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!
Interested in finding out more about our new seminar? Check it out here: https://zweiggroup.net/sandbox/seminars/baef/
About Zweig Group
Zweig Group, a four-time Inc. 500/5000 honoree, is the premiere authority in AEC management consulting, the go-to source for industry research, and the leading provider of customized learning and training. Zweig Group specializes in four core consulting areas: Talent, Performance, Growth, and Transition, including innovative solutions in mergers and acquisitions, strategic planning, financial management, ownership transition, executive search, business development, valuation, and more. Zweig Group exists to help AEC firms succeed in a competitive marketplace. The firm has offices in Dallas and Fayetteville, Arkansas.
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 realty telling!
