Sixteen years ago we merged a 46 person architecture firm with an 87 year old construction firm. The goal was to create an integrated firm that would allow us to 'revolutionize the industry and change our future'. Overall this merger has been a success. The CEO of the company is now a 40 year old architect, and we have grown to over 150 architects in six offices. More importantly, after 16 years most of the original architectural leadership team is still with the company.
At the time of the merger we felt like pioneers, and there were issues we never fully anticipated. I have talked to several firms that are thinking about a similar merger, and I thought I would just put down some issues for architects to consider before jumping in.
- Culture is critical. No matter how elegant the strategy, or strong the business case, the culture of the organization and the quality of the individuals will determine the ultimate success of the new firm. If the firm you are planning to merge with does not already have an outstanding reputation for collaboration and team team building, do not think that a merger will change that.
- Does the contractor care about design? Quality of design is one of the core values for almost any good architecture firm. There should be evidence that any potential partner cares about design and aspires to do the same quality of work that you do.
- Do you care about process? The integration of design and construction takes a great deal of process and structure to work effectively. If you enjoy having a loose unstructured firm, you will struggle to adapt to the new structure. In order to effectively integrate finances you will most likely need to switch to a construction based accounting software. It took us two years to make the full switch, but without it you cannot achieve real financial integration.
- The financial compensation structure can be very different. Most architecture firms keep very little capital in the firm and distribute the majority of the profits at the end of the year. Construction firms require bonding, and that requires a significant capital account in the firm. The majority of my dividends remain in the firm to build the capital account and buy out any exiting partners. These dividends are then paid out at retirement (or termination). However this money funds the activities of the firm and is at risk. Unlike what you hear at most architect gatherings, contractors have more risk because they have more assets that an owner can pursue. You need to get comfortable with delayed compensation and having your compensation at risk.
- The business model is different from what you thought it was. After twenty years in the profession I was quite certain I knew how contractors operated and made profits. I had no idea. The hourly/professional model is very different from the contractor business model. It has been very rewarding to be able to really understand the full picture.
- Technology matters. One of the driving forces behind our merger was the optimization of BIM technology to allow for the use of the model from design through construction. This can be done without the legal barriers typically encountered between two separate firms. Optimizing the use of technology is one of the real competitive advantages of a merged firm, and potential partners should to be in alignment on this.
These are just a few things to consider. I have no regrets about our merger: it has been a challenging but very rewarding experience. The 10 months we invested in getting to know our future partners before the merger certainly paid off. The potential upside is significant, just make sure you go into it with your eyes wide open.