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The Rural Practice Acquisition Fund An AIA Ownership Transition Program: A Proposal

  • 1.  The Rural Practice Acquisition Fund An AIA Ownership Transition Program: A Proposal

    Posted 07-31-2020 17:24
    Recently, I was doing some brainstorming on ideas to make it easier for young architects to acquire an equity stake in a practice. I would love to get your feedback on this idea.

    The Mission:

    To slow the number of architectural practice closures in rural communities and small cities due to owner retirement and other addressable issues. The 4-pronged mission of this new program is:

    (1). to strengthen and increase the public's access to architectural design services in the targeted communities,

    (2). to maintain and increase architectural design employment opportunities in those communities.

    (3). to create an effective path to ownership for experienced architects who would like to own their practice, but due to a lack of financial resources, lack of business management training or because of heavy student loan debt, are not currently able to secure an equity stake in an architectural practice by their own means.

    (4). to increase the value of membership in the AIA, fueling membership growth and improving member retention.

    The Challenge:

    Supporting Young Architects - Architectural students spend as much time in school and interning while working toward licensure as attorneys and doctors, but architects tend to earn less, while often accumulating the same student loan debt as these other professionals. Historically, owning your own firm - while not a guarantee of increased income – it has been a vehicle many architects have used to reach their financial and professional goals.

    Supporting Retiring Architects - AIA Chapters and Components in rural communities and small city's, report that their membership is falling. Membership loss usually means lower revenues. Lower revenues can lead to a reduction in staffing and services the Chapter can provide to its members.

    The Solution:

    Let's use the strength of our national organization to create tools that allow these two groups of AIA members to help each other to achieve their goals.

    The Facts:

    Worldwide, architectural practices represent over $440 billion* of equity assets to their owners. A large percentage of this group are from the baby boom generation, and as these owners continue to age, much of this equity could be lost.**

    The reasons for this tremendous potential loss of business equity? It's because the majority of these firms are small businesses, and they have not groomed their business to appeal to a larger pool of potential business buyers. Because of this oversight, the only realistic buyer for their practice is another architect, whom the seller may or may know.

    To make matters worse, even if an experienced and interested architect learns of a potential opportunity for ownership, they may not be able to secure the funding necessary to buy out the previous owner. The result; the owner closes the practice, ceases all operations and enters retirement. What a tragedy. The business owner loses hundreds of thousands of dollars of equity; a bright, young architect loses a chance to own their own firm and the community loses yet another small employer.

    This program will reverse this increasing trend by providing powerful new tools that facilitate leadership transition in AIA member firms and helps to preserve the practice of architectural design in our small cities and rural communities.

    What Can Be Done:

    The AIA can create a series of tools to facilitate the buyout of small city and rural firms and transition these firms to the next generation of practice leaders.

    The Tools Needed:

    1.     The creation of the AIA Rural Practice Acquisition Fund (RPAF). This funding tool will be initially capitalized at $100 million dollars. AIA National will provide $10M to the fund, $90M will come from private investors and the program will take advantage of the current, historically low interest rates, to provide the funds necessary for the new owners to buy out the existing owners of a practice. Sixty percent of all architectural practices have 20 or less employees and billings of a $5,000,000 or less per year**. With many firms billing less than $1M per year.

    With $100M in capital to invest, and using typical small business valuation modeling (i.e., .25 -.75 of the preceding 12-months billings), over a 10-year period the RPAF could easily fund the transition of ownership of 80 to 120 rural and small city architectural firms. There will be a 3-year ownership transition period after acquisition. During this period the selling principal will work with the new owner to ramp them up and introduce them to the firms' staff and customers.

    At acquisition, the selling principal will receive 70% of the sales price. The balance of 30% will be paid over the course of the following 36-months to motivate the seller to support the new owner. This will help to discourage the seller from competing against the new owner by creating a new practice and taking their old clients back.

    At Acquisition, the RPAF will own 60% of the firm and the new owners will own 40%. The new owners will sign a Note to secure their 40% stake. Additionally, at acquisition, the new owners will be given a 10-year option to buy-out the RPAF's stake in the acquired firm. The buy-out price will allow the RPAF to earn a nice profit so it can fund additional ownership transitions, but it will leave the real upside potential of owning the practice in the hands of the new leadership team.

    The new owners are not under obligation to buy out the RPAF. If the new owners do not buy-out the RPAF before the ten year time period expires, the RPAF will be free to sell its stake in the firm. Profits from the firm's activities shall, after the needs of the business are satisfied (including performance bonuses for the new owners), be paid 60% to the RPAF and 40% to the new owners. 80% of all new owners' profits will be applied to the Owners Note until it is paid off. 

    2.     The creation of a buyer/seller match-making program that helps owners looking to retire to meet well-qualified architects looking to own their own firm. Potential sellers and potential firm buyers will discretely identify themselves to the RPAF. This information will be held in the strictest confidence. To participate in the program you will sign a Confidentiality Agreement. Potential buyers will not disclose or discuss the names of firms that are considering selling their practice, and potential sellers will not discuss the names of potential buyers with anyone. This will protect the current business/professional interests of both groups of participants.

    3.     Participation in a peer review program for both the selling and buying principals. The peer review program will be comprised of several groups of non-competing, geographically dispersed firms who can learn and share best practices. Examples of these types of organizations are the NAHB Builder 20 Program, Remodelers Advantage and others. Running a successful business in any industry requires more than the ability to create a product or deliver a service. Most architecture schools spend very little time teaching their students how to run a successful business. The peer review program will ensure that everyone participating in this program receives real world instruction on how to operate and grow a profitable practice.

    Why It Can be Hard to Sell Your Architectural Practice:

    When businesses go up for sale, they are divided into 1 of 2 categories; businesses that run themselves and businesses that require involvement by the owners. Most well-capitalized potential purchasers/investors do not want to be involved in the day-to-day operations of the business they just acquired. They want to put their money to work, they are not looking for a job. This means they are looking to acquire businesses with seasoned, effective leadership; efficient, dependable staff and a solid client base.

    So, unless the founder has built a business that can run well without his/her participation, when they reach out to the business broker they will find out that the only real candidate to acquire their practice, is another licensed architect. Someone who's both willing and capable of personally running the firm on a day-to-day basis. In terms of getting the highest sale price for your firm, this is bad news for the seller. Why? Because it means the potential pool of people who would be a good fit to purchase the firm, are a small subset of the number of people who have the financial resources to purchase the firm. Why is this important? Supply and demand. The more people interested in your firm, the higher the price you can ask for it. The fewer people interested in your firm, the less likely you are to sell it.

    Why It's Harder To Sell a Small Firm Than It Is To Sell a Large Firm

    Small businesses do not have the same ownership transition options that the larger firms have. Larger firms have access to institutional funding; they have access to the capital markets, to private equity investments, they are more attractive as merger and acquisition candidates, etc. For example, a large firm can work with their consultants and financial advisors to put an Employee Stock Ownership Program (ESOP) in place to buy out the founders. Designing, implementing and maintaining an ESOP is an expensive and time-consuming process – putting it beyond the reach of most small businesses.

    Also, larger firms tend to do a better job and long-term planning than small firms. For example, a large firm may have put in place a Strategic Plan which plans for generational leadership transition; a small firm may have no such tool in place. Unfortunately, what this means is that after a lifetime of hard work, when an owner is finally ready to sell the business and retire, they may find out that their practice has no financial value to anyone but themselves.

    Conclusion:

    Participation in the RPAF can have a meaningful impact in helping AIA members in rural communities and small city's reach their professional and financial goals.

    References:

    * According to a recent firm survey by the AIA

    ** However, given the size of the baby boom generation, even delaying retirement means that there will be a sizable number of architectural positions to be replaced over the coming years due to retirements. Almost 30% of firms estimate that they will lose 10% or more of their current architectural staff over the coming five years due to retirements. One in six firms estimates that they will lose 20% or more of their staff over the coming five years due to retirement. For many smaller firms, the retirement of a firm leader may well lead to that firm ceasing operations. (https://www.aia.org/pages/6280831-abi-february-2020-a-solid-business-perform)



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    Kevin Harris Assoc. AIA, CSI
    Director, Sales & Marketing
    AGS Stainless, Inc.
    Bainbridge Island, WA
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  • 2.  RE: The Rural Practice Acquisition Fund An AIA Ownership Transition Program: A Proposal

    Posted 08-03-2020 17:33

    Kevin,

     

    This is a very interesting proposal.  You may gain interest among members via the discussion board.  I also suggest you reach out to leadership of the AIA Small Firm Exchange (SFx). On their webpage, you can 'Find Your Rep' and use them to engage the leadership group.  Good luck!

     

    https://network.aia.org/communities/community-home?communitykey=5dccd29e-2089-48ae-8452-471d5068b76d&tab=groupdetails

     

    Melissa Harlan, AIA

    Kiku Obata & Company
    6161 Delmar Blvd., Suite 200, St. Louis, MO 63112
    Direct 314.505.8427  Mobile 617.272.0878
    www.kikuobata.com

     




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  • 3.  RE: The Rural Practice Acquisition Fund An AIA Ownership Transition Program: A Proposal

    Posted 08-04-2020 10:02
    I feel this approach has merit.  While "Rural" is a likely misnomer, it certainly initiates the discussion.  I am one of those who have been in a successful and rewarding "rural" practice for nearly 30 years.  I certainly understand the frustrations in finding appropriate career minded individuals who aspire to private practice.  I am interested in this program and could offer insight based upon my experience.
    Pat Kelly

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    Patrick Kelly AIA
    President
    Kelly Architectural Services, Inc.
    Zanesville OH
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  • 4.  RE: The Rural Practice Acquisition Fund An AIA Ownership Transition Program: A Proposal

    Posted 08-04-2020 14:15
    Great information Kevin...!!  Thank you.

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    Nelson B. Nave AIA
    Owner
    Nelson Breech Nave, AIA Architect
    Kalamazoo MI
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