A few of the reasons a great, successful firm can falter and experience a fall from grace.
At Zweig Group, we love to celebrate the successful companies in the AEC business. Our Hot Firm award that looks at revenue growth over a multi-year period is just one example. But what about the companies in this business that grow and become super successful, and then falter and eventually get swallowed up by another firm in their decimated state, or worse, just close their doors and shut down completely? These are the firms that go from good to not so great.
After 42 years working in this business, first as a management consultant, then as an employee, manager, owner, and board member of a variety of AEC firms across the land, I have seen a number of firms go from good to not so great. Here are just some of the reasons WHY this can happen and a great firm can fall from grace:
- No one has an interest or understanding of the business side of our business. I have always said that architects and engineers go into architecture or engineering because they like it. That doesn’t necessarily mean, however, that they will also love business. Not everyone who forms one of these companies has to love or even like business. But someone has to, or eventually the whole thing will blow up from a lack of profitability, bad cash flow, poor marketing, ownership transition plans that are unsustainable, or failure to create an environment that other people want to work in. The other problem associated with a lack of business knowledge is when too much cash is taken out of the business by the owners (and I blame the outside accountants in many of these cases!). The working capital gets stripped every year in an attempt to minimize taxes and maximize personal incomes. Or the owners have too much personal overhead, or overhead from other unprofitable businesses or real estate investments they may have. Then there is no money left to finance growth or deal with unforeseen future financial difficulties.
- There is no leadership transition plan or action, or if action is taken, it comes too late. I have seen this more than once and as a result it is one of the first things on this list. You would be shocked how many AEC firm owners in their 70s or older contact us to sell their firms because they don’t have anyone capable enough to turn the reins over to. Leadership transition requires three things – a willingness of the current owners to part with the reins, time for mentoring and to gain acceptance from the rest of the people, and deliberate action versus just talking about it. If any one of these three is shortchanged, the transition may not ever happen. Going from good to a decline is the inevitable result.
- The firm is passed down to the children of the owner who are not equipped to run it. I’m not saying that all second generation family businesses fail. They don’t. Clearly there have been some great successes with firms such as Nelson, WD Partners, Leo A Daly, and others. But many times the children of founders don’t have the interest in or passion for the business. They may not have the maturity or experience required, either. Then there is the issue of respect from the other employees and managers that they may not have earned over time. These kinds of family-owned business transitions don’t always work out for a number of reasons and can take a good firm down.
- Petty disputes between owners grow to unmanageable proportions and the firm breaks apart. Sometimes people who get together and form a firm in this business change over time. The individuals find they want different things from the business (or from life), or they want to take it in different directions. Or, they may be a second or third generation company with principals or partners who did not pick each other, and in fact may dislike each other. Any of these kinds of relationship problems or disputes can quickly destroy a good firm. People don’t want to work for firms where the principals don’t get along. It’s like being children in a household where the parents are in a bad marriage and constantly fighting and arguing. It can take a good firm to not so great quickly.
- The firm becomes financially unviable. Sometimes a good firm can find itself in unexpected financial hot water that it cannot escape. This happened to an old friend of mine when his high growth design company of about 300 people had to be quickly dissolved because his bank, with little notice would not renew his line of credit (few people in our business think this can happen). They went from good, to great, to bust almost overnight. Another example is the recent sale of EYP to Houston-based Page. EYP was, without question, one of the top firms in our business not too long ago. But over the years and multiple transitions, and resulting mismanagement, they somehow went from being super successful to a company that was bankrupt and had to be quickly sold. Maintaining financial viability has to be treated by management as a top priority, or a price will be paid. Being in the right market sectors, proper pricing, project management, cash flow forecasting and management, capitalization, credit facilities – all of these and more are crucial for firms that don’t want to go from good to not so great.
- There is some sort of a liability or reputational incident that the company cannot recover from. We once had to quickly find a buyer for a company that was a top environmental consulting firm with offices throughout New England because they had a Phase 2 site assessment problem identified during construction precisely at the time their professional liability coverage lapsed for 30 days. As a result of a lawsuit and judgement against them, their financial condition was so weak that their lender not only called their line of credit but also refused to renew their commercial real estate loans they used to finance the purchase of the buildings that their six or seven offices were housed in. They went from good to non-existent (at least non-existent in their original form) in a hurry. We did, fortunately, find a buyer in less than 20 days and the firm was absorbed by a larger European enterprise. If we had failed, all of the principals would have lost their homes that were pledged to the bank as a part of their financing package. This is just one example. In other cases, ethics incidents have taken down companies in this business because they got the reputation for being crooks. It’s hard to recover from and can take a good company to not so great in a hurry.
These are just some of the reasons AEC firms go from good to not so great. There are others but I’m out of space. The real question is, are you on one of the paths laid out above? If so, you better make a correction, soon!
Mark Zweig is Zweig Group’s chairman and founder. Contact him at mzweig@zweiggroup.com.