/ Column / Executive Corner: The Dilemmas of A/E Family Ownership

Executive Corner: The Dilemmas of A/E Family Ownership

Steve Gido on September 30, 2015 - in Column

During the last several years, there has been increased consulting demand for ownership transition as well as mergers and acquisitions for family owned A/E and environmental-consulting firms. These inquiries have cut across the gamut of family ties: husband/wife-, sibling- and parent/child-owned organizations. They also cross a range of firm size, discipline and geographic location.

Family run businesses within this industry traditionally have been general-contractor firms (think of how many companies end with “& Sons” or “Brothers” as it relates to family construction dynasties). Most A/E firms aren’t family owned and have disparate individual backgrounds in terms of professional ownership, management and overall operations.

More Family Businesses

The severe design recession changed this to some degree. Hungry entrepreneurs itching for their own business as well as numerous displaced A/E professionals reluctantly started their own small boutiques. These individuals often initiate the business out of their home and may tap into the assistance of a spouse to “do the books,” create a Web site, or use family savings and credit cards for seed capital. In addition, as building and infrastructure demand waned, starting in 2007, some shrewd firms brought a licensed spouse to the ownership fold as a 51-percent woman-business enterprise (WBE) or used similar maneuvers to attract new clients and project types.

Perhaps this shouldn’t be surprising. Family businesses are “the most common type of business on Earth, particularly in developing countries,” says Professor Wesley Sine, faculty director of the Cornell University Johnson Graduate School of Management’s Entrepreneurship and Innovation Institute. In addition, the nonprofit Family Firm Institute (FFI) reported that family firms create an estimated 70-90 percent of global GDP annually as well as 50-80 percent of jobs in the majority of countries worldwide. Many owners and entrepreneurs start with financial and emotional support from family; FFI reports that a whopping 85 percent of startups are established with family money.

Pros and Cons

Many family owned A/E firms have wonderful characteristics. They often possess a close “paternal/maternal” company culture, where treating and protecting employees like family members guides decision making and interactions. These organizations can be slow to fire dedicated team members purely for bottom-line results and often have a “we’re all in this together” family mentality—when times are good or bad—for organizational resiliency. As a result, family run A/E organizations may exhibit higher employee loyalty and retention rates, and staff may cultivate a deeper commitment to the firm’s mission and values.

However, family dynamics and relationships can be complicated. Issues such as rivalries, resentment, drama, jealousy and entitlement can be found among relatives in professional organizations. And in the context of family businesses and pursuing sound ownership transition, such problems frequently can be exacerbated. The following are four typical challenges found with family owned A/E firms:

1. Which takes strategic priority: business or family pursuits? The most confounding aspect of family owned firms can be determining its strategic mission or purpose. Many owners will tell you it’s to offer exemplary engineering, architecture or scientific services; making communities and society better; and serving its clients and staff—just like their non-family competitors.

But candidly, it may serve first and foremost as a vehicle for family wealth, children or sibling employment, or closely held decisions and control. Should profits be reinvested in the A/E firm for growth, or is it fair to extract those profits for other family pursuits, such as ancillary business ventures or real-estate investments? Employees can grow confused and resentful in the presence of non-productive family members’ excessive vacations and perquisites as well as personal squabbles that spill over into business matters.

2. Ownership may not be available to “outsiders.” The “Godfather” movies were a classic case study in tight organizational kinship and control. Members and associates who were not “blood” and part of the family lineage could never be fully welcomed into the Corleone Empire. This is similarly the case with many family A/E firms.

Oftentimes, A/E family ownership is quite complicated, commingled with estate- and tax-planning goals designed to protect the “nest egg” for inheritance purposes. Some fear that opening the books to new employee-owners is a slippery slope to entangling insiders and outsiders, between those who are loyal and those who eventually may not be. As such, it’s common to see A/E firms offer other means of retention and recruitment models other than direct equity ownership, such as higher salaries and bonuses; non-voting classes of stock; and phantom stock, stock options or synthetic-equity programs.

3. Leadership succession can be thorny. Making the leap from a first-generation owned and led firm to the next one is a struggle for A/E firms of all shapes and sizes. The firm’s ethos and culture often is part of the founder’s “cult of persona,” whether a family run firm or not. In many family organizations, it’s clear (and even unspoken), that the founder’s son or daughter will be next in line to take over the business. But what if that possibility isn’t there? Or worse, the organization’s staff knows that “junior” doesn’t have the skills or acumen to be in charge? Should a new insider be elevated or an external candidate found to be the next CEO? Can that person effectively juggle the dichotomy of “family business” vs. “design business?”

4. They can be difficult to sell. If a harmonious, internal succession plan to other family members isn’t available, these firms may attempt to test the waters and sell to an outside buyer.

Surprisingly, in cases where strategic, synergistic and valuation expectations are aligned between buyer and seller, family relationships and governance often are minor worries, and a transaction can be consummated. In other cases, strategic buyers from the start are leery of stepping into a family run A/E firm. Larger firms may have “nepotism” rules that prevent direct family member reporting relationships. In other cases, cultural and communication differences as well as integrating family members into new organizational roles may be too difficult to overcome.

 

Steve Gido

About Steve Gido

Steve Gido specializes in corporate financial advisory services, including mergers and acquisitions, business valuations, ownership transition plans, and strategic planning for engineering, architecture, environmental consulting and construction firms. He leads ROG+ Partners’ merger and acquisition practice, and has advised on a wide number of A/E/C transactions, representing buyers and sellers of all sizes and disciplines.

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