With economic conditions increasingly difficult for smaller firms, mergers and takeovers are often the best way for a practice to thrive. Nick Schumann examines the options
A key challenge that design and consultant businesses face is how best to deal with success and the increasing risks that result from demanding contract conditions, lower fees, investment needs, and the changes to global economic conditions. All of this makes it increasingly difficult to operate as a small to medium size practice, so there is an increasing trend towards consolidation to create ever bigger businesses. As BDP’s purchase by Japanese consultant Nippon Koei in March demonstrated, size, it seems, does matter.
Having recently completed a merger of my business with a larger international firm, and having spoken to a number of architectural business owners who wonder if such a move would be right for them, I thought it might be useful to share a few lessons learned, this being the third time I have either merged or sold a business during the last 16 years.
The key considerations are ‘why’, ‘how’ and ‘who with’. The ‘why’, as always, is the most important factor and I would suggest that if the reason and benefit are not significant then you should not do it because such a move will only work to everyone’s benefit if there are clear and major reasons for going through with it.
In my experience a merger gives a better chance of having a long-term influence and continuing business as usual
The ‘how’ can be the difference between success and failure. There are basically two ‘hows’: merger or acquisition. Merger is the coming together of two businesses without compensation or goodwill payments, while acquisition is one party buying the other business for an agreed price. Do not be under any illusion that these are the same; they are not and will produce very different outcomes, with the resultant combined business entity having significant differences in terms of culture, rules, influence and reward.
One is not necessarily better or worse than the other, as the ‘how’ is purely down to the ‘why’. In my experience a merger gives a better chance of having a long-term influence and continuing business as usual, whereas in an acquisition the seller becomes part of the buyer’s business and basically has to fit, regardless of the effect it has on its business, with less influence, having accepted payment as compensation.
Architectural firms are different to most, in that each has a clear identity and unique culture, so merging or selling to another company is especially difficult and maintaining that uniqueness can be virtually impossible. Therefore the reasons or benefits have to be very clear and significant for it to have a chance of being a success.
The question of ‘who with’ is, of course, also driven by the ‘why’ as well as who might be interested. If the ‘why’ is about cashing in for any reason, then the answer is whoever offers the best price, regardless of post-acquisition consequences. A benefit case can always be made to justify a sale, but the truth is that it is nearly always about the business valuation – sell and get on with it regardless of whether the change to working culture is enjoyable or not.
However, if the ‘why’ is genuinely about improvement, growth, opportunity, investment, etc, then the choices of ‘how’ and ‘who with’ have different drivers. In such a case a merger tends to work better in the long term, despite the fact that there is no initial cash benefit, because there is more chance the team will continue to work in the way that made it successful in the first place. The ‘who with’ has to be a firm with a similar culture, great relationships and clients who understand the long-term benefits to all parties, resulting in what is ofen described as being 2+2=5.