Should You Merge Your Firm? Probably!

Robert Peake , 15 December 2017

Merging your firm can make good business sense. Robert Peake outlines the many benefits that a company merge can have for small practice owners.

According to the Australian Bureau of Statistics, there are approximately 10,800 architecture, engineering, planning and related consultant and design businesses in Australia. Of these:

60% of practices have less than 5 people;
80% of practices have less than 10 people; and
90% of practices have less than 20 people.

This is just under 10,000 businesses who have a heavy reliance on the principals to bring in the clients, recruit and manage the people, design and deliver projects, and control the finances. Ultimately, it doesn’t leave a lot of headspace, time or capacity to build and grow the practice. It also doesn’t allow much time to deal with success and the increasing risks that result from demanding contract conditions, finding and retaining the right people, lower fees, investment needs, and the changes in an increasingly global economy.

Most architecture, engineering and consultant (AEC) practices have a desire to develop their businesses and watch their practices prosper. But what’s holding them back from achieving this?

Today, some forward-thinking businesses are considering how they break the mould. As BDP’s alignment with Japanese consultant Nippon Koei in March 2017 demonstrated, size, it seems, does matter.

The benefits of merging

Merging — the coming together of two businesses, which become a new business — is an increasing trend worldwide, an approach that Australia is slow to embrace. In our region, we are a long way behind what’s happening in other parts of the world — in particular, Asia and the US. In the past six years alone, approximately 600 architecture and engineering firms have been either sold or merged in the US.

It is clear that the total number of architects, engineers and designers in Australia far exceeds the commercial demand for services. There are too many businesses competing for a diminishing service in an increasingly competitive marketplace. The number one concern for AEC leaders is the diminution of fees and services — the consequence of high and increasing competition for clients and projects from myriad sources. This includes other professions, the construction sector, the impact of technology and the forces of globalisation.

The advantages of merging / combining your business in today’s increasingly competitive and oversupplied marketplace include:

• Increasing the client base;
• Gaining stronger and more talented leadership;
• Increasing your skill base;
• Increasing productivity;
• Economies of scale;
• Increasing the capacity to invest in technology, innovation and systems;
• Building scale to engage experts in business;
• Improving the firm’s competitive position;
• Expansion into other geographic regions;
• Adding new practice areas;
• Greater capacity to devolve and spread the client relationships;
• Diversification of work to mitigate the risk;
• Sharing the workload and improving work / life balance;
• Increasing your influence in the marketplace; and
• Succession and exit strategy.

Although it is often overlooked in our industry, one of the greatest strengths of leaders of AEC businesses is their innate capacity to work with others and collaborate effectively. Add to this the reasons above, and merging becomes a recipe for success!

Our advice is to start with the premise that you should merge your practice — not why you shouldn’t. By merging with like-minded businesses, you will accelerate your path to success and break the innate tendency to incrementally improve the way you do things.

As Nick Schumann, UK Board Member of Rider Levett Bucknall and ex Shumann Consult, says “After three and a half successful years developing and growing SCL we have now merged with Rider Levett Bucknall, a global multi-service line consultancy, which will provide further opportunities for success. In my experience, a merger gives a better chance of having a long-term influence and continuing business as usual.”

Why the hesitation?

AEC businesses, in particular, are different to most in that each has a clear identity, a distinctive design proposition and unique culture. Merging with another company and maintaining that uniqueness is seen to be especially difficult to overcome for many AEC business leaders.

Some of the primary reasons that Management for Design regularly confronts when dealing with businesses who are hesitant to merge include:

1. Leaders not wanting to lose control of design and clients.
2. Lack of outside trusted advisors — “who do I go to?”.
3. Answering and being accountable to others.
4. Inability to step away from the day to day.
5. Not knowing where to start and how to go about it.
6. Not knowing potential partners / targets.
7. Culture of independence and freedom.

Let’s look at some of these reasons in more detail.

Losing control

‘Control’ is a crucial factor for the sense of satisfaction and accomplishment that leaders achieve from running their own practice and producing their own work. The ability to influence your own environment and change what you don’t like is critical for the sense of satisfaction an owner gets from their work. Unfortunately, when you are part of a team, you surrender some of that control in exchange for the resources and support of your team.

If you are insistent on not having to argue your decisions and explain your reasons every step of the way, then you will hold your business at its present level. You can’t expect your business to grow. If it does, and you are holding onto control, then you are embedding yourself in a job and not building your business as a result.

Inability to step away from the day to day

More often than not, AEC leaders are engaged in the here and now — the current and next project, the current and next client, etc. Yet, at the same time, they bemoan the fees they are receiving for their services, and the lack of business acumen and project management expertise in their businesses. They wonder why they’re not attracting and retaining great people.

Stepping away from the here and now is not easy for AEC firm leaders — “there is too much to do!”. As a business leader, this is your challenge — more notably, your obligation — to your clients and people. They are looking for you to discover and implement innovative ways of working, designing and collaborating, with more exciting work and more opportunities.

Lack of outside trusted advisors

Simply put, there isn’t a great deal of merger and acquisition expertise readily available in Australia in the AEC sector. Partners that have expertise and specialism in AEC businesses are few and far between in our region, primarily because of the low level of activity. Having said this, they are out there. There are two businesses based in Australia that have the required criteria, including:

• Australian presence and expertise;
• In-depth knowledge and experience in the marketplace;
• A track record of closing deals;
• Target sourcing and screening;
• Valuation and transaction negotiation;
• Due diligence; and
• Strategy development and execution.

Not knowing potential partners / targets

Finding quality partners is the biggest challenge, according to 45% of AEC businesses that have conducted a merger in the past five years (PSMJ 2016 M&A Study). While sifting out the businesses with tarnished brands, poor strategic alignment and ineffective systems, it is evident that people issues are a huge challenge. Finding a business that shares common aspirations and cultural values, and is a fit financially makes it even more difficult.

Having said that, be assured that there are myriad businesses that should merge or be absorbed by more developed businesses — you just need to put in the work to find them.