Sucession. More than a box set
10 Nov 2020
Ed Jones was my external examiner when I graduated from the Polytechnic of Central London back in the late 70’s. Along with James Stirling and Bob Maxwell they formed a pretty intimidating team. I have always followed the work of Dixon Jones with interest, their analytical approach to urban design was up there with the best, and in recent years I have seen a few of their projects in design review at RBKC (The Royal Borough of Kensington & Chelsea). I particularly admire Marlborough Primary School in South Kensington, it is a great example of their recent work.
So, it was with some sadness that I read that Dixon Jones are liquidating their practice. It is implied that as the founders got older the lack of a succession plan meant that their clients were concerned about the longevity of the business.
This is not an unfamiliar story. Over the years the founding partners of a practice build up undrawn profits, which are in essence the value of the company or partnership. Succession planning should release this equity, allowing the introduction of the next generation of directors and owners. However too often this does not happen, and the effects on the business can be divisive and ultimately destructive.
Fundamentally architectural practice is often run at break-even or with minimal profit, so generating cash is not seen as the priority. The value of a practice is more often than not based on turnover rather than profit, and this exacerbates the problem. Would you rather have a business with a £2m turnover and £1m in the bank or a £3m turnover and nothing in the bank? Unfortunately, a lot of practices work on the latter model.
For the founders to realise and extract the value they have created by starting the practice and generating the workload there are few options.
- In the past junior partners would raise a loan and buy the equity from the senior team, this is no longer a viable idea.
- A practice can be sold, but what is the purchaser buying? Goodwill, a client list, a lease and a few computers.
- In some circumstances merging firms can diversify the workload but rarely do the owners of the purchased company get what they think they are worth. It is rather like an arranged marriage.
- Employee Ownership Trusts have become a very popular way of getting equity out and sharing the value of the business, but they do not suit all businesses.
Starting out in practice is never easy. Stiff+Trevillion started in a recession and lived hand to mouth for many years and we have survived even worse recessions in the intervening years. If we were starting today with the wisdom of forty years of business experience what would we have done differently? I would argue very little.
Our premise from day one was parity of equity, we had equal call on profit, and equal liability for debt.
We did not measure the fee efficiency of the individual directors; all were rewarded equally.
Valuing each director equally removes rivalry and sets up a supportive and tight management group. Of course, it relies on the directors being very close friends and colleagues, and in that respect the four original Stiff+Trevillion directors were remarkably close and supportive.
As we move the business on and the younger directors take the reins, we will continue this culture. Our business has self-funded the buy-back of director’s shares so that the founders can leave with their equity and without the practice needing to borrow which would inevitably compromise its growth and expansion.
This is not the only way to do it as I have said, but the importance of having a plan well in advance of its implementation is absolutely fundamental to business development. Our plan has been in place for many years and demonstrates how important succession planning is if a business is to survive beyond its founding partners.