The Strategic Path

TEXT Maj-Lis Vettoretti
PHOTOS Ben Rahn/A-Frame Inc.

In the September issue of Canadian Architect, my colleague Elaine Pantel discussed how recent legislative changes to the Architects Act of Ontario opened a range of new organizational and ownership opportunities for the province’s architects. One of the most significant changes is that a wider range of parties, including outside investors, can now take on ownership stakes in architectural firms.

With that foundation as a starting point, this article will offer a somewhat more “macro” view and discuss how architectural firms can address these new business development and growth opportunities through various strategies and business combinations, including joint ventures and other collaborations, mergers and acquisitions, and internal succession plans.

First, we begin with the assumption that the management groups within firms are focused on strengthening and growing their business, rather than simply maintaining everything in an “as is” fashion. As such, the key considerations that must always be kept in sight are building top-line revenue and bottom-line profits, as well as managing cash flow and cash resources. 

Short-Term vs. Long-Term Plans

Any firm considering a shift in its strategic trajectory must focus its efforts on the appropriate time horizon to encompass either, or both, short-term and long-term prospects.

Particularly if this is a new direction for the firm, starting with a short-term outlook may be a lower-risk option, as it allows management to further develop their plans before committing significant time and resources to a single strategic path. It also gives them the opportunity to assess the performance of any new parties who may have been brought into the picture and their “fit” for a longer-term relationship.

This short-term focus often starts with the introduction of a new service or the initiation of a specific new project. Many architectural firms choose to collaborate on a wide range of short-term projects, both locally and internationally, through consortiums, joint ventures and other arrangements, giving them broader reach.

Looking at longer-term strategic planning, the firm may have decided to commit greater resources to in-house development of a new service, or the parties are interested in coming together in a more formal arrangement where ownership and investment may be shared in some manner.

Public-private partnerships (P3s) offer another long-term strategy for architectural firms to expand their reach through participation in large and complex public infrastructure projects. In doing so, many firms become exposed to new methodologies and processes that allow them to win other projects and grow their business over the longer term.

Through these various arrangements, architectural firms can gain a competitive advantage through accessing pools of talent, acquiring new leading-edge technologies, and entering new markets. If managed properly, this can all lead to increased valuations for these firms, giving more power to their succession and growth plans, and bolstering the opportunities for the owners upon their retirement. The enhanced flexibility offered by the changes to the Architects Act for structuring the ownership of architectural firms can help facilitate these plans.

Adding New Services

By adding new services, most architectural firms leverage their reputations and contacts to introduce a new, broader range of offerings to the marketplace. Many firms are expanding beyond core architecture services into areas such as project and construction management, functional and space planning, interior design, and furniture design and distribution, to name a few.

Choosing to develop the capability of providing new services internally can be a cost-effective strategy to build on existing resources and infrastructure. However, this still involves planning for staffing and resource allocations, marketing, and systems and process integration. 

When considering this approach as a longer-term strategy, the current ownership structure should be reviewed, particularly if there are different levels of liability risk relating to the new service areas, as compared to the core architectural practice which carries professional liability, and also to optimize tax planning opportunities. One useful strategy is to use separate corporations for new services outside of the architecture practice, thereby limiting risk.

Many architectural firms trying to expand their reach commonly hire professionals or other companies as sub-contractors or sub-consultants to get the job done. This type of outsourcing allows the firm to access talent without committing additional internal resources. It is important to have properly drafted sub-contractor agreements outlining the responsibilities of the parties and clearly establishing the contractor status, as opposed to employment status. A further benefit is that if everything goes according to plan, these relationships can lead to longer-term and more permanent collaboration arrangements in which ownership is shared in some manner. 

Joint Ventures and Other Collaborations

Joint ventures are a common and very effective way for architectural firms to broaden their horizons on specific projects. In such arrangements, the involved parties retain their separate and legal identities, with each recording their specific share of revenues and expenses on the project. Whenever such agreements are struck, there should always be written contracts in place to specify the roles and responsibilities of each party in fulfilling the project. Some points of consideration within these agreements include who will handle the accounting and administration, how the project will be financed, and how revenues and expenses will be shared.

Architecture firms are collaborating and partnering with companies and organizations in new and creative ways, bringing their unique capabilities together to access new markets. An example of just such a collaboration, undertaken by Quadrangle Architects Limited–one of our clients–involved their work with March of Dimes Canada, a non-profit charity dedicated to working with individuals who have physical disabilities (see inset above).

Mergers and Acquisitions

Mergers and acquisitions among firms are increasingly common in the architectural design industry as the trend towards consolidation continues across Canada, resulting in larger multidisciplinary firms. Although the terms “merger” and “acquisition” are often grouped together, they refer to two very distinct types of organizational events. A merger commonly happens when two firms, often of about the same size, agree to go forward as a combined entity. These transactions usually involve a swap of shares or payment of cash between the parties. An acquisition is when one firm buys another firm and clearly establishes itself as the new owner; often a larger firm acquires a small firm as a means to grow rapidly. Effectively, the target firm ceases to exist as the buyer “swallows” the business.

In all cases, when businesses are combining there is a need to value each business separately, and these valuations will impact the ownership structure that is put in place. It is critical to consider how the business will be financed going forward, both externally from bank loans and contributions by owners and investors, and internally from operating profits retained in the business. Under the revised Architects Act, outside investors may now take an equity position in the firm, providing new ways to structure and finance a merger or acquisition transaction, which may also include the buy-out of a departing owner as part of the deal.

We have worked with many clients over the years to help them negotiate and structure merger and acquisition transactions during the due diligence process that takes place in the period prior to the transaction. This includes financial and tax due diligence, with a focus on the opportunities and wide range of risks associated with the proposed transaction.

Internal Succession Planning

Internal succession planning refers to how a firm plans to transfer the management and ownership of a firm from its current owners to the next generation, over time. The strategy involves creating a long-term ownership opportunity for qualified employees in order to facilitate the continuity of the firm. Continuity of the firm secures the future of employees beyond the careers of the current owners, and creates “legacy” value.

Over the past years, there has been significant interest by many firms–from well-established firms to new start-ups–to include internal succession as an essential component of their strategic growth planning, often in conjunction with some of the other strategies I’ve presented. The strategy of achieving “buy-in” from key employees enhances the culture of the firm.

The succession planning process includes creating the financial plan and timelines, a remuneration strategy for owners, and a valuation basis for ownership interests. Pricing a deal with employees has some unique factors to consider and many options are available to negotiate and facilitate a sale to employees. We work with our clients to develop the best structure for their situation that considers both financial and tax strategies that can shorten the period of time in which employees will have access to the necessary funds to finance the purchase of ownership interests. One such example may be the use of holding companies and separate classes of shares in order to aid in the removal of any surplus assets by the existing owners and to maximize cash flow available to employees to fund purchase financing.

Vision and Objectives

In all of these scenarios, the strategic planning process should cause the owners to carefully consider and establish the firm’s strategic vision and objectives, to consider the firm’s profitability and future growth, to benchmark the firm to the industry, and to implement strategies to improve the firm’s standing and financial health. The recent changes to the Architects Act in Ontario provide an opportunity for firms to consider new options to integrate changes to the ownership of their firms in line with their strategic planning.

The planning begins well in advance of a transaction. Once the strategic growth plan has been formulated, you will need to assess the firm’s current resources (e.g., financial, human resources, real estate, etc.) to have a clear understanding of what will be needed going forward. Understanding how firms are valued before starting will give you a head start on how a deal may be priced and structured and, ultimately, will help ensure the long-term success of the effort. CA

Maj-Lis Vettoretti, CA, is Partner, Assurance and Business Advisory and Elaine Pantel, CGA, is Principal, Assurance and Business advisory at Toronto-based Shimmerman Penn LLP where they both head up the firm’s industry specialist group for architecture, engineering and design firms.

Quadrangle Architects in joint-venture lockstep with March of Dimes

Maybe it was serendipity. 

With the Ontario government set to begin enforcing a law that would require virtually every business in the province to remove and prevent barriers to accessibility for customers and employees with disabilities, Quadrangle Architects Limited didn’t have to look far for a partner both to help educate companies about the new requirements and to build its long-established accessibility consulting business.

The fact is that Susan Ruptash, a principal with Quadrangle–a prominent architectural firm in Toronto–had been a strong proponent of universal, barrier-free building design for more than 20 years and she already had a close working relationship with March of Dimes Canada, a community-based rehabilitation and advocacy charity for people with physical disabilities.

In 2009, with the Accessibility for Ontarians with Disabilities Act (AODA) calling for almost every business in Ontario to be in compliance by 2025 getting closer to fruition, it was like a light switch went on for Ruptash.

“We were already working with March of Dimes. We knew and respected their work and their people,” explains Ruptash. “With AODA enforcement on the horizon, we saw a big opportunity for our firm to grow and it was only natural that we would ask March of Dimes to come together with us in a joint venture.”

Starting with a series of small, focused projects to help the two organizations fine-tune their working relationship–a critical success factor in the much bigger and ongoing accessibility program that would follow, according to Ruptash–Quadrangle and March of Dimes soon launched AccessAbility Advantage, an organization specifically focused on helping Ontario businesses interpret and implement accessibility standards that meet AODA standards.

While acknowledging that the collaboration between Quadrangle and March of Dimes came together in a largely organic manner, Ruptash says there were still some obstacles to overcome in bringing the two culturally distinct parties together in a formal working relationship.

“One of the big challenges,” she explains, “was in determining exactly who was going to do what and having clarity in how responsibilities for specific tasks would be parcelled out. That’s not always easy when you have two strong organizations that are confident in their own processes coming together.”

The key to success, she says, was “having a shared vision and a huge mutual respect between the two organizations.”

While AccessAbility Advantage is still in its early days, Ruptash says the joint venture with March of Dimes has already started to pay dividends for Quadrangle. 

“It’s opened the doors to a wide range of new business opportunities that we wouldn’t have had otherwise and it’s allowed us to build a bigger internal team of accessibility specialists whose energy and fresh creativity add to the strength of our entire firm.”

Serendipitous, indeed.