Succession Planning... spotlight

29 October 2021

Two of our Construction & Built Environment Sector team, Peter Jubb and Norman Taylor, have both been in business ownership and client management roles throughout their tenure, particularly in Architecture & Design and Construction. This quarter’s theme is Succession Planning and the importance of thinking ahead. Considering how you’re going to sell your business, or what your retirement will look like isn’t always your first thought, but it’s vital in the long run. Our team provide invaluable insight into their experience, and how this may help your future decisions.

Question 1 – We touched upon succession planning in our last Spotlight feature which prompted quite a bit of response. What has taken me by surprise is the increased activity we’ve seen in the sector from business owners focussing on succession planning since January. Clearly a lot of reflection has happened during the pandemic which has triggered this. What are you seeing and why do you think this has been?

Norman – I’m certainly aware of more businesses looking seriously at how they can exit and hand over or sell their business. Clearly, the pandemic’s had a number of effects on business owners. I think people have become more aware of their own mortality and have thought about the ‘what if I wasn’t here’ question. This sometimes brings into real focus the fact that they’ve not planned for their exit and don’t really have anyone who could effectively take their place.

I’m also seeing more people who have been exhausted by the past 18 months and are thinking of early retirement.

Succession in an Architectural practice isn’t an easy issue for Directors and Partners who have spent their working life building a successful business. Does the business have people with the client relationship skills and business acumen but most importantly real drive and commitment to continue that success?

Peter –  There’s a growing trend for professional consultancy practices of all types, to be more business-like in their operations. The are several reasons for this;

  • Business owners getting their ‘house’ in order for exit
  • Growth/ diversification strategies required to combat new circumstances
  • Financial performance issues, necessitating a more forensic approach
  • Risk profile improvement required-e.g. too much reliance on certain clients or sectors
  • The owners simply can’t cover all the bases and need help to sustain the business.

Many years after starting their businesses, the owners still find themselves embroiled in work generation, project delivery and financial management, and realise they haven’t upskilled  their senior management team in requisite business skills, which is crucial to achieve a smooth exit.

Spending quality time on the strategic development of the business, fathoming what the future holds and preparing the ground for evolution and change is the way forward to prevent getting stuck in a business at retirement age; this has become a real wake up call for many owners.

Question 2 – The biggest challenge we find in the sector is around the leadership skills gap in the next tier of management. What can businesses do to tackle this as it’s clearly not a quick fix?

Norman –  One of the biggest challenges any business owner faces today is being agile enough to adapt to constant changes and impacts in the economy and the construction industry. The COVID -19 pandemic’s exacerbated the challenges and choices that businesses now face. It’s bought into focus the need to ensure that next tier management have the skills and knowledge so business owners can share the wide ranging responsibilities.

The ‘Rising Stars’ programme that Peter’s developed with the CLC is aimed at senior managers and Associates in SME professional services organisations and aims to give a toolkit to enable delegates to become work generators and not just deliverers of work. It essentially aims to bridge the ‘leadership gap’ to help business owners create a succession plan which meets their needs and those of future leaders/owners in a timely manner. Programmes like this should be invested in by business owners.

Peter – Leadership skills as far as I know aren’t covered in any level of detail within initial professional training to become qualified in a chosen discipline.

This inertia can continue for many years, with the current owners still largely being seen as the business and visibility to the senior management team, relatively muted. It’s not until the current owners experience a trigger point in their business lives, such as a desire to exit or wanting to grow the business/take it in a different direction, that the subject of leadership and the qualities required move up the agenda and end up being retrofitted.

Having a high propensity of emotional intelligence is far more important than technical skills and leadership studies point to this fact time and again. This is where business owners should start in their assessment of potential leaders within the senior management team.

Question 3 – Succession planning can be a complex and time-consuming matter which often results in it being put off to a later date. However, failure to effectively plan can be a critical factor in the future success of a business; at what point do you think business owners should start to plan for their succession and what should this plan entail?.

Norman – There are many questions that business leaders need to answer when thoughts turn to how they exit the business. Clearly the main focus has to be an arrangement that suits their practice as a whole. The main challenge is how they extract reasonable value without making it unaffordable for potential Directors.

Making sure that the people who take over have the right skills takes years of planning unless you can buy in the people you need. However, doing so can often cause issues with existing people who have aspirations to rise through the ranks.

External support’s available to help business owners get their business ready and make the right decisions for them and those taking over. It’s therefore important that the owners take the right advice at an early stage on such matters as sale options, valuations and tax implications.

Importantly, business owners need to understand the all the options available to them. Fortus has the expertise to provide this advice as well as advising on all aspects of tax – it’s worth having a call with the team.

Peter – I was told a few years ago that if you’re planning a new business, you should ‘start with the end in mind’; my experience of professional consultancies is that this rarely happens.

I do have some sympathy with this, because when you’re younger it can be hard to define what you might want the endgame to look like in 30 years’ time.

However, during 2 recent business development audits I’ve undertaken with architects’ practices, one of the most interesting discoveries was around the lack of a distinctive definition of their business models.

I believe this is the key to understanding what kind of business you want to build, your motivations for doing so and the commercial expectations required. This will then enable businesses owners to define a more focused succession plan, taking the team with you as you go and not shoe-horning this process in at the last minute.

Question 4 – Norman, you were the MD of a very successful architects practice before exiting; what advice would you give to your former self if you had to go through the journey again?

Norman – They say hindsight is a wonderful thing. Having spent 16 years growing a practice with an enviable client base and with a with a very specific culture, if I had my time again, I’d spend more time developing a more robust succession plan.

Firstly, I’d seek better advice on the options available, not just rely on a trade sale as the sole option. I’d also ask similar businesses what it really means to sell to a large PLC/Corporate.

As attractive as the initial financial offer appears, the outcome’s somewhat different and the journey to concluding the sale can be painful. Earn-outs rarely deliver on expectations, this is quite common.

Having gone through the process, I’m now acutely aware of the impact on the staff. The process, by its nature, is cloaked in secrecy. This proved to be an unfortunate part of the process and resulted in us losing trust by the staff and some key staff left when it was announced.

Question 5 – Business owners are increasingly looking at internal solutions for succession planning and one in particular, employee ownership trusts (EOTs), are very popular within the sector especially architects practices. Why do you think architects practices have taken to EOTs and what benefits have you seen this brings to those who have adopted this approach?

Norman – Employee Ownerships Trusts have become a popular option for Architectural firms. It’s popularity largely stems from the fact that the culture within architects is collaborative and egalitarian and owners can readily see the benefits available for those in the business.

There are many reasons why owners choose the EOT route. Some owners divest all their shares in the trust and take a back seat when it comes to day to day management. Some find it a better route to extracting value over a period of time making investment by staff affordable.

An EOT can ensure that the culture of the practice is maintained and enhanced though giving everyone a financial interest in the business and it’s a fact that productivity and profitability increases. Everyone sees the benefit of going the extra mile.

It also allows the current Directors to maintain a key role within the practice if they wish whilst identifying key people who can be developed to take over the day to day management when the owner wishes to finally leave the business.

Peter – I think it’s important to understand that the motivations for becoming a business owner in today’s-built environment may be completely different to the founding owners.

People want a better work life balance, a real ‘Just Cause’ (ref: Simon Sinek) to unite the business behind and less financial risk exposure…i.e. they don’t fancy putting their houses on the line.

The next generation of business owners beyond current senior managers may have different motivations still. The point is, that you must be tuned into these desires, or the model you’ve created and would like people to adopt may simply not be attractive to staff and then you’ve got a real issue fashioning a timely exit or transition from a business.

This is why the internal communications eco-system in your business is crucial in finding out what motivates people, what do they see as important, what kind of business do they really want to be part of.