Sealing the Deal: Mergers and Acquisitions
For better or for worse, many architects see the profession as a calling, not a job. “They often don’t want to think about their practices as businesses,” says Brian Kenet, a senior advisor specializing in mergers and acquisitions (M&A) at consulting firm Anchin. “Architects are reluctant to think about issues like ownership, transition planning, and making money while still doing good work, until it’s too late.” Presenting these challenges as design problems, however, he says, often gets more engagement. So, how do you build the perfect exit strategy—one that also ensures the continued success of the practice and its employees?
One place to start is from within, by slowly cultivating a younger generation of leaders while owners gradually step back. But internal transitions, ideal as they may seem, are not always easy, or feasible. “Most employees like the idea of becoming an owner,” says Kenet. “There are rewards, of course, but there are also risks and responsibilities.” The realization for prospective owners that they might need to personally sign a loan, or become liable for a lease, can abate enthusiasm—especially when a turbulent economy compounds uncertainty.
For Frances Halsband, who cofounded New York–based Kliment Halsband Architects with her late husband, Robert Kliment, in 1972, internal transition was, for this reason, not viable. “Our younger partners, in that atmosphere of fear during the pandemic, could not really picture taking on the risk of running a firm,” Halsband says. “As a founder and somebody who might very well retire myself someday, it seemed that my principal responsibility was to find safe harbor and keep everybody employed.” In 2022, she sold her 20-person studio to Perkins Eastman (PE), where she now practices.
Although transition plans might prompt an M&A deal, there are other benefits for sellers to consider. An acquisition can bring greater financial security, a more robust managerial infrastructure, or efficient economies of scale for day-to-day tasks. These, in turn, can increase a firm’s ability to land (and successfully deliver) larger projects. And, for owners looking to retire alongside the transaction, Kenet puts it more bluntly: “Chances are that you can get more money from a third-party sale than from selling to your employees.”
But every sale requires a buyer, and many practices are not well positioned for an acquisition. According to the AIA, of the 19,000 firms in the U.S., about 75 percent have fewer than 10 employees. Smaller practices, like Halsband’s, can stand out by “punching above their weight class,” says Kenet. Developing a specialty, such as historic preservation, or amassing one or more high-profile clients, are other ways to attract suitable buyers. For them, an acquisition can be an opportunity to gain a footing in a new geographic region or build a deep bench with new subject-matter expertise. Large firms and engineering companies can also utilize such deals to boost their in-house design chops or grow their brand.
When Michael Graves died in 2015, the firm that he founded in 1964 was left without a figurehead. “He was a rock star,” says Joe Furey, president and CEO at Michael Graves Architecture (MGA). The generation following that of the starchitects, he points out, has many talented designers but is lacking in “seller-doers”—individuals who can balance billable work with business development. When a well-known personality like Graves secures so much of a firm’s work, there are not as many opportunities for others to develop those skills. For Furey, acquiring other practices has been a way to address this, as well as to spread Graves’s legacy and tap into new markets. He has closed seven acquisitions (with an eighth in the works), and, Furey says, “The value of the enterprise has grown 25 times over the last eight years.”
Leonard Castro, an executive vice president for Stantec’s Buildings group, explains that there are five areas that the E/A company examines when reviewing prospects: design culture, commitment on behalf of leaders, alignment on diversity, technical expertise, and entrepreneurial acumen. Stantec, based in Edmonton, Alberta, recently announced plans to acquire Page (which, in 2023, acquired Davis Brody Bond). This particular acquisition will be Stantec’s 149th since 1994, increasing its head count in the U.S. by 1,400 and bringing a stronger architecture presence to many cities where it already has engineering offices. “But we walk away from the vast majority of acquisition opportunities,” he notes, emphasizing the need for a “perfect fit” on all fronts. “We’ve probably vetted at least 10 times as many firms.”
Whether a deal emerges organically or through a matchmaker like Kenet, a term sheet (or a memorandum of understanding) sets out the contours of the agreement: compensation, organization, employment conditions, etc. Ask the tough questions up front—something that looks good on paper may not be so in practice. “It has to work culturally,” says Shawn Basler, co-CEO at PE. “We don’t buy portfolios. We merge with people,” he stresses. Many firms, like PE and MGA, often partner with prospects to pursue work and test chemistry.
Typically, the term sheet is nonbinding, perhaps with a confidentiality clause, allowing both parties to initiate due diligence. “At this point, somebody is brought in to opine about valuation and determine cost,” says Bennet Heart, partner at Noble, Wickersham & Heart, a law firm in Boston, where he advises design firms on matters including contract negotiation and ownership transition.
There are several ways to structure firm consolidations, Heart says, but the most common are stock-purchase agreements and asset-purchase agreements. In the former, the buyer acquires the firm by buying a controlling stake in its stock, thus acquiring assets and liabilities. In contrast, an asset-purchase agreement, which tends to be more complex in nature, allows the buyer to identify specific assets to procure, leaving the acquired entity as a shell company. “It will probably have to change or stop using its name, but it still exists and will typically carry professional liability insurance for a number of years with a ‘tail policy,’” he explains. When determining which agreement structure works best, buyers and sellers look at comparative costs and assess risk together.
After closing, work begins on integrating the two entities, a process that can take anywhere from a few months to a few years. Clients may be surprised to hear of the acquisition. Some sellers may find themselves marginalized in decision-making. Small redundancies between firms can lead to internal competition. Even with the best planning, issues as banal as IT infrastructure, expense reports, and software licensing, or as sensitive as branding (such as how much and how long to preserve the acquired entity’s) can create unexpected friction. “You can go from excitement over a bigger platform to the reality of a new way of doing time sheets and other headaches,” PE’s Basler says. “I’m the product of a merger myself. You have to remind people why they did the deal in the first place.”
Attrition is another (at times unavoidable) concern. Some architects join small practices for the inherent intimacy. “They wanted to be involved by going to interviews, meeting every client, being out on the construction site,” says Halsband, “and suddenly there were a hundred people around. Some left. Those who stayed, including myself, are now working on new types of projects that we never imagined we would—that’s really exciting.”
M&A deals can also sour, irreparably. In 2007, the partners of Princeton, New Jersey–based Hillier Architecture—then 350 people strong—offered the firm’s founder a buyout on less than favorable terms. “It was insultingly low,” J. Robert Hillier recalls, ultimately leading him to negotiate with Scotland-based RMJM, which was then looking for a toehold in the U.S. The acquisition created one of the largest global design firms (peaking at No. 9 on RECORD’s Top 300 list). But, soon after the merger, the parent company laid off Hillier’s marketing team, closed the Philadelphia and Princeton offices, dropped his name from “RMJM Hillier” (the U.S.-based entity), and cut his salary, prompting him to leave. “They didn’t understand how to secure work here,” he says, an issue compounded by the subsequent financial crisis. RMJM reportedly struggled to make payroll at several of its worldwide offices, and employees in the U.S. sued the parent company over unpaid retention bonuses. (The suit was settled, and RMJM still has a presence in New York.)
“I’m very sorry that I sold the firm,” he says. But there was a silver lining: because Hillier had instituted an employee stock-ownership plan (ESOP) before selling, everyone received a portion of the $33 million deal. Today, he runs Studio Hillier, which he cofounded with his wife Barbara in 2011, and he has candid advice for sellers: get cash, talk to clients early, and protect your employees.
M&A is on the rise in the profession. For principals planning their firm’s future—with them or without—a merger or acquisition can be a lifeline, a launchpad, or a valuable lesson. Kenet has a simple litmus test he poses to architects considering the plunge: “Will you start winning projects that you wouldn’t on your own? There’s little value in only becoming bigger,” he says. “The value, ultimately, is in becoming better.”
