Blog

The Principal's Dilemma: The turning point in your firm's life cycle

As founder of a small firm that has been in business for 10-12 years, your business may be at a turning point. Do you grow your firm or are you content with its current size and capabilities? A decision to grow your firm may allow you to make more money, but you will have to let go of some control.

 

According to Harvard researcher Noam Wasserman, most entrepreneurs go into business seeking both wealth and control. In his book, “The Founder's Dilemma,” Wasserman reports on a decade of research involving hundreds of American start-ups. His findings how that as a business grows, it inevitably outgrows the skills, energy and resources of the founder. Basically, Wasserman has discovered that most entrepreneurs must choose between “making a lot of money or running the show.”

For a single principal/owner of a design firm, that point usually comes when the firm has grown beyond seven or eight employees. Beyond that number, it usually becomes unsustainable for the principal and additional managerial and “rainmaking” capacity is needed. To acquire this additional capacity, either from experienced employees and/or new partners, firm owners must share control. Wasserman calls this the “rich versus king” trade-off and finds that founders who share control with others build a more valuable company and are better compensated than those who do not.

In addition, for firms that have reached stable maturity, they may not be able to build equity and increase in market value beyond the founder's work life unless second generation leadership is fostered. And for this transition to succeed, founders must be willing to share responsibility and authority. Firms that embrace second-generation leadership have the potential to create financial and social equity beyond the firm's formerly established reputation, core competency and revenue stream. Firms such as these allow founders to retire with the promise of financial support provided by an ongoing firm.

Many founding principals, however, are more comfortable being “king” of their own domains, no matter how small or finite. Research suggests that these founders' personal sense of success may be dependent on always being in charge of their organization. Often these small firm owners can increase their financial success by working in lucrative market segments or with specialized expertise. In addition, they can pursue other endeavors to increase their earnings, such as investing in real estate or partnering with a developer.

In any case, it's important to have a long-term retirement and succession plan that might include selling the firm to an outside buyer, grooming a potential partner or transferring ownership to trusted employee (s) over time.

Other options include closing the office and seeking employment at another firm at the principal level or perhaps merging with another firm headed by younger leadership. These two options may potentially provide income when the founder finally retires.

Read the complete article by Rena Klein, FAIA and author of The Architect's Guide to Small Firm Management and principal of R M Klein Consulting, a division of Charrette Venture Group.

 










 

Contributors