Final Countdown to Principal: Advice for Up and Comers

Posted on: 02/02/16
Written by: Chris Klemmer

IMG_6074-664669-editedAgreeing to become a Principal (equity owner) in an architecture or engineering firm has lasting consequences. Don’t leap for the power and prestige without considering the deeper responsibilities and challenges.

Do Your Due Diligence
Study your firm as the prospective purchaser you are. Assess the financials of the firm like an investment. Would you invest in this company as a stockholder? Consider what customers, stakeholders, and competitors say about the firm.

Choose your fellow Principals wisely. You will be “married” to them for the next 20 years or more. Get to know their visions, biases, and foibles. Do as much research as possible by yourself, but be sure to include the counsel of knowledgeable experts that you hire, in addition to those provided by the firm.

Learn How the A/E Business Really Works
Enlist the support of a willing, able, and trustworthy Partner to be your transition guide or coach. They have information and perspective only an insider can provide. Start by examining the firm’s succession plan for you. Does it identify a cadre of future leaders including several likely to be your successor?

If not, leadership development is a serious issue that needs immediate attention; and the viability of your own transition plan may need reconsideration. Speak openly with fellow Principals on matters of succession, money, raises, bonuses, promotions, hiring/firing, and policy while assessing how decisions are made and the role you play.

Understand the Deal
Read closely all documents related to becoming a Principal such as the Shareholder Agreement, Deferred Compensation Agreement, Buy-Sell agreement, Company By-Laws, Articles of Incorporation, Board Minutes, Budgets, business plans, strategic plans, and Annual Reports from the past several years. Keep a file of corporate documents current. Develop a thorough understanding of the authority, legal responsibilities, and financial liabilities you may have, including as a member of the Board of Directors or Executive Committee.

Know—don’t assume—what power you will have.Documentation of how and how well the firm has performed in the past is the best available indicator (but no guarantee) of future performance. Study performance trends, and especially those that impact your compensation, such as salary, bonus, stock valuation, and dividends.

Test Your Understanding
Listen closely to people outside of your echo chamber, especially past, present, and prospective principals. Push a few buttons (advisedly) on important issues you would like to change. As a Principal it is important to know you can speak your mind comfortably. If frank conversation is not well received before you sign on, it is unlikely to change afterwards. Spend time inside the “sausage factory” of an executive level committee. Get a realistic understanding of the role into which you will be stepping. Is it more like an influential partner or simply a stockholding employee? 

Clearly understand any non-compete restrictions imposed once you leave the firm; these may act as “Golden Handcuffs.” If there are deferred compensation provisions, have them carefully checked by a knowledgeable tax adviser. Be respectfully skeptical of all firm valuations. Valuation methods (e. g., multiples of earnings or sales) tend to get frozen to filter out short-term noise and protect longer-term stockholders. Over time industry and firm specific trends can diverge creating large anomalies.

Search Your Soul, with Support from Your Family
Make sure you will enjoy the entire experience, accepting longer hours and sleepless nights, not just financial rewards. Only you can know for sure how you would handle a serious business downturn that resulted in no bonus being paid, or worse, a “cash call.” Although this may seem unlikely, you must be willing to take the risk. Lastly, if you cannot fully explain what it means to be a Principal to your spouse or best friend, then you do not understand the deal well enough.

Being a Principal is not for everyone. Make sure it is right for you. Yes, you can say no. Senior Project Manager or nonequity Associate is not a bad career.

Pass it on: What do you know today that you wished you'd known before becoming a prinicpal?

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How are you developing your next generation leaders? Real deal” firm leaders aren’t just born that way.  Rather, they develop through proven guidance and experience. They develop by staying close to those who have been there and learning from the seasoned experts.  They develop by attending PSMJ’s A/E/C Principals Bootcamp.


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