“The exit that many leaders had thought would take place in their mid to late 50’s is now getting delayed to 65 and older.”

As I enter my mid-fifties (never thought it would happen) I have become privy to many private conversations from my age-related peers at A&E firms around the subject of retirement. Many business owners my age thought that by the time they had been working for 25 years or more in their architecture or engineering firms that they would be in a great position to retire in the near future.

They are now discovering that this great dream of retiring in a warm location after the kids graduate from college is not going to be as easy as they thought. The rise to the top has not proven to deliver the golden handshake they thought they had earned by now. Because of tough economic realities and the lack of resources to take over their roles, the long awaited retirement plans are going to require much more planning, effort and financial consequences.

In looking at the current state of the A&E industry, it is easy to look around and see the aging of A&E firm principals. I attend many industry conferences each year, and the primary topics of conversation are around mergers & acquisitions (M&A), transition planning and preparing emerging leaders. The exit that many leaders had thought would take place in their mid to late 50’s is now getting delayed to 65 and older. This harsh reality is affecting the industry in many ways and paving the way for ambitious younger leaders to come forth and get a piece of the action – but where are they?

The other big topic that seems to be confusing and concerning today’s leaders is the lack of interest of the younger generations in purchasing ownership shares. While there used to be some prestige and pride in ownership years ago, today’s 40 and under technical staff are not as interested in taking risk, investing, and joining firms where there could be a long wait to get to a significant leadership role.

The impact of this dilemma is explained clearly by Leadership Transition and M&A specialist Steve Gido, Principal at Rusk O’Brien Gido + Partners, McLean, VA.

“The reality today is a large percentage of A/E firms of all shapes and sizes have ownership profiles that defy logic. Many are “top heavy” with principals in their 50s and 60s who own a large majority of the stock. There simply aren’t enough 30 and 40 year-olds ready, willing, and able to buy these senior owners out in a coordinated process that won’t result in a decade (or more) long sell down.

With profitability levels squeezed, using the firm as a conduit to fund buyouts via cash bonuses for equity or other transfer mechanisms is increasingly difficult. More ominously, in a low growth environment, cash used to pay down redemption liabilities means less available for firm reinvestment, incentive compensation, and growth capital.”

3 issues are keeping today’s leaders from retiring

These conditions have led to three primary significant issues that are keeping today’s leaders from retiring, and solving these problems could require some extreme measures and investment of time:

Firm Valuation

The great recession has caused many firm founders and principals to have to wait many years later to retire than planned. Financial setbacks caused by firm shrinkage has meant that leaders hopeful to sell their firms years ago found that either there weren’t any buyers, or their firm value has shrunk too low to get the price they were looking for. Another fallout from the recession was a litany of bargain basement shoppers looking for desperate owners that had to sell lower and it has been hard for many smaller firms to bounce back from that. In many areas, there are more sellers than buyers making it a buyer’s market. For many owners, a M&A exit just doesn’t have the same appeal that it used to have before the great recession, and in most cases, a much lower payout.

Low Profit Margins

Another effect of the recession is lower profit margins. More competition has led to low-bidding and clients expecting more for less. This has led to a scenario where many firms don’t have the cash flow to buy out their older owners, and the ones that do have found themselves strapped and limited in how they can grow. The commoditization of A&E services has affected many of today’s owners by limiting their options and extending their retirement ages.

Lack of Qualified Emerging Leaders

As discussed, today’s younger staff are not as excited about firm ownership, and less likely to want to work for the same firm their entire lives. They are often thrown into project manager (PM) roles with little to no training which has also affected the financial success of many firms in this competitive market. The lack of business acumen at the PM level is a real issue, and often a contributor to the lower profit margins that many firms are experiencing. This combination of lack of interest and loyalty, and absence of business management skills is causing many firm principals to have to hold on much longer than they wanted or planned.

So what is the answer to this problem?

I believe that A&E firm leaders need to develop a strategy to improve profitability, finance their retirement over a longer period of time and develop leaders that can take over for them. This will involve a multiple-stage approach to improving business operations and resulting project profit margins by eliminating scope creep, improving win rates and utilization, and training today’s Project Managers to gain business management competency.