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The Three Big Questions

Poor Sheila. She sat at her desk and shook her head. Sheila wanted to retire to Italy with Tony. They had honeymooned in Venice, and spent twenty years dreaming of a Palladian villa for their "golden" years. They had fifteen more years before Sheila turned sixty-five. But, business had been really good lately, and they thought they might want to retire earlier.

Sheila couldn't understand why she hadn't been able to sell her business. She only wanted $1.5 million for her thriving practice. It seemed so reasonable. But, no one seemed even mildly interested, after almost a year of discrete discussions.

She had asked several friends and acquaintances what they thought was the reason...and, people either dodged the question, or shrugged their shoulders. Her accountant had told her it was unlikely she would be able to sell the business, but she didn't think he understood what a great reputation she had.

She just had to get an informed and honest opinion. She knew Marty would be direct with her...even if the answer were painful. So, she picked up the phone. Sheila told Marty about her practice...

"I’ve always worked better alone. I like the entire design process and have definite opinions about what will work for each client. I tried hiring someone, but they didn't do things the way I like them done. I've maintained an administrative assistant and a bookkeeper as support staff. My firm has its original name, Sheila Designs."

Sheila prides herself for doing the job right. Sometimes, she spends three days looking for the right upholstery. One time she searched two days for the perfect white paint for her client's entry. She knew she would exceed her fee budget, but she just had to find this color.

Sheila continued, "I like my office space. My landlord is reasonable, and leasing gives me flexibility to add or delete space. We only need office space for three of us, a good library/work room area, and a client conference room."

Sheila proudly stated, "Last year, I billed over $500,000. That’s huge! And, I heard that one design firm was purchased for 300%. So, Marty, tell me what’s up?"

Marty decided to ask Sheila some questions to help Sheila arrive at her own conclusions.

"Sheila, do you intend to work in the firm after someone buys it?" Sheila told her no, she wanted to use the money to buy a villa in Italy. Tony’s retirement plan would cover their living expenses.

Marty asked Sheila if she thought any one would hire a firm with a good reputation like Sheila Designs without Sheila. Sheila thought for a minute and said, "I guess not. If people hire the firm based on my reputation, then if I’m not there..." her voice got softer, "the reputation of the firm has little monetary value."

Then, Marty asked if the firm had any other assets, like real estate, financial investments, physical inventory, intellectual property, vehicles, office machines and furnishings. Sheila said, "No. We lease almost everything, except some 3 year old computers, the copier, and our office furniture. I had some ideas for an accessories line, but I never really got that going."

Sheila made some mental calculations and muttered, "It doesn’t total more than $50,000."

Sheila was pretty disappointed. But, she finally understood why she hadn't been able to find a buyer for her firm. She now saw that the firm had little monetary value for an investor...certainly not $1.5 million...particularly, if she no longer worked there.

Marty also suggested that Sheila look at the potential sale from the buyer's point of view. If Sheila were going to invest in a design business, would she invest a large some of money in a one person firm, particularly if the person were no longer there? Sheila agreed she would be wiser to invest $1.5 million (if she had it) in real estate or mutual funds...not another person's design firm.

A dejected Sheila said, "I guess we won’t be going to Italy." Marty assured Sheila that she would be able to retire to Italy, but she would have to ask herself some very hard questions…and, plan.

Get Real about your Future

Each design firm owner needs to “get real” about what value will be available from their firm when retirement comes. To do that, sit down fifteen or twenty years before you plan to retire, and have a “heart-to-heart” with yourself. There are Three Big Questions only you can answer that determine your business operating philosophy and forecast your business exit strategy.

Question 1:Is it “Me” or is it “We”?

Sheila likes to work alone. It gives her complete control over clients, design, projects, expenditures, revenues, resources and activities. She doesn’t have to explain to anyone (except her clients, of course) how she spends her time. She can work for an interesting client even if it means less money. She receives all of the credit for the completed assignments. She has complete autonomy over everything.

Of course, there’s a downside to everything. If Sheila works alone, she has all of the responsibility, risk and workload. She gets all of the blame if things go wrong. And, a huge downside is no one within the firm is capable or willing to buy the firm from Sheila in the years leading to her retirement. If there is no future sale, Sheila will need to rely on other investments to fund her retirement.

Most experts agree, the most likely and lucrative scenario for selling a professional services firm is within the current firm to current employees. To do that, you need the “We” scenario several years before you plan to retire. Why?

* You need to expand the identity of the firm to multiple people, not just you. If Sheila groomed a young assistant on the career path to owner, Sheila Designs should be branded as “Sheila and Sharon Designs”, or “S&S Design Associates”. You get the idea. You can’t change the firm’s identity from a solo profile to a larger entity in just one year…so, the “We” makes the transition from Sheila to Sharon easier to orchestrate. * You need to train the person to take your place. You must prepare your successor and your clients for your eventual retirement. Further, you should develop mutual commitments to ensure your successor’s employment longevity and your agreement to ownership transition.

Question 2: Is it Design with a “BIG D” or Dollars with a “BIG D”?

Clearly, Sheila believes in Design with a “BIG D.” Spending two days to select the perfect white paint is a luxury that many design professionals can’t or won’t afford. Yet, Sheila is making a lot of revenue. However, we don’t know how much net profit she’s making. That’s a topic for another article.

The answer to Question 2 is fundamental. The answer guides the way you operate your design practice. Do you design without regard to profit? Or, do you design with total focus on profitability, without regard to detail or aesthetics? Obviously, these are polar extremes. Most of us fall in between. However, it is likely that each of us has one preference over the other.

If she practices alone, Sheila can continue her focus on Design with a BIG D...living with the profitability consequences. But, if Sheila adds another person, it’s important for them to discuss this issue before hand. Either agreeing on the answer, or complementing each others’ differing views, can be valuable. But, it needs to be consciously determined in advance, because conflict on this issue can destroy a partnership. Also, answering this question starts to establish realistic expectations for retirement and your exit strategy.

Question 3: Is it “Live for Today” or “Plan for Tomorrow”?

Do you spend every penny you earn in the good years, and tighten your belt in the bad years? Do you routinely extract profits from the firm and invest in real estate and financial instruments as part of a personal portfolio? Do you leave profits in the business as retained earnings, and hope to gain return on your investment when you sell the business?

It seems like our friend, Sheila, may be a “Live for Today” person, or she’d already have the money for the villa. The answer to this question…and, how you implement it…may be influenced by the answers to Questions 1 and 2. If you’re going solo, you really should routinely invest some of your profits in other investments as part of your personal portfolio. If you’re a “We,” you need to decide with your partners how much you will leave in the business as retained earnings, how much you will use to enable ownership transition, and how much you will extract for your personal financial portfolio.

If you answer the THREE BIG QUESTIONS before you go into your own practice (with or without other people), and twenty years before you want to retire, you will start with a purposeful operational guide that saves you a lot of grief and angst.

Martha G. Rayle, FASID, IIDA is principal of Rayle Associates, management consultants and trainers for design professionals. Hear more on this topic and others in “Design Your Marketing Success,” a two-day training program to help interior designers and architects get the work they want, rather than settling for the work they get. This program will be conducted in 11 US cities before September. Visit www.rayleassociates.com and click “Design Your Marketing Success” for locations and dates. Or, call toll free: 866-90-RAYLE.