Structure your firm so the cash is divided fairly among partners
We were all for one and one for all," recalls Bob Sober of his five partners in a fledgling architecture firm. But not for long. The six of them split profits equally, but not the work. "After 18 months there was a growing feeling," Sober says, "that some people were contributing lots and others little, and that those who were doing little should do more."
But some didn't want to, and others couldn't, and those producing the profits grew resentful. Rancor rose. Why should one partner's inability to produce high-margin work affect the earnings of another? No one had an answer. "I was on a plane to Denver to see a potential client," Sober recalls, "and I should have been enthusiastic, but I didn't care. If we got the job, I'd work a lot harder and let my partners continue to do nothing. I couldn't sense the excitement of doing the deal; that excitement had to come back into the business."
It has. Revenues at BSW Group Inc., as the firm is now called, increased almost ninefold between 1985 and last year, and annual profits have averaged between 10% and 12% of revenues, about twice the industry average. Whereas 39 people were employed five years ago when Sober flew to Denver, 130 now work there.
In part, that turnaround comes from finding an alternative to the traditional partnership structure. But it also results from creating business owners out of many people who might otherwise be just employees.
The first step in the turnaround is going to sound a lot easier than it really was, because we're going to skip over the wrenching aspects of breaking up a partnership. Suffice it to say that it took the six architects more than a year to dissolve their union. Sober and David Broach ended up buying out the other four.
With that done, the survivors, later joined by Bob Workman, got on with building a new business on the foundation of the old one. They didn't want to make the same mistake again: a bunch of partners scrapping over joint profits. This time it would be different. They formed a new corporation called BSW Group Inc. As BSW's business grew, they would invite people to become partners, but only with the BSW Group, not with one another. The firm would not consist of a single large partnership, but of a collection of independent partnerships between BSW and individual architects.
Every partnership would be separate from the others, except that BSW would be one of the two partners in each of them. Sober, Broach, and Workman are general principals; the people invited into partnership with them they call operating partners.
With that arrangement, the profit that one operating partner takes home is essentially unaffected by profits generated by the others. One can hustle; another can slack off. The hustler isn't penalized, nor the slacker subsidized.
Now every BSW operating partner is an owner. Because each operating partner is responsible for and can be rated by his or her own bottom line, most of the administrative and managerial machinery that companies usually require to measure performance and ensure compliance with executive decisions isn't necessary. BSW and its partnerships are lean and mean.
To walk into the place in an office building near downtown Tulsa, you wouldn't suspect that BSW was not a conventional firm. Somebody would have to tell you that each group of people, separated from their neighbors by file cases, bookshelves, and half walls, is a separate studio. Each studio, containing five to seven people and their equipment, works for one client.
The studios are owned by operating partners, some of whom own as many as three. Ownership makes them think hard about whether they really need, say, a new piece of equipment or another employee. Maybe they could continue to contract for a while longer with the studio next door. That kind of cooperation -- the sharing of people and equipment -- goes on among operating partners, who also meet in a regular Friday forum to work through common concerns.
What operating partners get from BSW Group is management depth, support services, and substantial marketing clout unavailable in a smaller firm. They also get central services -- accounting, payroll, legal, insurance, specification writing, shipping and receiving, and quality management. For all that, they're charged a flat rate per studio. An operating partner with three studios pays three times as much as another with just one.
Operating partners don't compete with one another for clients. Although they're expected to develop business with their existing clients, most new selling falls to the general principals, who feed the new business to operating partners based on need and other considerations -- experience with the kind of job involved, for instance.
Every partnership with BSW Group is structured a little differently, but Janet Merk's is typical. After 18 months of working in someone else's studio, she was invited to become an operating partner. To capitalize the new partnership, BSW Group contributed a $70,000 line of credit, and Merk put up a certificate of deposit for $17,500 -- 25% of $70,000, which represents the initial percentage she takes of the partnership's profits. Her percentage can grow to a maximum of 50% over time.
Employees become operating partners by buying into the paper assets -- the accounts receivable -- of a studio. They can purchase as little as 10% until they can afford more. Their profit participation matches their equity participation. "Friends don't understand why I give 75% of my profits away," Merk says, "but I have more resources here than I'd ever have on my own. In the end, I'm going to make more money."
So BSW Group's creative restructuring has accomplished more than just keeping the firm together. It has given rising young professionals a way to build their own enterprises without having to leave the parent. "We allow people to satisfy their ambitions within our organization," says Sober.
"The advantage here," says Brad Lechtenberger, a veteran operating partner, "is I have partners covering the administration, so I can concentrate on clients and my studio." Besides, he adds, "I enjoy being the owner of a company. It says something about me."
PROS AND CONS
What operating partners can and can't do
The operating partners at BSW Group Inc. own their firms. At the same time, as partners with the BSW general principals, they aren't entirely on their own. There's a mixture here of independence and paternalism. For instance, operating partners are responsible for their own cash flow, but a lot of educating goes on to teach them the difference between accrued profit and cash profit.
In fact, generally every benefit that operating partners receive has an associated cost:
* They don't have to spend much of their time selling. But that freedom comes at the cost of having to accept the new work generated by the general principals.
* They can veto strategic decisions made by the general principals, but they can't make major capital acquisitions without the general principals' concurrence.
* They don't have to do their own contract preparation and insurance negotiations, but that means they must comply with the administrative procedures that BSW Group sets.