Architecture Firm Transcends

Groff Architects (pseudonym) was founded in 2001 by architect Benjamin Groff, who earned his architecture degree at one of the top five schools in the country.  The firm grew steadily since then, though that growth was temporarily derailed during the Great Recession.  Over time, the firm found its niche in NYC residential projects for properties ranging in value from $1m to $10m.

In 2019, Benjamin was in his early 60s and thinking about his future.  Although he was not in a rush to retire, he wanted to devote more of his time to real estate investing and other passions.  He loved the practice of architectural design, but had grown wary of managing client’s expectations and dealing with the daily problems that inevitably arise.  He was willing to work for several more years, but ideally fewer hours per week.  In addition, Benjamin needed to ensure he could afford to retire in Manhattan.

Groff Architects achieved a relatively flat level of owner’s discretionary earnings of approximately $400,000 from 2017 through 2019.  During this same period, revenue rose slightly from $1.6m to $1.8m, but rising salaries for its 14-person staff prevented profits from growing.  In a full-time job, the owner could expect a compensation package worth approximately $200,000.  His business was clearly successful.

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Initial Exploration

Initially, the owner sought what most owners seek and what his attorney advised was safest:  He wanted to receive the vast majority of the purchase price at the time of closing.  By advertising online, we obtained several offers of this type.  Unfortunately, they were in the range of 1X to 2X owner’s discretionary earnings.  These prices were inadequate for the owner’s long-term financial security.  In addition, almost all of the offers were from people who were significantly less qualified than Benjamin.

We reached out to architecture firms in other states, offering them a chance to expand their footprint into the highly desirable New York City market.  However, we received little interest from effort because architecture firms prefer organic growth over risky inorganic growth through small firm acquisitions.

Second Approach

We create a financial model, showing Benjamin the after-tax cash flows he would receive under the offers we received and under the offers we might receive if we accepted offers not involving a large payment at closing.  In early 2020, Benjamin expressed a willingness to accept a wider variety of deal structures.

We approached top-tier New York City architects who did not own their own firms.  We described a deal structure involving a high purchase price but a low level of upfront commitment.  We generated interest from several highly accomplished architects.  We disqualified some of them because they were looking for employment more so than to become business owners.

Coronavirus

Starting from the New York City lockdown in March and April, the local residential architecture industry suffered for several months of 2020.  Although Groff Architects stayed afloat with help from a PPP loan, it needed to lay off its sole administrative employee and a few architects.  

We needed to pause our sale efforts until later in the year, when business began picking up again.

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A Qualified Successor

When we resumed our sale efforts, one prospective buyer stood out.  Roberto Pervez expressed with a simple confidence that he could take Groff Architects to the next level.  His professional goal was to own a great New York architecture firm.  Roberto’s personal portfolio suggested his ambition was reasonable.  He had completed beautiful work for many highly wealthy clients at a level beyond where Groff Architects operated.

We structured a deal where the firm’s equity would be acquired in pieces over several years. Benjamin and Roberto would be co-owners for several years, before Roberto assumed 100% ownership.  This reduced the risk that the firm would lose its referral relationships by ensuring that it would not lose its owner.  In addition, it allowed Benjamin to continue earning his firm’s profit.  

We implemented protections for both parties.  We allowed a trial period where either party could unwind the deal with minimal consequence.  Following that, we put “golden handcuffs” on both parties, so that they were highly incentivized to keep their commitments to the firm.

Both buyer and seller are optimistic about taking their business to the next level in 2021.