Many designers face the same challenge: they hit a growth ceiling. This limitation comes from the fact that the business’s greatest bottleneck is also its greatest strength: the owner. As the principal, your failure can bring the entire operation to a halt, which can possibly lead to major financial losses. So what happens when you retire? If you don’t prepare for succession, your business simply closes without you. But building a legacy brand isn’t easy. You lose top talent because your best designers leave to start their own firms when they reach a salary and seniority limit. You have a team of employees passionate about design, but they aren’t invested in the business itself. The solution is to build a path to partnership that turns employees into stakeholders.
Identifying Partnership Potential
Just as you create ideal client profiles, you should create an ideal potential partnership profile. Identify the characteristics of an ideal partner in your firm.
A talented designer is not necessarily a strong business leader. If they were, Pearl Collective wouldn’t need to exist! Design education is severely lacking in finance, operations, and marketing. Make sure your team has both employees with excellent design skills and employees with great business acumen.
So when creating your ideal partnership profile, look beyond just creative talent. A potential leader has a long-term vision and can strategically move the business forward. Look for someone who exhibits proactive action. They are alert to what is happening locally and worldwide that may affect the business and will recognize what needs to be done to be prepared. They exhibit the ability to focus on growth, take ownership of outcomes, and are lifelong learners.
But even if an employee is a great designer and a great leader, culture fit will still be the make-or-break decision. Be sure that you and your team have clearly identified your firm’s culture, and that the potential partner exhibits those tenets.
Evaluate how the candidate achieves results. Focus on those who consistently produce strategic and scalable results. These are leadership qualities!
Create a Roadmap
Plan for the future of your firm by creating a multi-tiered roadmap for potential partners. You don’t want to just tell an employee that they’re going to inherit your business; it needs to be a process that prepares them and incentivizes them to care about all aspects of running this precious thing you’ve created. This documented path to partnership will help ensure a smooth process that actually produces results.
Level 1: Profit-Sharing: Offer value for an associate. Introduce performance-based bonuses tied to net profit rather than just project revenue. Give them a reason to buy into the firm as more than an employee, but rather as an invested member of the team. It will encourage accountability for project budgets and timelines.
Level 2: Phantom Equity: At this level, you will start offering a form of equity in the firm. You can use Phantom Stock or Stock Appreciation Rights (SARs), which grant the upside of stock ownership without the legal ramifications of actually owning stock. It’s essentially a bonus tied to the company’s value, but it will help employees feel a financial interest in the firm’s growth, without giving them any actual ownership or controlling rights. They are much more likely to stay with the firm long-term as they are literally invested in the firm beyond just employment. It rewards long-term commitment and high performance, because they can earn beyond just a salary.
Level 3: Equity Buy-In: At this level, you create a formal path to true ownership, which may require a financial buy-in of some kind. In essence, they are buying actual shares and ownership in the firm. At this point, you’re offering a clear path to this employee, and you should invest time in them to mentor them into an effective successor. There are many legal considerations at this level, which we’ll go into in the next section.
Financial and Legal Frameworks for Succession
Establish the legal ground rules for how shares are bought, sold, or transferred in the event of an exit. Do not put together buy-sell agreements on your own. You have expertise in the field of design, and should rely on a legal expert to draw up these contracts. It is helpful if those experts have an understanding of design firms and of yours in particular―Pearl Collective can help connect you with these people! Making sure that all parties understand their rights is important to get out of the way as early as possible.
The opportunity to earn equity in the business―earning the right to own benefits―is an incentive for the employee to stay and work their way up in the business. That equity might be employer contributions to retirement plans or stock options over time. Vesting refers to how long a stock takes to be owned by an employee after it is promised by the employer. To make sure your team is committed to the growth of your firm over the long term, be sure that the vesting period is across 5-10 years. That means that the employee will not have full access to these benefits immediately. This may sound like withholding value, but it actually ensures that an employee will stick around for the long term rather than just taking the money and running. It’s compensation for loyalty, in a sense.
A major key to expanding your business by offering a path to partnership is understanding just what your business is worth. Using clear metrics like your Annual Revenue and Net Profit will help you determine your firm’s actual worth.
Cultivating the Owner’s Mindset
Moving from managing to leadership means a change of mindset. Principals of a firm need to shift from managing tasks to leading their team with a vision. Don’t be afraid to look to a business coach to get help in making that mindset change!
Part of the necessary mindset change is letting go. Define clear goals and learn to delegate rather than micro-managing. Allow future partners to own a segment or division of the business to prove their own leadership. That segment might be procurement, business development, or possibly a specific design sector.
Encourage and create the opportunity for accountability circles. These circles provide a like-minded community and network where future leaders can be challenged by peers. They are designed to support individuals in achieving their goals by fostering mutual accountability among members. It provides a structured environment where participants can share their progress, challenges, and visions, helping them to stay focused on their objectives.
A Long-Term Investment
Understand the value of working to design a path to partnership. Imagine the rewards―achieving time freedom and financial freedom through a business you built that can function without you.
If the idea of achieving time and financial freedom appeals to you, then it’s time to take action. Don’t wait until the time when you want to exit to start this conversation. Do the necessary research and planning. Begin laying out the path to partnership today so you’ll be prepared when the time is right!
Looking for more resources about succession planning? Look no further!
- PODCAST: Succession Planning 101 featuring Bob Rauf
- ARTICLE: Why Leadership Development is Critical for Growing Your Design Firm
- ARTICLE: How to Sell Your Interior Design Business
- PODCAST: Doubling Down on a Design Legacy featuring Mike Ufferman and Catrina Cooper
- PODCAST: Avoiding Pitfalls When Selling Your Business featuring Manny Clark
- PODCAST: Selling Your Business with the Buyer’s Success in Mind featuring Kirsten Kaplan
- PODCAST: Always Be Ready to Sell Your Business featuring Marty Fahnke
- PODCAST: Tips for Selling Your Business featuring Patti Julber