While the 2012 version of ZweigWhite's "Principals, Partners & Owners Survey" showed that most principals' fortunes were improving, the most recent (2013) version indicated a small reversal, with a reported decrease in median base salary and bonus payments. Given these numbers, it's no surprise that the number of principals who feel their investment in their firm was worth more than a good mutual fund also decreased this year, something that reflects the lagging state of the architecture, engineering, planning (A/E/P) and environmental industry in relation to the rest of the economy.
"The market as a whole far outperformed many firms in our industry. The benefit of economic recovery in our business is latent, and we are not yet seeing the returns of the magnitude being earned in the overall markets," said Chad Clinehens, executive vice president at ZweigWhite.
Lack of growth and small profits have impacted the way in which many current design firm stockholders see their investment and the way future stockholders may consider investing. Thirty-eight percent of respondents stated they had received a shareholder distribution or owner dividend in 2012, 55 percent had not, and 7 percent didn't specify.
In 2008, 92 percent of respondents felt their investment in their firm was worth more than they paid for it. In 2013, this number has decreased to 78 percent. Brad Workman, vice president of technology and special projects at ZweigWhite, said this phenomenon is most likely because of decreased profitability or ROI percentage of AEC firms compared with the strong recovery of stock markets.
"Just look at the S&P 500 over the last three years. Even if the ROI of the firms hasn't declined, then I'm sure it hasn't followed the upward overall stock market curve," Workman said. "Naturally, this would cause the valuation of the respective markets to reflect this."
"The ease of buying and selling stock in the broad market makes the highly restrictive stock that many firms offer less appealing," Clinehens said. "Firms have to adjust their buy-sell agreements to reflect this new culture and appropriately protect their interests while maximizing the ease of buying and selling stock to keep demand healthy. It's a tough balance, no doubt."
Stock ownership may be becoming less desirable, especially for the future generation of stockholders. "Naturally, they want the best return on their hard-earned money, so many have picked ETF's and mutual funds over their own firms' stock. Also, they may be pessimistic about the speed of the construction industry recovery, but if you follow the recent Wall Street Journal articles about the construction outlook, then this attitude may change," Workman said.
Bruce Sadler, a partner at Austin Brockenbrough & Associates, LLP (Richmond, Va.), a 50-person multidiscipline consulting engineering firm, expressed excitement about 2013 last November in an interview with The Zweig Letter. Since then, he has toned down his outlook.
"Due to our success in 2012, we expect to add to our current staffing levels by around 10 percent by increasing our marketing/business development staff, acquiring a new service, and adding to our core technical staff," he said in November 2012.
So far, the promise has not materialized. "Regarding my comments back in November, we have made a couple of the anticipated additions. We hired a business develop manager and added architecture (via a small acquisition) in January," Sadler said. "We have not added any other staff because we have not seen the anticipated increase in work load for our core businesses. Thus, we are still optimistic, but our first quarter was not nearly as good as expected."
ZweigWhite's "2013 Principals, Partners & Owners Survey of Architecture, Engineering, Planning & Environmental Consulting Firms" is available for purchase at www.zweigwhite.com/p-2153-principals-partners-owners-survey-2013
This is an abridged version of an article that first appeared in The Zweig Letter (ISSN 1068-1310) Issue # 1004, published April 22, 2013.