From True Believers to Deal Signers

From True Believers to Deal Signers

Of the ENR Top 500 U.S. design firms, 396 are currently employee- or ESOP-owned—a cohort that has been shrinking steadily since 2016. Among the ENR Top 100 alone, the number of employee-owned firms has contracted from 75 in 2016 to just 61 today. At that rate of attrition, employee-owned and ESOP designers among the Top 100 carry a half-life of roughly 32 years—meaning that, absent a change in trajectory, the cohort could be half its current size before most of today’s leaders have fully retired. 

The numbers behind this decline are striking: Since the start of 2021, 121 ENR-ranked firms have sold. Of those, 96 were employee-owned. Eighty-four sold to private equity, PE-backed, or publicly traded buyers. Just 12 (10%) merged with or sold to other employee-owned firms. That works out to an average of 18 ENR Top 500-ranked employee-owned firms selling every single year—a pace that is shrinking the cohort by roughly 5% annually—faster than the annual closure rate of shopping malls around the country. 

But there’s more. The median employee-owned seller generates $80 million in net revenue. At a conservative revenue multiple of 1.5x, these 18 annual sales represent approximately $2.2 billion in annual deal value—a massive transfer of wealth from employee ownership to private equity. 

In our experience working with AE firms across the country, the CEOs and boards of employee-owned firms exist on a spectrum. At one end are the true evangelists—leaders for whom employee ownership is not just a capital structure but a calling—a commitment, an obligation, a passion even. They have built their firms’ cultures around it. They talk about it at all-hands meetings, reference it in recruiting conversations, and represent it as a competitive advantage in client pitches. For these leaders, even entertaining a conversation about a recapitalization by private equity can feel like a betrayal of the firm’s founding DNA. A sale to PE? That’s not a strategic option. That’s heresy.

At the other end of the spectrum—let’s call it “the about-to-be-recapped-by-PE” pole—sits a CEO and board who have quietly retained an investment bank, completed a management presentation, and are a few weeks away from a signed purchase and sale agreement with a private equity group.

Here’s what makes this so interesting: The CEO at the PE end of the spectrum almost always started out at the evangelist end. The journey from one pole to the other is rarely sudden. It is, instead, a slow accumulation of pressure, disappointment, and hard-nosed arithmetic—punctuated by a few pivotal moments that shift the calculus. It is a journey that deserves to be understood with both clarity and compassion because the leaders taking it are navigating genuinely difficult terrain.

This trend begs two questions. First, why are 18 CEOs and their boards making this choice every year? And second—perhaps more fascinating and more human—how does a leader who once viewed private equity as a failure end up signing “on the line that is dotted?” (Credit, of course, to David Mamet). Here are three reasons why…

Reason #1: Inability to fund departing shareholder buyouts due to financial underperformance

Employee ownership is a beautiful model—until the math stops working. The internal stock repurchase obligation is the beating heart of an ESOP or employee-owned firm. As long as the firm is growing, profitable, and generating sufficient cash flow, that obligation is manageable. Shares are repurchased at fair value, departing shareholders are made whole, and incoming employee-owners see their stakes appreciate over time. The model is self-reinforcing.

But when the firm underperforms—whether due to a softening market, a loss of key clients, margin compression, or simply the difficulty of managing a design firm through economic cycles—the model can become a source of acute financial stress. (To see which metrics high-performing firms are achieving so as to avoid such stress, check out last week’s article, “The Perfect AE Firm?”) Share values that were set in more profitable years must still be honored and purchased at those prices. Departing principals and senior staff expect to be bought out at or near peak valuations. And when cash flow cannot support those buyouts, firms face an uncomfortable set of options: take on debt, delay buyouts, reduce distributions, or restructure the program entirely.

Any of these paths can erode morale, damage trust with senior staff, and accelerate the departures of the very people whose buyout obligations are already straining the balance sheet. A CEO who finds herself in this position—watching the firm’s share repurchase liability grow while profitability stagnates—begins, often for the first time, to see private equity not as an adversary but as a potential exit ramp. A transaction doesn’t just deliver liquidity to the departing generation of owners. It solves, in a single stroke, an accumulating structural problem that internal resources simply cannot address.

It is worth noting that financial underperformance is not always a crisis. Sometimes it is simply a plateau—years of flat revenue, modest profitability, and a gradual realization that the firm is not growing its way out of the problem. For many CEOs, that quiet reckoning is more consequential than any dramatic moment of financial distress.

Reason #2: Inability to transition leadership

Leadership succession is the great unfinished business of the employee-owned AE firm. Firms are frequently founded or led by strong, visionary individuals who have spent decades building client relationships, shaping culture, and driving growth. The firm, in many meaningful ways, is an extension of its founders. And when the time comes to transition leadership to the next generation, the gap between who the founder is and who the firm needs next can be enormous. Two-thirds of design firms never successfully transition past their founders. And those stats get worse with every subsequent leadership transition. There are not a lot of 100-year-old design firms knocking about. 

Many employee-owned firms simply do not have an obvious successor. The pipeline of senior talent may be thin. Promising candidates may have departed for competitors or to set up their own shops. Others may be technically strong but lack the business development instincts, financial acumen, or organizational leadership skills that a CEO role demands. And the founders themselves, for all their virtues, are not always objective evaluators of the next generation’s readiness. (The overly loyal, rose-tinted glasses syndrome.) 

When leadership transition fails—or when it becomes clear that it is likely to fail—the existential question surfaces quickly. If the firm cannot sustain its culture, its client relationships, and its performance through a leadership change, what exactly is being preserved by maintaining the employee-ownership model? A CEO confronting this question honestly, and without a clear answer, finds herself in a very different conversation than she was having five years earlier.

Private equity, paradoxically, can look like a solution to a succession problem. A transaction brings in professional management infrastructure, creates new leadership incentives, and—at least in theory—reduces the firm’s dependence on any single individual. Whether those promises are consistently delivered is a separate question. But for a CEO who has spent years worrying about what comes next, a PE partner offering a clear path forward can be genuinely compelling. And the right PE partner can provide an excellent financial return for shareholders—especially in the current M&A environment—with the potential of a second bite of the apple (or cherry, or whatever other fruit is being used these days).

Reason #3: Inability or unwillingness to fund the necessary investments in technology or acquisitions to remain viable

In case you hadn’t noticed, the AE industry is undergoing a period of competitive disruption that is unlike anything most of today’s leaders have experienced in their careers. Technology investment—in AI-enabled design tools, digital delivery platforms, data analytics, and project management infrastructure—is no longer a nice-to-have. It is increasingly a prerequisite for competing effectively for the most desirable clients and projects. At the same time, geographic and service-line diversification through acquisitions has become a primary growth strategy, particularly for firms looking to access new markets or build capabilities they cannot organically develop at pace.

For many employee-owned firms, funding these investments at the scale required is genuinely difficult. Capital that might otherwise be deployed into technology or acquisitions is consumed by shareholder buyouts, debt service, and the normal capital requirements of running a professional services business. Boards that are appropriately cautious about taking on new debt—particularly after years of modest performance—can find themselves unable to approve the investment levels needed to keep pace with PE-backed competitors that are writing large checks with speed and confidence.

This creates a compounding disadvantage. As PE-backed platforms invest aggressively and grow through acquisition, the competitive gap widens. Clients notice. Talent notices. And the CEO of the employee-owned firm—watching competitors expand into new geographies and service lines while her own firm stays largely static—begins to wonder whether the constraints of the ownership model are limiting the firm’s long-term potential in ways that cannot be fixed from within.

There is also a subtler dynamic at work. Some boards of employee-owned firms are simply unwilling—not merely unable—to approve significant capital deployment. The culture of conservatism that often characterizes long-standing employee-owned firms, while admirable in many respects, can calcify into an institutional reluctance to take the kinds of risks that growth requires. A CEO who has made the case for a transformative acquisition or a major technology investment, only to watch it voted down by a board that prioritizes financial caution over strategic ambition, may quietly begin exploring other options.

The journey, not the destination

It would be a mistake to read this as a story about failure or to view the CEOs making these decisions as leaders who simply lost faith in a model they once believed in. The reality is considerably more nuanced. Most of these leaders spent years—often decades—working hard to make employee ownership succeed. They invested in the model, defended it, and built something meaningful within its constraints.

What changed, in most cases, was not their values. It was the math—and the competitive environment in which that math plays out. The financial pressures, succession challenges, and capital constraints that drive firms toward a transaction are real, and the leaders navigating them deserve to be met with respect, not judgment.

What the data tell us is that the AE industry is at an inflection point for employee ownership. At 18 transactions per year, the cohort of employee-owned ENR-ranked firms is shrinking in ways that will reshape the industry’s ownership landscape over the next decade. The firms that will remain employee-owned—and thrive—will be those whose leaders address these three pressures proactively: building financial strength that can sustain the buyout obligation through economic cycles, developing deep leadership pipelines that don’t depend on any single individual, and creating capital strategies that allow for bold investment without sacrificing the firm’s ownership culture.

For those firms, employee ownership will remain not just a viable model but a powerful competitive advantage. For the others, the journey across the spectrum will continue—one signed LOI at a time.

You can reach Mick Morrissey at [email protected].