173: Brett Powell, CFO & Partner @ Cline

Brett Powell started his career as an architect who consistently dug into the numbers behind every project he designed. 

Today, he is the Chief Financial Officer of a 120-person firm. 

As Partner and CFO of Cline, Brett sits at the point where architecture and business decisions collide. He and Rens explore what it takes to manage the financial side of a design firm, from understanding a P&L to structuring an acquisition, and why financial fluency remains one of the most underrated skills in the industry. 

A few more topics this week's conversation covers: 

• How Cline built a financially literate firm, from the metrics Brett uses to track performance to the ESOP structure that gives every employee ownership.
• Scaling and integrating two firms through a merger.
• How alignment improves when architects learn the language of developers.

If you're an architect who's had any interest in business financials, Brett is an important voice to listen to. 

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Transcript

Rens Hayes IV 0:08

Hi everyone, welcome to Design Development, your hub to learn direct from top performers in real estate design and construction. I'm your host, Ren Tays, co-founder of HO Structural Engineering, lifelong learner, and I'm personally obsessed with high-powered organizations and the leaders that got them. Let's go. Thanks for joining us today on design development. It's my pleasure to introduce Brett Powell, CFO and partner at Klein Design. Brett, thanks so much for joining us today.

Brett Powell 0:34

Thanks for having me.

Rens Hayes IV 0:35

There's such a good conversation in today's episode. The balance between being a design professional and then also building financial acumen where you've grown from architect and then taken over as a CFO as well. Most architects, and I think most professionals, avoid the PL. You ran towards it. How did that impact you as an architect?

Brett Powell 0:55

Uh well, I think earlier on in my career, I was always focused, good or bad, financial aspects of the project as a project manager, making sure that the project was along okay, the firm was at least holding our own in the project. And as our firm grew, we decided that we needed to have a position like TFO. It was, I felt like it was a natural progression for me to just fill the role. And the people around me, our company president, Michael Mesdower, our business consultants, Sidney Anderson, with strategies they thought it would be a role that I could excel in. So when I was presented with the opportunities, sure, why not?

Rens Hayes IV 1:32

Yeah, I like that. Now, focusing on the financials as a project manager, was that something you were just naturally driven to do because you knew it was important, or is that something that was taught and instilled as a part of project management training?

Brett Powell 1:45

I don't think it was really taught so much as I guess in my mind, thinking about the projects as a whole, you've got the quality of the design, the quality of your documentation, and the quality of the finances. How's the project doing overall? If you can't make money in the project, you go out of business pretty fast. So I think part of managing people is managing the process of the design and documentation, subsequent construction. So if you're not paying attention to those metrics, then you're really not doing your job well as a project manager.

Rens Hayes IV 2:19

100%. Yeah, I use the example. It's if the market at a given pay rate, and I could talk about hourly billing, it's not really my jam anyway. It's like the value you create is what it's worth, not necessarily the time of your hour. But if we work backwards into an average hourly rate over a given year, it's if a project has a budget that allows for a hundred hours, and you're like, I can do that job really well, but you spend 200 hours, that is not a financially viable business, is it?

Brett Powell 2:45

Not really. Yeah. I'd like to think of when we're looking at the projects, you've got what the total work is. This is what the finished product needs to be. And again, you've got quality of design, quality of documentation, and how long is it going to take to do that work and to make sure that you're producing something that is good. You've got to do with it whatever your budget is. And if it takes into account what you know, how did you set your fee? What is the scope? If the scope is particularly well written, then you leave yourself open to all kinds of just if you can't define what it is that you're doing, it makes it really hard or hard for us, easier for a client, let's say, to go back and just ask for work. And it's not that we couldn't provide the more, but without having a big foundation for what establishes what the contract would be is, you really you've got no foundation at all.

Rens Hayes IV 3:37

Absolutely no foundation. Yeah, it's really hard for a project manager to manage a project if they don't know what the defined set of scope of work is for the contract, do they?

Brett Powell 3:46

No. If you don't, again, you don't have a well-defined scope of what the project should be, what your budget should be, what you're trying to achieve, what are your goals? Not every project's goal is to maximize profit. I'd say most of the time, maximizing profit is not a major goal of what we're trying to do. The major goal is always to do good work and have good design and put what we put out is something that we can be proud of. And the profitability of it is yes, we would like to be able to make a profit doing it. There are times it will be more profitable than others, and there are times where you don't make a profit at all. You're just trying to find a way to balance it out.

Rens Hayes IV 4:20

Yeah. Profit and cash flow are two of the most important metrics in business. And I know sometimes maybe if somebody hasn't been exposed to business financials or what it takes to run a business, profit can have a bad taste to it. Profit sounds like a bad word, but without profit, your company doesn't exist to service your customers. So if you actually provide value to your customer, pride that provide value to the world, you have a responsibility to earn a profit so that you can continue to invest and grow and serve more people and provide that value to the market, right?

Brett Powell 4:53

Yeah, to be able to maintain a reasonable profit margin, it allows us to pay the people what we pay them and provide the benefits that we provide. I think overall we have a pretty pretty strong benefits package that we we provide our employees, health insurance covers that we provide, some of the other benefits. We'll probably talk about a later work part of ESOP and things like that are all the outcome of being able to maintain a minimum level of profitability.

Rens Hayes IV 5:21

Let's go right into that. Talk to us about the decision to go partial ESOP and when Klein Design did that.

Brett Powell 5:27

Sure. Uh so our founding partner, Gary Klein, he retired a few years ago, and he owns, we'll say, about 40% of the company. And I, if you were to take a straw poll in the room, I would say that there wasn't anybody who was going to be able to or willing to extend themselves enough to buy all that out. So we started a transition plan. I think it was probably back in maybe 2017, 2016, looking forward, these are the dates we had several partners that were going to be retiring soon being within the next five to ten years, we'll say. And how do you manage that process? So again, with our business installment, we talked about maybe these people can be, we can just buy out the business percentage that they own. But when it came to Garrett Sharing, really wasn't, that wasn't a really a viable path. So she mentioned the idea of converting that into an ASOP for the company. We still wanted to have private shareholders, like myself. So that was a decision that was made, and it took a few years of planning to make sure that every everybody is in the had the right seat on the bus, so to speak, that we had provided the right kind of documentation, that we had set up the plan, so that when you go to a bank, you know, it's a loan. It's not like you just say suddenly we're an eSOP, there's a bank that's out to it that's got to be willing to lend you the money, and then you've got to pay the loan off.

Rens Hayes IV 6:43

Yeah, it's not monopoly money.

Brett Powell 6:45

Yeah, that the person at the bank is sitting there talking to you, really just assessing the risk. What's the likelihood I'm gonna get my money back? So I think I will, so I'll lend you the money and you're your rate, and you pay it back like any other anal.

Rens Hayes IV 6:56

And for those unfamiliar, could you tell us what an eSOB is and what it means to your team?

Brett Powell 7:01

Basically, what it is, it makes every employee a part owner of the company. So 40% of the company roughly is owned by everybody. The biggest benefit to everybody is as a shareholder, as the company does well, each employee benefits from that, whereas they have their own accounts. Once a year we go through a third-party evaluation that determines this is what the company is worth, and then a portion of the profit gets put into everybody's account. And with the idea that they'll stay here for a really long time, and over time it builds up. You don't have to do anything to get it other than show up for work and do a good job. I'm trying to be as efficient as possible because the more efficient we are as a company, the more profitability we'll have, which is feed your individual account that builds over time. So if somebody is here for 30 or 40 years when they go to retire, they should hopefully have a nice extra nest egg that's sitting there waiting for them. So, yeah, it's one of the benefits we provide to employees to try to promote longevity, longevity of staying here.

Rens Hayes IV 8:02

Yeah, it's like absolutely a great benefit to have ownership in a company is a wonderful thing. And like you said, if the company does well and everyone's investing in making it a better company that provides more value and continues to grow, then their value of ownership goes up over time. How does that change your responsibility as a CFO? Does it change anything in the financial department, reporting, staying up to date with an ESOP?

Brett Powell 8:25

It doesn't change too much. When we have a loan that we pay down, we're trying to accelerate it a little bit because the sooner you pay off the loan, the faster more that you're able to return to the to the ESOP. And when it comes to tax time, we don't pay tax on the portion that's owned by the ESOP. That's part of the benefit that returns back to the company to incentivize them to be something like the ESOP. So we've got that we have to manage, but at the end it's not it's not something that's created a whole after you got past the initial setup of it, it's not something that is burdensome to really continue to process.

Rens Hayes IV 9:01

It that's true for so many things in business. I know we were fortunate when we launched HL, I had learned or we had learned the importance of financial acumen and having your system set up. And so we had paid a fractional CFO to come in and set up all of our accounting systems and our financial forecasting. And it's had we not done that, the amount of debt we would have accrued in terms of all the things we would have had to change and fix years of data to get what we want for reporting today would have been very burdensome. So, like I I appreciate how important it is to set it up so that it's not a burden year after year. Can't run a business out of a checkbook, that's for sure. Before becoming CFO, you're an architectural principal at Klein. Talk to us about balancing your work as a principal and the CFO.

Brett Powell 9:52

Well, I was saying the leadership in the firm, you've got responsibilities looking at financials. We would look at them monthly, quarterly, annually, just monthly is just how are things going along. Quarterly is like any other company reports, their quarterly earnings, and we would have our strategic planning meetings, set our goals and things like that. And it's just the extra time that you spent and you add it on to your workload as whatever, because we have people here who are principals that aren't an architect, so it just adds on top of I know it sounds bad like we're just overloading ourselves with all kinds of work, but it's an extra executive job, right? Yeah, exactly. But it's really it's one of those things that you when you love what you do, you love the company that you work for, it's not hard to spend the extra time that you need to do to make sure that it excels and just continues to grow. You want more people, you want to start hoarding people to say, look at all the great things that we do. You should be wanting to want to be a part of this.

Rens Hayes IV 10:50

Do you see a tipping point? And maybe that I think in some cases, professional services can be pretty clean financially, right? And in other industries, CFO might be a more time-consuming role. Do you see a tipping point in the architecture world where CFO is like its own role that would be too difficult to balance both?

Brett Powell 11:09

It would depend more on how strong your accounting portion is.

Rens Hayes IV 11:15

Yeah, so your accounting department really dictates a lot there.

Brett Powell 11:18

Yeah, what I'm trying, I guess what I'm trying to say is looking as a CFO, we're really looking at long term goals, looking in the past, what we've done, and try to forecast what's going to happen in the future, managing budgets and things like that. And the better your accounting team is behind that, it makes my job a lot easier because I can just reach out to those people and say, hey, let's try and let's start tracking this. And I'm not the one who's sitting there trying to figure out how to do the reporting. Lucky for me, just making it harder for somebody else. But as you said before, once you set them up, a lot of the times just going back and refreshing.

Rens Hayes IV 11:51

Your your dashboards, you're getting the information. And this was a big this was a big learning point of learning for me in my career when I really started to understand what is the role of a CFO, and it's accounting, is documenting things that have already happened. So it's documenting the past, which means if you're learning lessons from your accounting function, that means you're already paying a price for doing something that was maybe right or wrong, or paying a price for something that was wrong that you now have time to correct for that to show up in your accounting. So it's like a long runway. Whereas forecasting from a CFO, you're looking ahead and setting benchmarks that you're leading to so that you learn about the efficiency of your business or what to change sooner.

Brett Powell 12:34

Yeah, it's utilization rates is a great example of that. We go through it, we've got our roster of employees, and depending on what their role is, you're establishing this is how efficient I think you're going to be. It's you've got 100% of their time, everybody gets a certain amount of PTO, we have company paid holidays, we have internal meetings and things like that just aren't billable. So you're trying to determine what that will be and establish utilization rate, and the sum of the parts you can say is this is what our revenue could be for the year if everybody hits what a target is. Of course, revenue isn't this, a target revenue isn't the same thing as what you actually bill or how efficient you are on a project, but it's just one of the metrics that you've got to monitor that I think the CFO is going through and looking at as opposed to say the accounting department, where they'll provide me with this is what the last however long I want them to say for utilization for any employee, but looking forward, this is what we think we can do. We project who everybody would like to get a raise every year. So big in list of how much we think we'll be able to do. If we're doing this, that means we have to do these other things. So it's as you said, it's the past is a very long runway. The future is how far in the future can you really predict it and still be out? We go through, we have our forecasting spreadsheet, and it's probably good for about three months, and then it starts to wane a little bit just because the projects become a little bit more we think it's gonna start here. The client says it's gonna start June 1st. Is it gonna start on June 1st? I don't know. We're at March 10th, maybe it isn't.

Rens Hayes IV 14:05

Oh, absolutely. Yeah, we're in a difficult industry in terms of nailing start dates, that's for sure, especially today's economic times. Utilization is a double-edged sword from my seed, especially as we continue to layer on technology and technological advancements. It's really creating like leverage. I think it's an amazing time to be professional services. So for me, utilization is a quantitative metric and something I like to look at as it's really a lag metric to me. It might be something I look at once a year to see how it's stacked up, but it's not something I manage directly because I think it can drive the wrong behaviors. And an example of how I might look at that is if somebody is an engineer on my team and they're managing projects, but they had time in their schedule and they saw an opportunity to create a training or create a process or create a little piece of technology that created leverage for everybody else on the team, their utilization just went down, but they just created value for the company and everybody else around them that increased the value that we can create. So it's something I like to have a pulse on over time, but not something I manage directly, right?

Brett Powell 15:09

Yeah, and that's a good point because at any snapshot in time, depending on how you're trying to look at it, if it's a rolling 12 months as opposed to what's my year to date. But year to date, especially at the beginning of the year, it's really hard to use those metrics to see how you're doing because let's say somebody took two weeks of vacation in January, their utilization is going to be looked, it was going to be very low. Why was they took two weeks of vacation? Well, if they only get three weeks of vacation, you've got another nine months of the year, but we're only going to take one week. So it's yeah, so we try to look at specifically to that is what's the rolling 12 months, and then what are we here to date, and how much say PTO has been taken, how many holidays have we had? Because it all plays into the role, and you don't want to come down and sort of your utilization rate is so low, but it's because you know they're Yeah, the window you're looking at is too small to actually have to do that.

Rens Hayes IV 16:01

Exactly.

Brett Powell 16:02

So somebody's had a conference that they've gone to that's very important to the firm. They were gone for four or five days for the conference. It's not, it's gonna look like they're not doing something, but they really are.

Rens Hayes IV 16:11

All right. I think we owe the audience an opportunity to learn more about client design. I could geek out on the business and the strategy and the financials all day, and we'll get back to that. But tell us about client design, the market sectors you serve, the team today.

Brett Powell 16:25

Sure, thank you. Klein design, we are 30 plus years old. We have offices now at Raleigh, Charlotte's. I recently acquired an office in Austin, and we have a small branch in the DC metro area. Our primary project type is multifamily housing. We do a lot of apartments, mixed-use projects, garden style, wrapper, podium, townhomes, student housing, Greek housing. I kind of joke that if it's got a bed in it, short of a prison, we probably will design it.

Rens Hayes IV 16:56

Yeah, I like that. Anything with a bed, that's the service area.

Brett Powell 16:59

But we also serve corporate clients. We do commercial retail bed clinics, which is another small kind of niche, not a lot of firms that do that. And we also, as I said, we've got the landscape architecture, planning, interior design, procurement, and branding in-house as well. So we we like to think that we can take a piece of dirt and then move it through the entire process through entitlements and zoning, design, documentation, the interior design. We can get all the furniture to go inside the project and brand the whole thing.

Rens Hayes IV 17:29

Yeah, that's yeah, a one-stop shop for all that. Branding is a really interesting piece. Brand is certainly top of mind for me. So talk to me about branding and how it integrates with your architectural work.

Brett Powell 17:40

Sure. So we we for years we would have clients that would come to us with their project and then we would get to the end of it, and they would bring in their branding consultant to determine what we should call it, what should the logo be, what should be the colors and things like that. We had somebody here in the firm who had a lot of interest in this. We just gave her the runway to start trying to grow that. So we've been doing it dedicated for probably about a year or something, two years. And it's starting to pick up, we're giving more and more proposals to do to do branding for the projects we have. And I think we've even done a couple for projects that we didn't do in the project, but we're doing some branding for it as well.

Rens Hayes IV 18:17

Oh, that's interesting.

Brett Powell 18:19

Yeah, so again, the idea that we can do the whole gamut of a project throughout its lifespan.

Rens Hayes IV 18:24

And so if let's say I'm a new developer, I'm doing a mixed-use multifamily development and we're considering client design. Am I coming to you and you have an a la carte menu, you have an all-in price, how do you start to kind of position it?

Brett Powell 18:37

So it would, you would have to come to me and tell me whether or not it's not uncommon that there was a civil engineer already on the project. So we'd be, if we were early before the civil engineer, we would certainly tell you if we can take your piece of drone, we can do the due diligence, determine what the billable envelope on the site might be, determine how many, it's a let's say it's a multi-family project, how many units per acre you can get. So we do a density study to show how that would actually lay out on the sites, determine how many parking spaces you have, make adjustments to that based on maybe there's a parking criteria that says you need one and a half spaces per unit. Okay, we can make the building this big, but we can't get too many parking spaces, so reduce the size of the building or increase the size, whatever, to maximize what it is the developer is trying to achieve, then we can put together the documents to go to the local jurisdiction, to if it's a rezoning, to go through the rezoning process. If it's buying, I know where we are in my office here in Raleigh, we've got a lot of architecture review type boards where there's some member of the public or number of the public, I should say, they have the opportunities to look at the project and comment on it, or there's the UDO that says it's got to be a certain blazing percentage or brick, masonry, or something like that. So we'll go through that process as well. And then once the project is hopefully approved, then we go through and actually design the building and down along it until you get to the end.

Rens Hayes IV 20:00

Give us a sense of the projects you're working on today, maybe some projects you're proud of.

Brett Powell 20:04

For me personally, I think probably the most recent one would be the Seabor Station project here in Raleigh. We did it for our mopping and associates. Right now we're at three buildings, three mixed-use buildings. One's got a high house hotel in it. Half of it, the other half is multifamily. They all have retail on the ground floor. One of them has got subterranean boxing, two have subterranean parking, one is just a wrapper project. But all the whole, I think they're about 700, 800 units and 100,000-ish square feet of retail on the three projects. We've got another project right now that's an adaptive reuse that would be the fourth block there. The retenanting portion of the building, they're taking down part of it to make an outdoor plaza. They still have one more parcel that's left that hopefully near future will come to fruition. But again, I think we started in 2000, maybe late 2018, year in 2026. All three of them are open. Like I said, the fourth one is gonna start construction here pretty soon. So it's just one of those things you can look at. A lot of opportunities where you've designed multiple blocks in a single area.

Rens Hayes IV 21:05

Yeah, what an exciting development. And I gotta imagine the relationship and especially having trust with your client. When a project spans basically a decade over multiple buildings, you have to have a lot of trust with your customer.

Brett Powell 21:19

I I think they're a great developer to work for.

Rens Hayes IV 21:46

I can appreciate that perspective. I know even from our side, and it is a fine line to walk is if a developer brings us a development that seems really expensive relative to every other project we see in the market. When capital's challenging and people are struggling to get a project to construction, you want to have the conversation like, are you sure this is like the highest and best use and that this is going to be an economically viable development? And then they say yes, and it's like you're still concerned, versus they're also the development professional and have a set of experience and perspective and information that we might not have. So it's like how to walk that line to support their success and help them avoid a wrong move, right?

Brett Powell 22:26

Yeah, I'd like to think we've been doing this long enough that we've got a pretty pretty strong history in the product types that we do, but at the end of the day, the developers are looking at the metrics differently than we are to try to review a pro forma and say this is what makes it viable and not viable. I know we've a couple of times we've had some of our clients come in and almost give us like a real estate development 101 class and go through one of the projects that we designed for them and have them show us just the metrics how they work on their side for the pro forma. This little cost add here turns into this big number over the lifespan of the project. So being able to understand more about what the developer sees on their end really helps inform us when we're moving into a project to make sure that it is as viable as for the role that we play, we're making it as viable as possible.

Rens Hayes IV 23:15

I I love to hear that Klein brought a developer in to go through development economics for the team. It is such a big disconnect in the industry. And I'm often talking to developers and trying to help bridge that gap by saying, your design consultants, your construction partners, like 95% or more of them have no idea the stuff that you face on a day-to-day business or what it takes to get the development off the ground. You know how I know is because I didn't know for a long time until I invested in trying to learn how real estate development worked and it changed how I communicate and how I made decisions. I understood far more. And it's I like to try to bridge that gap.

Brett Powell 23:53

Yeah, it was great that the that each one of the parties was willing to come in and do it. I think they they saw value to it as well, having their design team understand where they're coming from, that it's not just we say, Oh, but the design has got to be like this. This is the we're not a big even ego firm kind of firm. At the end of the day, if there's no project, then there's no project. We need there to be. But the idea that when they say we really need this is where our budget has some flexibility, okay. We take what they presented to us as this is where the flexibility is, and that's each week you can with that, but there's no point in trying to argue against them with what their budget is. You said if there's no project, there's no project, and then nobody wins.

Rens Hayes IV 24:32

Tell us about the team structure inside of Klein. Are you guys organizing your people by market sector, by service area? Do you have studios? Do you have pod? How do you organize it?

Brett Powell 24:44

So in Raleigh, we've got three architecture teams. They're not broken down by project type necessarily. We want everybody to have the opportunity to work on whatever kinds of projects that they want to. And we do what we call a redraft every so many years just to allow people to move around. Different people have different management styles to work with other people in the firm, their coworkers. Nobody wants to sit at the same desk every working with the same people every day forever, kind of thing. So it's a healthy shakeup. But we do trade people depending on what's going on. One team is more busy than the other team, then we'll move people around like that. But it's really just a means of managing people. You couldn't take 30 people and have one person say, all right, this is what we're all doing. It's just it's not, it doesn't function well. You've got to break it down into a smaller group. So you say we've got three architecture teams here. Our Charlotte office has three architecture teams. Now if they were two, they just split into a third. Interiors Raleigh is one team, interiors and Charlotte is one team.

Rens Hayes IV 25:41

How many people are generally on your architecture team? You mentioned that split from two to three. Did you kind of find a secret number?

Brett Powell 25:47

It's about eight, nine, ten people at any given time. Maybe it grows a little bit more than that. It really just depends on what's going on in the in the project. Like I said, if one team is busier than another, one team's got a lot of person out, and another team is just artificially grown temporarily.

Rens Hayes IV 26:02

But generally speaking, we feel like eight, nine, ten is about the most that anyone do you like one person leading a team or is it a two-person team leading?

Brett Powell 26:11

So each team has got a team leader and then there's a design leader. The team leader is really more assignment focused, we'll say. They're determining who's working on which project kind of thing.

Rens Hayes IV 26:23

Resource scheduling type of thing and capacity of the team.

Brett Powell 26:26

Exactly. And then a design leader, they're controlling the designs and the projects, controlling acceptable back. They're leading the design in the different projects. So they're not necessarily, I'm only working on this, like maybe as an architecture team member might be. They're looking at all the projects in the team design and the quality. So there's usually a team leader and then a design leader, and then each team has got project managers, project architects, and then designers, and just the staff members on there.

Rens Hayes IV 26:54

You have somebody that's ultimately accountable for the customer experience? We do.

Brett Powell 26:59

We have a CXO, a chief experience officer, a Carl Winksted, and he's both internal and external. He will take the culture of client design internally. I mentioned we just acquired this office down in Austin, so he's done satisfaction surveys with those. However, how does everybody down there feel about the merger now that it's been about the acquisition now that it's been about three months, or in the third month, I should say. But he's also going out to the clients, doing client surveys and touching base with them to see how they feel client is doing overall. So it's both in order and external.

Rens Hayes IV 27:32

Quick break from the show. Thanks for tuning in to design development. We're trying to help as many people as possible. So if you could subscribe and leave a review on today's episode on whatever platform you're listening, it would be a great help. It's the only way we're going to reach more people. Let's get back to the show. The perfect transition, Brett. This is a conversation I wanted to jump right into. Clearly, your team's focused on geographic diversification. Walk us through the decision to acquire a Mark Odom studio in Austin, right? In Austin, Texas.

Brett Powell 28:05

Austin, yes. So we feel like we've we cover the southeast region pretty well. We've got projects that go all the way down into Florida, up the East Coast, into Maryland. Actually, we've got a project right now that's in Massachusetts. And then we've gone westward over towards, we've had some projects in Texas, Louisiana, Nashville, Detroit, but it was really a decision that we didn't want to be, we didn't want to move have an office in a location that was close enough to where we are right now that you're just we're growing, I'll say how ice forms. We're here just to sort of splinter now. Keep moving almost like a city grows. The idea was really let's get some place that was on far enough away that you're growing into the space in between. And given the reach that we had, that we were just touching Texas, it seemed like that was a good place to be. Texas is a huge market, but it seemed like a good place to be to start growing back and filling the space in between.

Rens Hayes IV 28:59

When I look at geographic expansion, there's really three strategies. You can take someone on your team, a key person, and you can move them to that new location and invest behind them to build and grow a client base and people to join the team. You can hire that person in another location and invest in getting them up to speed with your company brand, your company way of doing things, and then help them get build a team and get or you can grow through acquisition. They all have pros and cons and different set of challenges. Walk us through your decision at Klein as you've expanded in different offices and then this acquisition.

Brett Powell 29:35

I think we've done it all three ways now. We had a our office in Charlotte that we currently have was really more we had somebody move down there and start building the office. The unfortunate thing was he did it in 2008, right before the recession. So it was a really small office for a little while. But now we're up to about 45 people, I think, in that office. We had a Willington office that was a product of the recession. We it just didn't make sense for us to continue to have the office, but that was one where we had acquired a small firm, somebody who was retiring, and it ran really well for probably seven, eight good years in the early, I guess, mid 2000s, 20, 2003, I think it was about 2010, 11. And then this one in Austin, it was trying to identify somebody internal that you could just pick up and move into a brand new space that was as far away as Austin was, it seemed like it would just be you'd be putting a lot of dollars behind it that wouldn't necessarily get you to the same place as you would if you took the same dollars and said, can we find somebody that shared, had a similar culture that was the right size to be impactful, that had a design acumen that you felt that you could be proud of, and just connections in the local market to be able to say that this makes a lot of sense. And for us, I think that's the way Mark Modem Studio was. You checked all those boxes, and it's a nice size firm. There are 12 people, they do a lot of the same stuff we do as far as services, they've got interior design, they were doing procurement, they do architecture. They had we've got some of the similar clients, but they've got completely different clients. They've got a little bit more commercial work as a percentage of their work than we do. So it was very complementary of what they did compared to what we were doing. Like I said, it made a lot of sense to have that to move in that direction rather than like just try to pack somebody up and put them on a truck and move them to Texas and say, here, go draw an office.

Rens Hayes IV 31:31

I've learned from some small circles in the industry the runway required to get a new office up and running from like a cold start. And they say it's at least three years. So you have three years of effort and investment to really get a standalone office, like independently operating, which I think is a good frame of mind if you're ever looking to expand, like what you can expect in front of you. So I I understand it, it is different to do that in a faraway location. So, like when you buy another brand, if you can find one with the alignment that you just mentioned, you're buying revenue, a team, a client base to continue to grow and compound with your brand. You're also acquiring a different type of debt, right? Culture debt, management debt, process debt, like technical debt. And those are things that you have to be prepared to integrate. Talk to us about the integration team at Klein and how that's working today.

Brett Powell 32:22

Having a business consultant helped a lot because she was able to prep us for these are the things you really need to focus on. I think internally, our Carl, I mentioned our CXO, Michael, our CEO, Jill Davis, she's our chief strategic officer, collectively coming together is taking that list of these are the things we need to do so that we were really prepared for what we didn't know. We were really getting into this the first time we had done something this large. The one it was 20 years ago, 20 plus years ago, it was a small firm. This is 12 people, what's an established firm, they've been there for 20 years. They have their own culture, and while I could say that we think we felt like it really aligned with ours, what you feel like and what they feel like aren't necessarily the same thing. So it's you break down to things like this is what their benefits are, these are what our benefits are. We want to make sure that we're improving theirs, that we're not taking something away, that these are the computers that they work on. We want to make sure that we're not taking something away. In this case, they use MADEX and a different software. So it was like day one, here are new computers, and here's this new software you have to learn. And they have a couple of people that we use, we do everything in Revit. They have a couple of people who know Revit, but that's just part of the that integration process is making sure they have not just the training, but that they have a sort of a go-to system. We established a buddy system. So everybody in Austin has a buddy in either the Raleigh or our Charlotte office that they can bounce questions off of how are you feeling? What's going on? So that they feel like they've got an attachment to the other offices, the other new co-workers. When they interviewed for the job, they looked across the room and said, These are going to be my co-workers. They didn't expect that someplace, someday, the the 11 other people around them are going to turn into 110 other people that are Yeah, that's quite the change, right?

Rens Hayes IV 34:15

12 to 112.

Brett Powell 34:17

You know, we really you're trying to make sure that they feel welcome, that they're part of the client family as a whole, but at the same time, you still have work you've got to do. Even little things we're going back now and saying that we have another acquisition, we need to make a note of this to make sure that we're we cover this better than we did this time. There, there aren't big things like that you would see outwardly, little things inside of oh, if we had known that this would have been easier, or if we had set something this other way, it would have we could have gotten to the to the end of this time a lot sooner.

Rens Hayes IV 34:44

There's no way you can be prepared for everything, right? So it's like coming back to your values, your integrity, and your intent. That's what's going to carry you through. But you absolutely want to improve with every acquisition. How did you find this match? How did you find the company to acquire?

Brett Powell 34:59

Again, our consultant, she did it. That's part of what their business does, you know, acquisitions or investment banker and acquisitions. No, again, it's not she's the company's called Think Strategies, and like I said, that's part of what they do is they work pretty exclusively in the AEC industry, and they're assisting. We would go to her and say, hey, we're looking for a company, and we think this is where we want it to be. And then she it's almost like a real estate agent. They go out and they find the firms that are looking to sell, or maybe are thinking about selling for whatever the reason is, and then she makes a connection, and then you start having conversations about this is what we do, what do you do? This is what our culture is, what's yours like? And that's kind of really how it started.

Rens Hayes IV 35:40

I want to help maybe some existing business owners that are don't necessarily have an exit strategy in mind, but know their kind of career is on the on kind of the sunset cruise. So they got to figure out a way to how do they keep their business going? Could you help them understand maybe what a due diligence process is, what to expect?

Brett Powell 36:02

Sure. I think uh I can only speak on the acquiring side, but what I can speak to may help up the selling side. It's a lot of data to go through. And once you get through the data, then you're digging into just try to figure out maybe why some things are the way they are on paper. You might see a number or a line item or whatever it is, but you don't know the story behind it. I can see why they'd be a little reluctant to provide some of the data, not because there's something to hide, but just it's personal, especially when they're a sole proprietor or just some of the small corporations where they built this from nothing.

Rens Hayes IV 36:40

Yeah, it's unsettling, right? It's not something they've experienced before.

Brett Powell 36:43

Yeah, you wouldn't walk up to say somebody'd say, So what are your financials? Right, and I can't imagine somebody saying it to me, but that's what you have to do is you come to an agreement in order for us to have a you can have a certain amount of conversation, but it gets to a point where the conversation can't move without having information. And that person who's selling, it takes a lot to be able to trust to say I'm willing to give this information up, and then when you go back and you start asking questions, it's not I'm asking questions because I think you've made business mistakes. I'm asking questions because I'm trying to understand. I see this change here. Why did this number go down? Why did this number go up? What's going on over here? Because you want to evaluate it, not from uh whether or not they've been doing a good job in business, because if they've been there for 20 years, clearly they've done something right. I look at it as I want to give the benefit of the doubt. I want to understand why something maybe changed and something happened. Was there where there are two of you and three years ago the one person split, so they took half the revenue with them, and that's why the numbers are changing. Was there some was there something when you had somebody that key personnel left? They took a job someplace else, or their spouse was in the military and they moved somewhere, but so they had to leave. So there are a lot of reasons why numbers go up and down. Um, so we asked a lot of questions about why they are, and even to a seller, I would just hope that they understand that we're not doing it, like I said, to try to find I gotcha, you failed at this. It's really just to understand to know why things happen, so that if there is a future together, if it was an area of concern that we can make sure that we address it so it doesn't happen again, or if it was a blip in the radar when we came out of COVID, everything was high, and everything, those interest rates went up, it started going down. And if you were largely a developer-based business like ours are, I can see why your revenue would go down because there's just less work. We're working largely in the private sector, you got a different set of circumstances, or if you work in, you do a lot of state military work, which is a different kind of public sector, but a different sort of funding is different.

Rens Hayes IV 38:48

When someone is buying your business, they're buying the future cash flow of your business. And so the valuation, what they're willing to pay, is really based on the predictability, the sustainability, and the transferability of that cash flow. So due diligence is them starting to validate all of those areas of your financials that they just paid for to understand the story and on how predictable that is. Which kind of comes back to that beginning part of our conversation today, Brett, like how important it is to get your financials organized and correct from day one. Because if you ever every business is either going to transact or it's gonna die. And so you want to have your financials because otherwise this is gonna be a nightmare of a process.

Brett Powell 39:30

Going back a little bit, when you're talking about um the size of the firm, like you're that sole proprietor of a smaller firm, you can keep your books a certain way because that's you're just allowed to. When your partnership grows, your incorporation changes to something that allows for a larger, a larger pool, we'll say you've got to change the way you do it a little bit. When we became an ESOP, we had to change a lot of things just because we now have this fiduciary responsibility to everybody in the firm. It wasn't just a group of people who own the firm, and we said, Yeah, if we want to do that, we can do that. Now there's an evaluator who comes in and says, Why did you do that?

Rens Hayes IV 40:06

Did you have a quality of earnings report, Dunn? Was that important for this acquisition?

Brett Powell 40:11

I wouldn't say that we did that.

Rens Hayes IV 40:12

We just we went through It's a 12-person firm, and you're a strategic buyer, so I could see you not needing one in that case.

Brett Powell 40:20

I would think if we were, if at some point we were looking at a much larger firm.

Rens Hayes IV 40:23

You have to have it, right? At some point it becomes a requirement.

Brett Powell 40:26

Yeah, you start drilling into where are the earnings coming from. Are there different buckets that are your fee and whatever the revenue is, yeah, who are the tenants or the tenants, the who are your clients? How repeatable is what you're doing possible or that client list or something like that. So when you're smaller, it's a little less concerning because you're not you don't have this massive capital outlet that you're expecting to get this massive return on kind of a thing. You know, it's proportionate.

Rens Hayes IV 40:53

What are your go-to financial metrics to get a pulse on the business?

Brett Powell 40:57

I go through every couple of weeks, I look at what our pipeline is and tell us the pipeline is are those marketing projects, those things that come into the office. Maybe it's a project, maybe it's not. We're writing a proposal, something like that. We use a weighted revenue to track it. Not like about every two weeks, I'll go in and just see how that's moving along. We have our revenue forecast that all of our PMs go in and they update as the project looks more what they see that they're going to bill in the future. That's a live document that probably gets touched ten times a day by different people. And we check our cash flow forecast, we do an approval forecast, like I said, that's about every other week. And then once a month we go through the monthly financial like anybody else would. What's our utilization rating doing? What's our overhead, debt-to-income ratio, those sorts of things that are pretty pretty basic. And then we have four meetings and our partner meetings that happen every six months. So each one is our monthly meetings are really drilled into the weeds more, and then if you get to the board and partner meetings, it's more overarching metrics that we're working on.

Rens Hayes IV 41:57

I am not a CFO. Uh, the number that I always come back to in my business or when I'm even going through strategic planning is net revenue per FTE, which is full-time employee equivalent for those unfamiliar with F FTE. And essentially, if I sit down with a CFO or my business partner and we go through all the metrics, it boils down to me on a range on what our revenue per FTE should be. And for me, it's like a super quick, relevant. So if I look at, hey, I think we can grow revenue by 40% this year. How many people per million of revenue do I need to hire in order to be able to do that? And it helps me make like really quick decisions. Do you guys look at net revenue per FDE?

Brett Powell 42:40

Yeah, it's that's one of those probably quarterly numbers. It gets updated monthly, but I don't know that looking at it once a month is but yeah, so if you want a million, you probably need five and a half people here or say six people.

Rens Hayes IV 42:51

Love that. I like trailing 12 months financial. So a lot of we try to forecast our pipeline for closed deals, and then we see about a 90, 90 day lag between closed revenue to when that revenue hits our billings, and so it allows us to forecast. And when we look at trailing 12 months, because we were just talking about looking at some of these metrics on a month-to-month basis is too short of a window. But if I show trailing 12 months, it shows a rate of change that I think it helps us make better decisions.

Brett Powell 43:20

Yeah, we do the same thing. It's uh we have a year to day and then a trail of 12 months that we're looking at.

Rens Hayes IV 43:25

So as design professionals, accounts receivable is always a bear, like it seems that we're scared to fight. Like, what don't architects or engineers or design professionals understand about the cost of capital when it comes to accounts receivable?

Brett Powell 43:40

I I wish I had a magic answer for that. When I first came out of college, the firm I worked for, that was essentially what it was. You was a small firm. And when you came and picked up your drawings, you you left a check. So our AR is really relatively small. The only time I grew is when we got bigger corporate clients that oh, you can send the input. And then they pay whenever they pay it. No, I think like any business, you have people who are very prompt with their payments, and you have people they pay it when they pay it. I think the challenge for us really is one to avoid being a bank if we can. And it's different when we've got a client who's up front and says, look, this is the way we really want to structure a deal when it comes to our fees and how they want to pay it. At least we know going into it, here's what the picture is going to be.

Rens Hayes IV 44:27

I have absolutely no problem with that. I wish everybody worked like that because payment terms are fine as long as we adhere to the payment terms and they're clear up front when we sign a contract. It's really hard when that changes in the middle of a deal. Because as a CFO, like that impacts your cash flow, which is the lifeblood of your business.

Brett Powell 44:44

Right. You need to be able to pay your people and the work that I'm doing today, if I don't get paid for it for 120 days, I'm paying the people today, theoretically, whatever paying for the picture ends, and I'm floating that money for however long it takes for the client to pay the bill. Which, if you, as you said, if you know the terms going into it, at least you can plan for it. It's when you've got terms in a contract and then you know your client isn't adhering to the terms, and then how do you approach? And I think the fear is always they're just going to stop using us, they're going to give their work someplace else. Or there are several architects that do what we do. We like to think that we're the best at what we do. I'm sure they think that they're the best at what they do. And I again I'd like to think our clients like to work with us, but they don't give us all their work. They spread it out. Some give us more than others, but I can't think of an instance where any one client that we work for, any developer says, here's 100% of my work. Uh, if nothing else, just from the idea of I don't want to put all my eggs in one basket kind of thing. I need to spread it out because I can't have anything living here.

Rens Hayes IV 45:47

Yeah, concentration risk is real risk. So if they get a look at the profile there. And then it's our job to make it so that working with us is greater value than that concentration risk.

Brett Powell 45:57

Exactly. And sometimes that comes down to whatever the thing it is. You've got a client who pays when they pay, how much do you can you how much can you rattle it to say, hey, I need to, by the way, yeah, let's get rid of you out there, I really need you to pay for it. Where they go, why can't go over there? They don't ever ask me. So I think a lot of it is just disphere. You're afraid to, you don't want to put a lien on it because it on the property because it the precedent it sets and leave a bad taste in the client's mouth. Do you charge interest on those outstanding invoices? Your contract says that we can.

Rens Hayes IV 46:28

Not a single person in the industry does, even though it's in every contract.

Brett Powell 46:34

Or their contract's probably written the same way and they still don't chart it. Like I said, a lot of it comes down to I think the personal relationship we have with some of the clients and the ease with which you feel you can have a converse, a real conversation with the client about it. If you've got a client who's largely adversarial when it comes to it, it may be a client that you need to reconsider the next time another project comes up, assuming that you can backfill the void with something else. Like I said, there's real fear, especially in today's world, that once they they won't respect the conversation, they'll take the work someplace else. But again, if you've got a good relationship with a client and they enjoy working with you, I think they're at least receptive and they understand the conversation. They have to know that the question's gonna come eventually. Hey, as our 90 days out, we're gonna be this clean up.

Rens Hayes IV 47:24

Brad, this was one of the reasons I was excited for today's conversation because financial acumen in my mind is a big reason why this problem exists. And it's both understanding business finances but also development economics to understand the conversations that the design professions are in. If I take this back to pricing, there's three ways to price a project. There's one what is it going to cost you? And then you add overhead and profit. The other one is what value is this creating in the market? And is there a price between what it costs me and what it's worth that makes sense for us to scale our business? And the third one, which I think far more people are guilty of than they'd like to admit, is competitor-based pricing. I lost to so-and-so at this price on the last project, or they agreed to not get paid for eight months. So we have to now we're going up against them on the next one. So we got to drop our fee to win the next job. But the goal isn't to win every project, the goal is to win the right project with the right client at the right price. And I think understanding a cost of capital, because not getting paid for eight months is essentially a loan. And so you want to understand what's that value of that capital. You put that capital in the SP, on average, that's returning 10% a year. So if you have a million bucks in outstanding payments over a year, that's worth a hundred grand a year. And so, like, it has to be factored into your margins and your operating of your business for you to make those judgments. And if you can talk openly about it, it really helps those conversations with the customer. Yeah, that's what I say.

Brett Powell 48:54

I think the the relationship that you have with the client is when you've got a strong relationship where the conversation isn't necessarily about just the price. Oh, I can get it cheaper over there, for example. It's more about this is the quality of service that we give you, the quality of the drawing, the drawings that we're giving you. The way that we take care of our client when something comes up that if it's we need to make extra site visits, or there's this something happened here, there's a blip, or whatever the case may be, that they're part of the team to help address it, and maybe that other person does or doesn't do it. But I think if you can the goal to have it more of a relationship base, even if it's them coming honestly and saying, Hey, I can't use it on this project because your fee was too high in the last one, or because I owe a favor to somebody else, or whatever the case is, it's this is really more of a commodity project. I can't afford your fees on this one. Having the honest conversation, it helps moving forward with whatever the next project is going to be. As you said, if you're just competing squarely on fees, it makes it really difficult because I've lost this project or I lost that project. I've got 120 people out there that to be able to make a living, they all want to have a raise and they all want, we'd like to continue to provide the benefits that we provide. And if we can't make a reasonable profit on a project, or we're, for lack of a better term, backwardly, we're funding uh AR, that's a substantial amount for some clients or something like that. It makes it makes it hard to do that. You don't want to have to go borrow money to pay your staff because you're lending money to the client. It's just yeah, industry where that would be where that's acceptable, but it happens sometimes now, or not, and I don't quite understand it.

Rens Hayes IV 50:39

But if you have the spread on on the interest between taking out a loan to extend payment terms, like that can be an okay business decision, but you better be confident in your stability as a company in terms of financials, and you better be confident in your customer that they're not gonna default.

Brett Powell 50:59

Exactly. It comes right down to the front-end stuff that we do. It's the project will just die, and they'll hey, I'm sorry, we don't have the money to pay you, but you signed a contract.

Rens Hayes IV 51:10

It says paid, yeah, paid when paid or paid at the and but that company doesn't exist anymore, so how are you gonna get your money? Yeah, that's a tough place to be in because our expenses are fixed, right? Exactly.

Brett Powell 51:20

I still paid the person sitting there, I still have the lights on, still probably other stuff.

Rens Hayes IV 51:25

So Brett, what's the best advice you've ever received in this business that you could share with our audience?

Brett Powell 51:31

Don't go into architecture.

Rens Hayes IV 51:33

Don't go into architecture, come on.

Brett Powell 51:37

I mean, I think like any profession, when you love what you do, it really doesn't matter what it is that you do. I think that's probably the advice would be at least specific to being into architecture. I think if you were to go back in history and ask, architecture is probably one of the it's a field that's tends to be underpaid, and we do what we do because we love the work that we do. There aren't a lot of professions that you can see the actual results of what you've done. And account that you're you do people's taxes and you keep records and things like that, but they're it's not necessarily a tangible thing. Uh if you're depending on some of the things you do with doctorate, you can see there's a person I saved that did that. But driving down the street and pointing out to your family, I did that building, I did that building, they're there, they're going to be there for years to come, hopefully.

Rens Hayes IV 52:26

So rewarding.

Brett Powell 52:27

It's yeah, I think it's one of the few professions that you can look at and see every day the impact that you make. And it's I can't I personally can't imagine doing something else. Like I said, the advice I got was it's just think about you're doing the the uh doing a job that you love to do, it really changes your trajectory. I can't imagine doing something I didn't like.

Rens Hayes IV 52:48

Nor could I, and there is something special about having an imprint on the built environment and being able to see your book of work wherever you go.

Brett Powell 52:57

Yeah, I remember just real quick when I was a couple years out of school, I worked, like I said, this small firm in New Jersey, which is my boss and we had a lady that came in and needed an addition on her house because her daughter and granddaughter were moving in with her. And she had a small house, we put this whole second floor on it, and she was really nervous about the whole process. And when the project was done, getting to walk through it with her at the end and just how elated she was with how it came out and how impactful it was going to be in her life, being able to have a bigger house that her family could move into with her. I like I said, I think having to exp being able to experience that right out of school was just fantastic.

Rens Hayes IV 53:39

You mentioned architects typically being, say, underpaid or maybe undercharging. That to me is why conversations like this today are so important is hopefully it's a piece of education or sparks an interest to learn more about the financials behind the business because it'll help you make better decisions in your day-to-day. Brett, could you share a Top Booker podcast before we let you go?

Brett Powell 54:05

Top Booker Podcast. So I'll say my most of the books when I'm reading have something to do with finances or accounting or something like that, because I'm trying to learn more about what my day-to-day buttons when I read it's not a lot for pleasure, but my wife, she just finished the book, Theo of Golden, and she has pressed me on it. So I've started reading it. I think maybe I'm about halfway through it, but it's a great book because it's a lot about giving and not giving like here's five dollars kind of thing. It's more giving as a person. So it's a great read so far.

Rens Hayes IV 54:37

I love that. That's a great way to wrap up today's conversation. Brett, thanks so much for joining us today on design development. I'm excited to uh see what client design is able to achieve over the next five, ten years and beyond. Wish you nothing but the best.

Brett Powell 54:52

Thanks so much. I appreciate it.

Rens Hayes IV 54:56

Hey everyone, thanks for tuning in to Design Development. Real quick before you leave, our goal is to help as many people as possible. We're a growing community and you're a big part of it. So just click that send button. Send this episode to a friend to let them get the same insights that you got today. We appreciate you. See you next time.