Starting early with your ownership transition planning provides ample time to position your staff and firm to maximize your firm’s value.
Has ownership transition taken a back seat at your firm over the years? Are your major owners baby boomers? Right now, ownership transition in the AEC industry is at an interesting intersection of firm-value and ownership-demographic.
With ages ranging from 57 to 75, baby boomers are a demographic that is collectively in various stages of executing their ownership transition. The next generation of owners, the 41- to 56-year-old Generation X demographic, includes many engineers who are in, or entering, their prime earning years.
While this demographic has an increasingly stronger base of earnings, they will never match the peak number of baby boomers in the workforce. This demographic difference and the rapid rise in the value of many firms will impact certain ownership transitions.
Of course, some firms are deep into the execution of a well-planned ownership transition and are successfully minimizing the impact of this generational phenomenon. They have next-generation owners who are committed to the firm’s future, the leadership skills, and the means to invest financially in their firm.
However, for selling owners who have done little – if any – transition planning, the impact on the number of sellers and next-generation buyers can be significant. The overall result is that owners who are late to the game need to cast a wide net when considering transition options. Here are a few basic steps to get your ownership transition on track:
Understand how your firm is valued. Start with “spreadsheet calcs” using one or more of the metric-based plug-and-chug methods included in Zweig Group’s annual Valuation Survey Report.
As you move further along, the use of a third-party valuation firm with expertise in the AEC industry can provide confidence in valuations using advanced valuation methods and current market data.
Know your cash flow. If you have been profitable in recent years, understand why and work with your accountant to improve margins. If you have not been profitable, find out why and fix what is broken. The more confidence that a buyer, internal or external, has in your company’s ability to produce future profits, the more options you will have when developing your exit strategy.
Keep in mind that the likelihood of a successful ownership transition is maximized with solid profits. Future profits are obviously essential for new owners who often finance the purchase of your firm. But additionally, new ownership will need strong working capital to reward staff, maintain quality work environments, and keep up to date with training and equipment.
Consider internal or external transition. Choosing the best ownership transition strategy will determine your firm’s long-term success. Do you have both internal and external options?
- Does your firm generate enough profits to transfer ownership on a timeline that matches expectations?
- Does current staff have the desire to become owners?
- Can current staff dedicate the time needed to manage the business while also maintaining profits and managing client projects?
- Does your firm have staff to replace project managers that are transitioning into ownership roles?
- Does your potential internal ownership team meet your state’s criteria for minimal ownership levels by design professionals?
- If the answers to these questions lean toward “no,” your time would be best spent preparing for an external sale or merger with another firm. However, if the answer is “yes,” move forward considering both an internal and external transition.
- At the end of the day, relative to the value, a significant amount of capital will be required to purchase your firm. On an individual basis, this capital could be invested in your firm, or in other investments.
Communication is vital. All your staff will not be aware of or understand the implications of an ownership transition. However, your key staff will. Whether your transition is internal or external your staff will be the key to success.
Keeping staff informed will maximize the value of the firm. Staff who understand how the ownership transition will benefit their career will likely stay with your firm. At Fleis & VandenBrink, we worked hard to keep staff informed of ownership transition matters and welcomed questions through various methods, including all-staff meetings and one-on-one conversations.
Starting early with your ownership transition planning provides ample time to position your staff and firm to maximize your firm’s value. However, if ownership transition has taken a backseat at your firm, the longer you wait to start, the more difficult things will become as you slowly lose the ability to maximize the value of your firm.
Don’t be one of those firms that fails to survive beyond their first-generation leaders! Now is the time to take the necessary steps to create long-lasting firms.