Firm owners need to first be intentional, vulnerable, and transparent in order to make their transition a success.
One of the first questions I like to ask myself when evaluating a client’s succession plan is the context of their exit. Are they tired and ready to leave in two years? Are they checked out and overstaying their welcome? Who is initiating the ownership transition? Do any of the other owners want this individual out? Will the firm still need this individual to function properly?
There are many scenarios I see play out during ownership transition and getting clarity for these questions helps me understand how I can help. There are unique dynamics in each firm. Don’t try to hide them. Those unsaid truths and issues haunt every firm. The ego trips between the partners, power plays from departments, division between the current and incoming owners – these things all affect transition planning in a major way. That is why acknowledging them and bringing them into the limelight makes succession planning smoother. This is where leadership comes into play.
Being an effective leader is like riding a unicycle on the highway. Very few can do it well. Demonstrating leadership during ownership transition goes a long way by setting a standard of how transitions are supposed to occur. Here are three things an effective leader must think about during this time:
- Intentions. True leadership is tested during an ownership transition because you get to see people’s true colors. Is it all about the firm’s valuation and everything else is secondary? Does the owner care for their people to succeed beyond them or do they want to cash out and run? Do they care about overburdening the firm with debt? An intentional leader plans ahead and starts building their second-tier leaders up early. I worked with the sole proprietor of a small architecture firm in the South where the owner had been extracting the value of the business by taking a large salary and distributions. Despite this, he was trying to value the firm at 25 percent above its actual worth. Owners need to be realistic with their circumstances and come to grips with the truths of their intentions.
- Vulnerability. Showing an upcoming leader how to do your job puts you in a vulnerable place. You are entrusting what you have dedicated your entire life to doing to someone else. You are handing over what you have built into their hands. It is a delicate balance between delegating important responsibilities and not micromanaging. It’s important to recognize that certain decisions regarding the firm’s direction may be made differently from how you would have approached them. That is why building the necessary trust in advance will help you navigate succession planning.
- Transparency. What exactly are people buying? Not only as an investment, but culturally as well. There was an architectural firm in the Southwest that was growing gross revenue 6 percent each year for five years and their pre-tax, pre-bonus profit was 25 percent. They were well diversified in different markets. On paper everything was great, but behind that success were the burned-out individuals who could not take it any longer. One of the key employees had left a year before due to lack of transition planning and started his own business, another was dealing with a stroke that impaired his ability to work, and yet another who had significant client relationships was planning to leave in a couple of months. Being transparent with your staff will help you build credibility. This will communicate to the buying shareholders that you have their success in mind and that you have an honest perspective.
These points give you another layer to view the context of your firm. What’s the point in mapping out the financial component, buy/sell agreements, and sell down schedule if you don’t have fundamentals straight? Be an effective leader and the rest will follow. Firm owners need to first be intentional, vulnerable, and transparent in order to make their transition a success.
Ezequiel Tovar is an analyst within Zweig Group’s ownership transition team. Contact him at etovar@zweiggroup.com.
