Navigating the financials

Aug 27, 2023

Ezequiel Tovar

You must consider the financials before you can fully understand what it takes for a succession plan to be feasible.

Ownership transition touches a multitude of dimensions, but let’s take a look at the financial aspect to help owners determine what it takes for a succession plan to be financially feasible and practical.

  • How you value the firm is crucial. Is your valuation beyond book value? Does it take into consideration the growth, consistency of your performance, profitability, quality of the management team, and your diversification? If you value your firm too high and do not offer a discount, it causes problems of affordability for the next generation of leaders/owners of your firm. If it is valued too low, your ROI drops. From what we see here at Zweig Group, a discount of 15 percent to 25 percent will normally help facilitate buy-in. This is an exceedingly delicate balancing act because it affects your future and your firm’s future.
  • If there is no demand for ownership something is wrong. Have you communicated with your employees why your firm is a good investment? Creating a desire for being a principal at your firm is a cornerstone of good succession planning. Involving key people so they understand the benefits and ROI will entice them to want to be principals.
  • Require a downpayment for incoming owners. Having “skin in the game” is a necessary component for future owners to understand the value, risk, and care that comes with being a principal. You can be creative with this. One firm I worked with had a policy where the greater the downpayment, the less the interest rate was on the note. Another factor that goes along with this is whether or not the new principals receive a raise in order to ensure buy-in into the firm. Having a set plan to answer both of these topics will show your preparation and thought into ownership transition.
  • Make sure your next tier of owners is ready to lead the firm. You can have the right valuation in place and create demand for ownership, but if the next tier is not properly equipped with the necessary mentorship to run and operate the firm your efforts have been in vain. This step takes a lot of time and dedication to the ownership transition process. People need to be successfully prepared for ownership. Introducing them to clients and explaining how money flows through all the parts of the business is a must! The CEO of McDonald’s once said, “Succession planning success is dependent on clarity on what experiences that role needs to undertake.” Creating these opportunities will help your firm be ready.
  • When transitioning internally, determine whether the transactions (change of ownership) will happen directly or indirectly. What do I mean by that? In a direct transaction, the individuals transact on a one-on-one basis. The seller sells and the buyer secures their own financing with their bank to purchase the shares. It is like buying a car or a home. The buyer will need to make a personal guarantee on the loan they will be incurring. This type usually occurs in firms that are smaller and where there is no large owner pool to sell ownership to. The second option is the firm itself finances the transactions taking place (indirect method). This happens in more established firms. The seller redeems (sells) the shares to the firm then the buyer purchases the shares through the firm. These transactions directly affect the firm by showing up on the balance sheet as both a liability and an asset. Both methods have their own tax implications since each firm’s situation is different.
  • Explore your options to see what type of method works best for your transition. The two most basic ways to finance ownership transitions are through installment payments or structure notes. Installment payments are dependent on the firm’s value for each given year. This method provides more flexibility. Through installment sales, you can set up a payroll deduction plan where a certain amount of buyers purchase shares this way. On the other hand, a structured note locks in the firm’s valuation from when you commit, and the buyer fulfills the obligation of the loan. Another method of transitioning is through deferred compensation. This is where buyers have the opportunity to purchase equity at a highly discounted price and are moved into a compensation plan that involves contributing a portion of their pre-tax, pre-bonus earnings to a trust. This trust can be used to compensate exiting shareholders by bridging the gap between the value at which they sold their equity and the actual market value of the firm. This approach is typically less risky than a traditional equity transfer with transaction financing, as the values and obligations involved are smaller. With this being said, it is important to mention that the outflows (selling of shares) and inflows (purchasing of shares) match up – meaning if an existing owner sells 100 shares, the upcoming owner(s) also buy 100 shares. If this is unbalanced, it negatively affects the firm’s valuation because the share volume is off, which then impacts the value per share.

Ownership transition takes time, and the debt obligations can take up to seven years to satisfy. Long-term thinking will help you have better clarity and create a solid vision for your firm. Click here to learn about Zweig Group’s ownership transition services

Ezequiel Tovar is an analyst within Zweig Group’s ownership transition team. Contact him at

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About Zweig Group

Zweig Group, three times on the Inc. 500/5000 list, is the industry leader and premiere authority in AEC firm management and marketing, the go-to source for data and research, and the leading provider of customized learning and training. Zweig Group exists to help AEC firms succeed in a complicated and challenging marketplace through services that include: Mergers & Acquisitions, Strategic Planning, Valuation, Executive Search, Board of Director Services, Ownership Transition, Marketing & Branding, and Business Development Training. The firm has offices in Dallas and Fayetteville, Arkansas.