An ownership transition plan must combine the right strategy on both the human and financial side.
If I could boil down ownership transition into two words, it would be: people and money. That’s quite the combination!
On the people side.
Do the next generation of owners have a vision of where they want to take the firm? Do they have a mindset that they will be successful? Are they truly ready to run an actual business, and can they keep the engine running by winning work?
It’s crucial to have up-and-coming leaders who are ready and able to run a business effectively. That is why there are firms out there that consistently mentor and intentionally provide their future owners with executive education classes to better prepare and enhance their skills so they can lead the firm of the future.
There have also been cultural changes in the last decades in how each generation views work. Work-life balance has been a prominent topic of conversation in recent years. Younger generations may not want to burn the midnight oil as previous generations have done in the past. This results in many not being intentional with obtaining ownership. A proper ownership transition plan eliminates ambiguity and allows everyone to know where they stand in the midst of transition.
On the financial side.
As the firm continues to be successful – growing in markets, employees, and revenues – the valuation of the firm increases. That presents itself as a great benefit for the retiring shareholder, but it looks like a mountain of debt to incoming buyers.
If the firm’s owner’s priorities are its legacy and leaving it to the next-tier leaders, he or she will have to make a discount on the firm’s fair market valuation on a minority interest level instead of on a fair market value through the external market. This discount ranges from 15%-45%. That is why going the external route may be more attractive to other owners because they are able to get fair market value for their firm. There are always upsides and downsides with internal and external ownership transition.
In all these components you must think 10 years ahead if you are a mature, sophisticated firm or are aspiring to be one. Planning carefully means having the right buy/sell provisions, such as mandatory sell-downs once you reach a certain age, a cap on ownership percentages, valuing the firm fairly for all parties, and having enough cash flow. This is crucial for the sustainability of the firm. In other words, you must have a system (both legal and financial) in place for when owners start selling their shares.
Another financial factor: Younger generations today are experiencing increased inflation in housing and overall cost of living, with many graduating from college with student loan debt. These factors all culminate in many young leaders who might want to invest in the firm being unable to do so when the time comes. This has further diminished the affordability aspect of being an owner.
The bottom line.
It is a tricky landscape that owners must deal with. Despite the many uncertainties of life and the times, the AEC industry continues to grow and improve people’s lives. That is why an ownership transition plan that combines the right strategy on both the human and financial components will not only benefit you and your future owners, but also influence the DNA of your firm.
Plan your firm’s future with confidence. Zweig Group’s ownership transition consulting services help AEC firms align people and money to build lasting, sustainable transitions. Learn more here!
Ezequiel Tovar is a strategic planning consultant at Zweig Group. Contact him at etovar@zweiggroup.com.
