The decisions you make today will have monumental impacts on your next generation of owners tomorrow.
I have had the opportunity and privilege to review and help craft transition plans for dozens of architecture and engineering firms during my time here at Zweig Group. When analyzing these plans, I have seen reasonable and carefully considered succession programs, but I have also seen plans that do not make any sense, or – even worse – firms that don’t have a plan at all!
Here are some things to look out for when you are starting to think about transitioning:
- Waiting too long. This is the classic reason many transition plans cannot be executed properly. Ownership transition is an emotional business decision with massive ramifications. How do massive 737s land? With the right calculations and enough runway. If you rush this process, things will fall apart. You must think ahead so you can properly prepare! Too often time isn’t valued as a crucial asset during succession planning. Having enough gives everyone involved the necessary breathing room to course correct and avoid major mistakes.
- Relationship with banker. Relationships take time, but once you have them, they are indispensable. When planning for transition, there is usually debt involved with the transaction whether through the firm or buyer. Depending on the valuation of the firm, the firm can have a lot to take on its balance sheet. Having a trusted financial institution that is already familiar with the cash flows of your business and knows you well will go a long way when it comes time to determine coverage rations and how much they are willing to lend to you.
- Mentoring and teaching your successors is a marathon. You cannot suddenly decide to hand off the reins of your business. Your incoming successors need to have firsthand experience in how to run the business. Show them how it’s done and delegate responsibilities accordingly. There needs to be a blueprint of roles that each individual must know. Introduction to accounting, finance, marketing, HR, and key client relationships is needed.
- How you value the firm must make sense. Book value does not encompass the complete value of a firm. How will the valuation of your firm set a precedent of smart incentives? Your incoming owners need to be driven to increase the value of the firm. That is why having a valuation methodology that shows them what levers they must pull (revenue growth or profitability) to not only have their stake in the company rise, but their compensation as well. You must tie in the incentives that allow them to understand the more they grow the pie, the better it is for everyone. Never underestimate the power of incentives. Align them properly and your firm will radically transform.
- Class A and B shares. I’ve never understood the reasoning behind this. If you are selling someone 10 percent of the firm, but it is Class B (no voting power), that only sows distrust in the transition process. They are still in the minority (owning 10 percent) and major decisions will not be able to be made without the majority (51 percent). It is simply best to have all shares equal. Choose the right people to replace you and you will never worry about this!
- The benefits of selling internally. Ownership is a wonderful way to retain your key talent. They have a stake and including them in the fold will only help build a strong second-tier leadership for a potential sale of your business. Their ownership interest can be moved into the acquiring company and provide better opportunities for their career development.
Ownership transition gets better the more you do it, but getting it right the first time facilitates all future transactions. The ownership transition decisions you make right now will have a monumental impact later for your new generation of owners. So be transparent and create a vehicle that generates value for you and everyone else!
Ezequiel Tovar is a senior transition analyst at Zweig Group’s. Contact him at etovar@zweiggroup.com.
