When considering a transition, it’s important that you stay flexible and don’t wait until the end to plan your exit.
I’ve heard numerous times that you should start your business with an exit strategy in mind. It seems like very few business owners (in the AEC space) do this. Lots of decisions have to be made as an AEC firm establishes itself. What should we name the place? Do we have clients? What markets should we serve? Who are/will be my key people? These are a few of the practice-based questions that need to be resolved. Then there are questions regarding how the organization is put together, corporate governance, tax status, location, licensure, etc. At the beginning of an organization’s development, most firms are not looking at the long-term operating strategy nor the exit strategy. Reevaluating these subjects as a firm grows and evolves is critical. Question everything consistently and don’t be complacent in the “way we’ve always done it.”
The various realms of expertise needed to run an AEC firm are complex and require subject matter experts to provide guidance at every turn. From legal, tax, benefits, risk, insurance, and other more technical matters, owners of small and growing firms are tasked with making numerous (and frequent!) decisions that can have long range impacts on the way the business will function – not to mention how the business will transition ownership. This is important!
Identifying all the hurdles and constraints when selecting a particular business solution is impossible and certainly not an exact science. There is no silver bullet that accomplishes all the strategic and operational objectives a business leader must tend to, but there are certain decisions that can have lasting implications – good or bad. Maintaining some flexibility in your structure and not being painted into a corner with a decision should be at least one of the objectives here. Also, don’t wait until the end to contemplate your exit!
Most of my time at Zweig Group is spent focusing on ownership transition and developing strategies to accomplish this initiative. I’ve seen numerous examples of perceived constraints regarding changes in ownership in design firms. Whether perceived or real, almost anything is possible if you have the right subject matter expert in your corner and have a vision of where you want to go with the business.
There’s no shortage of tax mitigation strategies for the small firm owner. Similarly, there are a thousand ways an attorney can draft your documents. Legal documents designed and written by generalists, not focused on this industry, can be a real hurdle. Especially, if a firm creates expectations and programs around those documents that are not aligned with the overall philosophy of what business ownership means in this industry or at a specific firm. Owners should tie this philosophy directly to the collective vision for the firm and be communicating appropriately with key individuals. Determining control, decision making authority, methodology for transferring ownership, and continuously communicating with your key people is imperative to developing a sustainable business model.
A few of the frequent offenders I see complicating overall strategy and the ownership transition conversation are:
- Voting and non-voting shares for control purposes. These can be useful but can complicate valuation, real or perceived benefits of ownership, and weigh on organizational structure. If you choose this path, commit to growth and be intentional about why you have voting or non-voting shares. There are plenty of other ways to delineate control/decision-making authority.
- Voting or non-voting shares based on licensing requirements. There are other ways to develop MSAs, formal relationships between “affiliate” or wholly owned entities. Depending on your location, try not to get wrapped up in who can and cannot be an owner in your firm. Focus on getting the right business partners together.
- Reporting exclusively along operating entity lines for tax or other purposes. Using the previous strategy, but not looking at the entities or business units as “one firm.” This can get really ugly.
- Focusing on tax mitigation strategies and not focusing on the business objectives. Running personal expenses, owning real estate inside your corporation, and other “tax strategies” can complicate things as you expand and look to transition ownership.
- Using deferred compensation as a transition strategy. My experience with these is that after three to five years, the existing ownership start to really question the program for a variety of reasons. Is this a growth stock versus income stock – or neither? What are the benefits of ownership? Are the other owners aligned?
Any one of these can cramp a conversation regarding strategy and certainly come into play when you are discussing ownership transition. There are generalists and then there are industry experts who can advise you on some of these matters. Find peer groups to network with, seek out industry experts in tax, legal, and strategic/exit planning. Lean on your network to help you navigate the landscape of business ownership so you can focus on running a successful firm and creating value for your fellow stakeholders.
Will Swearingen is a principal and director of ownership transition advisory services at Zweig Group. He can be reached at wswearingen@zweiggroup.com.
