Succession Planning | Ownership Transition
Fact: It takes 10 years to do succession planning right. It takes at least 5 years to do it, under pressure, with lessened chance of success.
Fact: Most design firms leave it TOO LATE.
Fact: With depressing regularity, PSMJ sees design firms with much to pass on, blow their chances of leaving a legacy. Why? Because they either waited too long, got bad advice, or both.
Ownership transition (OT) can be quite tricky. What do you do about the 30-year employee who expects to lead the firm in the future but simply does not have, and will never have, the skills to lead the firm?
Helping our valued clients on succession planning is an important part of PSMJ’s global commitment to the continuity and legacy preservation of good design practice.
Many firms transition themselves extremely well, of course. They don’t need to call for help. If your practice is in that category, WELL DONE! If you’re unsure, book a free, no obligation, confidential meeting with one of our senior consultants to discuss your transition.
You Asked...
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How do we prepare for generational/ownership change?
Good ownership transition planning starts early, with effective strategies to retain the best staff – those with real leadership potential. If that doesn’t happen, they leave for greener pastures. In their leaving, founders deprive themselves of their best chances to pass on the torch.
Sadly, many of the firms that come to PSMJ for advice in this area have already sold down some of the founders’ shares to long-time employees without real leadership skills or even ambitions.
Not infrequently, we see these people as “coasting” toward retirement – and they are a drag on the firm, not part of the energy pulling it forward.
Not infrequently, we also see situations where a founder simply refuses to “let go” when their time is up. The most important “passing of the torch” is from the first generation of owners to the second.
Sometimes the second “passing” is equally complicated when the wrong people got the torch in the first pass, and the third generation find their pathway to leadership blocked.
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Do we need a firm valuation as part of planning for ownership change?
Short answer: YES. Longer answer: It is important to get the value of what’s being sold, and bought, correct – for both the buyers and sellers. The reasons are obvious. Without a reasonably current valuation, neither buyer or seller will know if the “deal” is right.
We often see company documents that specify formulas or values for share transfer. Sometimes these may have been accurate when they were created, but no longer are. Other times they seem to be numbers “picked out of the air” by founders, that have no real connection to true market value.
Equally important is the concept that those buying shares helped to create the value they hold – often by working long, unpaid hours. Logic says they should not have to pay full price for something they helped to create. Consequently, it is common for a firm to sell shares internally at a discount to market value, often in the range of 20% – 30%. Another common practice is to exclude the “goodwill” component of market value.
Lastly, it is important for share buyers to know what to expect in share appreciation. For all these reasons, a current valuation by some thoroughly experienced in valuing professional service companies is a key and essential part of any internal share transfer program.