How can we prepare for generational change?
Maybe I’ve met one or two design firm founders who expect their business to die when they retire – but they would be an insignificant, tiny fraction of practices. Almost all want to see their “creation” continue on, partly for their pride and ego, but also for the financial benefits they can realise either through continuing to work a reduced load, or through selling the business.
Many design firm founders I’ve met also feel an obligation to their loyal staff and want to leave them a thriving, ongoing business. All these excellent motives aside, an amazing number of firms “leave it too late” – they don’t do the things that need to happen to achieve these objectives.
The reality is that it usually takes about 10 years of planning and implementation to build successful future leadership – and 5 years is probably the realistic minimum.
PSMJ Asia Pacific has worked with many architects and engineers, large and small, to help them prepare for, and implement, this transition. Needless to say, every situation is different, and requires a unique plan.
Often, there are hidden issues and conflicts that stay buried until it’s time to start reviewing draft OT documents that can threaten to derail a program; these have to be resolved. Occasionally it involves the departure of long-serving staff, which can become very stressful and difficult.
The role of PSMJ in these scenarios varies enormously, according to the issues to be resolved and the capability of the firm members to effectively resolve them. Precisely what PSMJ brings to the table is objectivity and deep experience. We’re involved, but not emotionally involved – and often that makes all the difference.
For more information – and a free, no-obligation initial consultation – contact Charles Nelson: 03 9686 3846 or email@example.com.
How can we prepare for ownership change?
Generational change often includes ownership change: New leaders move up and buy or are given shares in the business. But it doesn’t always happen that way, and doesn’t need to.
In most circumstances, ownership change involves three processes: A Valuation of the firm to determine its worth, a Buy-Sell Agreement to establish conditions of the ownership transfer, and a Financial Model that shows what the financial future will look like.
Valuations are discussed under the Mergers & Acquisitions page, but there is one key difference between valuation of a practice for external sale, and for internal transfer to staff. That difference is that the internal price is almost always discounted; one reason being that present staff have had a role in creating the value, and the logic is that it’s unfair to “sell” them something they’ve been instrumental in establishing.
This discount can take several forms. Most common is to exclude “goodwill” from the internal price – it’s the staff who’ve helped create that goodwill. Another method relies on the truism that any sale requires a willing seller and a willing buyer.
If the buyer wants to buy, but refuses to accept the price asked, the only way for the sale to proceed is to negotiate a discount from the “external” value to a point where both parties agree.
The Buy/Sell Agreement is the most fundamental document underlying the allocation and transfer of ownership in your firm. Without it, you are putting yourself, other shareholders, your employees, and even your clients at risk in the event of an untimely departure of a principal or just about any other unforeseen event that could impact the ownership structure or capitalisation of the firm.
The Financial Model projects share ownership into the future a decade or two, anticipating future share values as well as scheduling when shares of current owners will be “sold down”. The Financial Model is critically important in effecting the entire ownership change, as people other than staff members (such as spouses) will be part of the decision-making process to invest in the practice.
For a list of useful resources, see the Mergers & Acquisitions page.