As hot as merger and acquisition activity in the A/E industry is – and it is hot (we probably get two or three calls/inquiries/RFPs a day now) – internal transition – selling from employees/owners to others – is still preferred by probably 90 percent of companies in this business.
That said, it is way too often mishandled. When done right, here are some of the common elements that we see:
- There was a plan in place and it was followed. This is so important! The plan has to match up with the business plan, too. Get qualified outside advisors. Industry knowledge is crucial. And this plan has to be modeled and constantly re-evaluated and tweaked so that it works and keeps working.
- Leadership transition was an integral part of the plan. The math alone is not enough. There has to be a leadership transition as well. And those next generation leaders need time to be trained. It’s best for everyone in the firm to pick their successor, tell them they are their successor, and then spend time mentoring and coaching them – both before and after they assume the person’s position.
- The company is a growing, profitable concern. Growth and profitability must be there to make it all work. That’s what makes the stock or ownership interest value go up. That’s what allows the company to pay bonuses/dividends/profit distributions that are essential for buyers to have the cash to buy stock. Without growth and profitability, the wheels will fall off.
- The valuation methodology responds to the company’s financial performance. Again – value should go up with the company’s growth and profitability. If it doesn’t and is strictly tied to assets or some other arbitrary numbers, then it’s possible owners will be doing the wrong things to make the company successful over the long haul.
- The sellers aren’t too greedy and the buyers aren’t unrealistic. These two are absolute requirements for a successful internal transition. I think the best way to do this is through education. This is where you have to be darn sure your advisors are appropriately experienced and have worked with other firms in this business. They can help everyone be realistic.
- There’s trust amongst all parties. This trust is necessary so everyone knows the other guy wants to be fair and do the right thing. When there’s no trust it all falls apart. Communication is the key to trust. Without good communication, there won’t be any.
Internal ownership transition is part art, part science, part psychology, part timing, and part luck. How much is related to each of these elements can be debated endlessly!
Mark Zweig is Zweig Group’s chairman and founder. Contact him at firstname.lastname@example.org.