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Developing an Ownership Plan

Dear Dave
We opened our civil/survey firm about ten years ago. Since then we have grown to around one hundred total staff in four offices. Our firm is owned equally by the three original founding principals. We have a couple of senior people to whom we would really like to extend some ownership, but don’t feel comfortable on how to even begin the process. Can you provide us some direction on the earliest steps to get us going?

Dear DD
I’d suggest a series of discussions between the current owners that eventually results in a uniform expression of their values, beliefs and philosophies on ownership at your firm. This "expression" will serve as a guide as you go on to develop your initial thoughts into a specific ownership plan for your firm.

The finished plan should include a description of how you will determine how many shareholders there may eventually be; the specific criteria necessary for someone to be considered for ownership; what increased responsibilities, expectations and rewards go along with ownership; how the stock of the firm will be valued and what mechanisms will be put in place to facilitate the buying and selling of firm stock as shareholders are added, and again when they eventually leave the firm.

Having a thought out and articulated ownership plan for your firm can offer enormous benefits. You can use your developed plan to help you retain and provide incentives to your current up and comers by showing them the opportunities available as they continue to grow and mature over time at your firm. A plan can also assist in attracting new key staff by being able to share an overview of your firm’s ownership plan as an integral part of the recruiting process. Not many firms have plans and therefore in a position to do this, which creates an advantage for those who do.

Is becoming an owner an all or nothing proposition at your firm, or will you create several intermediate steps or layers leading up to ownership itself? Within the ranks of owners, will all owners be equal or will there be varying levels? Your finished plan should illustrate the "path" for how staff might ordinarily expect to advance within your company.

Picture in your mind this path as looking like a profile of a staircase with a series of upwards steps. The criteria and conditions for reaching each step, or plateau along the way, should be thoroughly described. For some staff members, based on a combination of ability and ambition, any one step can become an ultimate destination as they may be lacking necessary attributes to go any higher. For certain others, the steps will serve as intermediate waypoints all the way to the highest levels of ownership.

Pricing and terms of ownership are important components of any plan. Keep in mind that for internal buy/sell ownership programs you are dealing with a closed-loop system, i.e. there are no outside buyers bringing fresh investment capital into the transaction. The typical employee has a limited amount of assets or income available to invest in company stock. No matter how you cut it, the company has to redistribute its disposable income in such a way as to provide additional income to the buyers so they may in turn re-invest back into the company (closed-loop). Due to this fundamental limitation, internal buy/sell programs as a rule tend to result in stock prices toward the lower end of the price spectrum when compared to selling the firm to outsiders, if and when that option exists.

For a truly viable internal plan, the price established for the stock must not create an unreasonably high hurdle to new shareholders purchasing stock, or create an undo burden on the firm when a shareholder leaves the firm and their stock must be repurchased. What’s more important? To get a few more dollars per share for the stock as it is sold, or is the real financial value from selling stock internally realized year over year in the form of consistently strong profits and continuous success enjoyed by all shareholders through attracting and keeping your key people by offering them affordable access to ownership.

Wahby and Associates