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Ownership: Setting a Place at the Table

Dear Dave
My partner and I are in our early fifties and equally own our firm. We currently have about 70 fulltime staff and invoice over seven million dollars annually.

We have four or five very key staff members who have been with us for several years and range in age from the early thirties to mid forties. Several of these folks have questioned us more than once about the potential for ownership. So far, we have shrugged it off, but I don’t think we can continue to take that approach too much longer or we may begin to see some leave even though we pay them extremely well for their services. My partner and I don’t feel we are ready to open up ownership just yet. The two of us work well together and don’t want to run the risk of having new owners enter the mix and spoil that relationship. Second, to be blunt about it, our practice has never been more profitable and we are quite frankly reluctant to share it. What can we do?

Dear WJ
All things must come to an end. Sooner or later, you’re going to want to cash-in and retire. Assuming you don’t intend to someday sell the firm to outsiders (what if no one wishes to buy?), or simply close the doors and walk away (not nearly as easy to do as it sounds), you would be well served by developing a pro-active plan for the eventual internal transition of your firm. By developing and communicating your plan now, you will entice and motivate your “B” generation to hang-in there in the interim, and help to ensure you will have a ready market established for your shares when the time does come for you and your partner to leave.

Internal transition is best thought of as a long-term, evolutionary process as opposed to being an overnight revolutionary process. It is best to implement internal transitions gradually, over five or more years, to minimize disruption and to allow ample time to regroup and try again should the first effort be unsuccessful for any reason.

Transition plans have two separate components: a management/leadership transition, followed by an exchange of equity transition. I advise my clients to always leadoff with a program to transition management followed by a gradual exchange of ownership to the extent the management transition has been time-tested and proves to be effective. It serves no one’s interest to sell stock to an unproven generation of new owners.

In your particular situation – principals in their fifties, 70 member firm, good financial performance and a group of younger key people nipping at your heels for ownership opportunities, you have nothing to lose and much to gain by planning now for the inevitable.

Begin the management transition phase by separating strategic management activities from operational management. Strategic management involves matters of firm vision and long-term direction; establishing goals and objectives; the development of operating policies; coaching and mentoring of promising staff members; general oversight of firm operating performance; programs to maintain key clients while attracting major new clients and the creation of future services. Operational management is more task oriented and is centered on routine activities done on a daily, weekly, monthly basis to accomplish the work of the organization in line with the direction provided by the strategic management process.

You and your partner should initially reserve strategic management for yourselves, while implementing an organizational structure and a timetable to gradually turn over operational management duties to those individuals who have the capability to someday become leaders and owners. Done well, you and your partner will continue to enjoy the satisfaction of your exclusive personal relationship at the strategic level, while passing the yoke of routine activities to others. As your comfort and confidence grows, gradually increase the exposure of your operating managers to matters of strategic management, as it feels right to do so.

A few years from now, with the management transition well underway and working satisfactorily, turn your attention to ownership transition. If you and your partner are still not willing to begin to sell down and dilute your economic stake in the organization, an initial ownership plan can be keyed to future growth. Throw down the gauntlet and challenge your management team to work with you to “grow” the firm. As a carrot, offer to share a stake in the incremental growth created. No growth? No stock.

Let’s assume the calculated economic value of your firm today is the equivalent of a ten-inch “pie”. By plan, when the pie reaches say perhaps fifteen inches, pledge to sell an ownership stake equivalent to some portion of the additional five inches to those who have most helped to make it happen. With this approach, you’ve made additional ownership available without personal expense. While you now own a smaller percentage, it is of a much larger pie. At the same time, you have created the perfect opportunity to test the practice management abilities of your potential next generation owners in action.

When the time finally does comes to wind down your ownership stake in the firm, a series of orderly sales should take place reducing your interest while you work to complete a transition of any remaining items of strategic or operating management not yet transferred to the next generation. Some principals prefer to have their stock interest bought out while still active in the practice. Others wish to keep their stock until the day they are ready to leave and are willing to accept payments after they are gone. It really comes down to a question of personal comfort and preference.

A transition process can be designed to fit just about any circumstances. The main ingredients for success are a capable “B” generation of up and comers, a steady flow of profits to fund the equity exchange and a well thought out plan.


Wahby and Associates