The Five “P”s of Successful Internal Ownership Transition
Written by Matt Henry
There are several ways to transition ownership of an A/E business including internal buyers, external buyers, and ESOPs. Like many founders, ours at Fehr & Peers chose the internal transition as their preferred option. Unlike many founders, they were able to make it work. Here’s a quick summary of lessons we’ve learned about the ingredients necessary for success.
- Priority –We recommend you treat the ownership transition planning effort as if you were buying a company, because you are! You must therefore give it the highest priority and scale back or postpone other major investments (e.g., acquisitions, new offices or service lines, non-urgent debt repayment, etc.) so you have the time and money available to make it work.
- Planned – Of course, you need a plan. But the key here is to make sure your plan is realistic and only changes if all parties agree. Most important (and very often lacking) is the firm commitment of the sellers as to exactly when they will sell their shares. Most sellers hesitate to make this commitment because they’re not exactly sure when they will be ready to sell. That’s definitely an understandable human emotion, but so is the buyers’ frustration over a lack of certainty on timing.
- Patience – Virtually all of the successful internal transitions we’ve seen took several years to complete. In our case, it took about 10 years from the first transaction to the last. Sellers looking to receive a large portion of funding early on should choose other transition options because very few buyers have a wad of cash laying around. Buyers must embrace the concept of deferred gratification, knowing that their time will come in terms of both control and reward.
- Profitability – As noted above, very rarely do buyers have lots of cash available for an internal transition so the majority of capital needed must come from the firm’s profits. In our experience, this is only doable if a firm is operating at or above 10% pre-bonus profit and you have a reasonable rate of collections. You must also be able to sustain that level of performance throughout the transition period to ensure success.
- Price – Greed kills a lot of things in life, including ownership transitions. Sellers need to be willing to accept a somewhat lower price than they could get from an external buyer in order to make it work. Hopefully you can consider it a small price to be paid for the sustained independence and enduring legacy of your creation. Buyers will also need to be willing to make some compromises and sacrifices along the way, whether it be price, payment terms, or other considerations.
In summary, getting ownership transition right is arguably the single most important component of an A/E firm’s enduring success. The process is complex, nuanced, and challenging from many perspectives, not the least of which are the emotions of all parties involved. If your firm lacks experience in these matters, we strongly recommend you seek the advice of others who have successfully navigated this process before.