October 2012

Plan to Live Forever - Part Deux

Perpetual life for people. Not possible, of course; but what about our spirit? It’s the concept of “spirit” that often influences the conversation about maintaining the ongoing operations of companies in our related businesses. That – and legitimate financial imperatives, which inform common sense and putting food on the table. “Get to the point!” you might say. OK – Ownership transition, AKA succession planning.

What is the context?

In an ideal world, management and ownership passes from one generation to the next, or from one group of stockholders to another, with limited fanfare.

Some think Walmart might be an example. However, we might want to look at more relevant prototypes in our AEC realm. Two examples:

• Payette Architects in Boston, founded in 1932, is now into its third generation of leadership.
• Daniel O’Connell’s Sons, Contractors founded in 1879, but still making its presence known in the industry.

But, perhaps less enthusiastically, I might ask, “Have you seen any of these happen?”

• A sole proprietor Architect who simply closes the doors when she retires.
• A small practice Civil Engineer, whose spouse is faced with a liquidation sale when he dies suddenly, and the company had no buyers for the practice.
• A large A/E firm that gets gobbled up by an even larger international conglomerate.
• Talented, productive people leaving employment, moving on to other opportunities because they see “no future”.
• A well-meaning CEO who pushed for an ESOP, only to have a coalition of unsatisfied stockholders force him out of the company.
• A medium-sized Architectural firm that had to consider being acquired, because senior management had no means to buy out the one major stockholder anxious to retire.
• A family-run construction company, where the younger generation had no passion for the business.

The survivors – those who have avoided the pitfalls – have either lucked into or effectively planned their futures. I believe planning is more reliable than luck.

Some people assume there are important business entities that are essential to this issue. What’s yours?

• Sole Proprietorship
• Single Member LLC
• Multiple Member LLC
• Partnership
• Limited Liability Partnership
• Professional Corporation
• Privately Held CorporationPublicly Traded Corporation
  or
• Any of the seemingly infinite permutations authorized by your local state or district.

I’ll grant you, there are some that offer options that might make life easier; but the entity in and of itself doesn’t dictate the attitudes that are essential for success. Their primary impact is on the mechanics of the turnover. In the discussion about succession planning, they are more a consequence – the means to an end.

In the context of this topic, discussion of mergers and acquisitions can be both relevant and distracting. There are countless reasons why strategic partnerships are formed. Many are instigated by collaborative discussions, with carefully crafted moves for business development and other satisfactions. Some are a consequence of unexpected turns in the fragile economies of our business. Others, however, are sadly a result of insufficient planning for succession – where the move is undertaken to resolve an unstable business situation. Hardly the result of proactive leadership.

What are the intentions? What Matters?

Control? Profit? Glory? Legacy?

If you’re a principal owner, what do you want to happen?

• Let the business fade into non-existence when you’re gone?
• Nurture and enable successors to the enterprise to assume leadership?
• Fend off predators?
• Perpetuate ethical, creative or business concepts?
• Protect investors and investments?

Sometimes execution can be challenging, with possible compromises to expectations. But, let’s give it a go.

Fundamentals

Take a long-term view. Plan for two generations, minimum.

This has multiple benefits. For those at the top, there is assurance the immediate transactions will happen, with perpetuation of the business and ethical values that are deemed important. Conversely, for those further down the pecking order, there is a clear indication of a path to the top – a good reason to maintain devotion and commitment to the cause.

Enable the financials

Thriving businesses usually have positive monetary value; and for a transition to occur, the valued asset inevitably changes hands. How is this meant to occur? Is stock purchased? Are shares handed out as bonuses? Is there an ESOP, with heavily regulated tax provisions?

It’s one thing, for example, to nominate senior managers to positions of ownership; but where does their investment come from? A good plan has built-in means for those people to find the funds. They might be given stock at the same time as they receive a bonus to offset the tax consequences. Or, they might be entitled to buy in, and there is a source of loan funds with reasonable repayment provisions, specifically designed for this purpose.

Nurture the “family”

There is a phenomenon in Japan, virtually unheard of in any other country, called “Adult Adoption”, with estimates of up to 98% of adoptions in Japan being young men in their twenties. Don’t believe me? Check out this scholarly article at http://goo.gl/bL0PV. This is their way of getting qualified people into the line of family business succession. Neat, huh?

OK, here in North America, we’re perhaps less creative; but that doesn’t mean we shouldn’t pay attention. Are the blood relatives being properly trained? Are they working into positions that fit the needs of the organization?

And, what if ‘blood’ is not a big concern? Under any circumstance, mentoring and staff development are essential to any organization's perpetuation. If the ‘Owners’ are stumbling into leadership roles without preparation, failure is clearly more likely.

Seek ‘Good’ Mergers and Acquisitions

Above, I alluded to the variety of reasons for mergers and acquisitions. Let’s say two companies have complementary, but non-competitive, interests. There may be good value in joining forces. A ‘whole’ greater than ‘the sum of the parts’ is possibly more likely to thrive.

Beware of Unintended Consequences

The example of the CEO and the ESOP was real. Go figure. A coalition formed against him, and he was soon gone. Obviously, the survivors had a different notion of transition than the former CEO; and he no longer works at the company that bears his name. Maybe this was for the best. Time will tell.

The moral of the story is that one needs to cautiously monitor developments to ensure things are going according to plan; and, importantly, the plan needs to have contingencies if things start to go awry. Remember, though, few things in life are guaranteed.

Get Help

Sure, this sounds like an obvious admonition from a consultant. Your business expertise is probably focused on your service or product, and you may be self-confident in your common sense; but there are people who do this for a living

Find them, use them, and be sure you maintain your company’s elusive ‘spirit’ while addressing the mechanics of the plan.

‘Life’ Perpetuated!

Not the same as perpetual life, of course. Nevertheless, keeping your business alive – short term, long term, and into future generations may be a worthy goal. Plan wisely.

Missed earlier newsletters? Find them here:

July 2012  “A Midsummer Dream”
May 2012  “Are you Virtually Working?”
March 2012  “Your Huddled Masses”
January 2012  “Observing Observations”
October 2011  “I Want What I Want”
August 2011  “A Beach Read”
May 2011  “NeoLuddite or Technophile?”
March 2011  “Do Your Silos Leak?”
January 2011  “Plan to Live Forever!”
November 2010  “May I Have A Plan, Master?”
September 2010  “How do we choose?”
July 2010  “Good People Behaving Badly”
May 2010  “LEED: LEADing or Dead Weight?”
March 2010  “Why does it cost so much?”
January 2010 “Design/Builders show us your softer side.”
November 2009 “What the Facilities?”
September 2009 “Why Do Architects Make Good Owner’s Reps?”