Six critical elements of AEC firm ownership transition
Ownership transition is a complex and ever-changing problem for the majority of AEC firms. No two firms are alike – so no universal formula or methodology will work in every situation.
Creators of internal ownership transition plans often overlook these critical elements:
1. The need to create a strong internal market for the stock. Leaders must maintain the capitalization of the firm. That means that as shareholders sell back, someone needs to be there to buy the stock. The stock has to appreciate, pay annual returns to the owners, and be reasonably liquid in case the shareholder needs to sell it. And, the company needs to “sell” the opportunity to purchase stock and explain why it is a worthwhile investment.
2. The need to plan for the departure of certain key, large-holding owners. If you don’t have a model that shows the effects of departing shareholders on the capitalization of the firm you are woefully unprepared!
3. The relationship of stock sales to the need to raise (or preserve) operating capital. Too many firms seem to act like stock sales are completely independent of the firm’s need for capital, and instead base it on some arbitrary ratio of the number of principals to employees, or something else unrelated.
4. The need to cover tax obligations for owners of S-corps or LLCs. Some amount of owner distributions has to be paid out to shareholders of profitable firms who also happen to be working in S-Corps or LLCs, as the tax obligations flow straight through to them.
5. The need to get more stock into the hands of those best able to influence the company’s future success. Generally, but not always, this is the younger, more active shareholders.
6. The need to have a valuation formula that parallels, if not reflects, what the real market value of the firm is. Arbitrary formulas based on book value may encourage the stripping out of capital each year as a dollar left in the till will only be a dollar down the road. As a result, people may not do what is ultimately in the firm’s best interest. More info on valuation formulas.
Zweig Group can help with every step of ownership transition, from the financial modeling to the internal and external communications. Learn more about Zweig Group’s ownership transition services by clicking here or contact Will Swearingen, Director, Ownership Transition at 479.435.6977 (direct).