As owners enter the final years of their careers and ponder ownership transition, they have to make some concessions.
Having your cake and eating it too. It’s a phrase we have all heard a thousand times. But I never took the time to understand what the phrase meant, much less how it came to be. In 16th century England, Thomas, Duke of Norfolk, is recorded saying, “A man cannot have his cake and eat his cake,” and in 1546 the writer John Heywood wrote, “Wolde you bothe eate your cake and have your cake?”
While these are English examples, the concept is one that spans across cultures and throughout time. In Korea an analogous idiom is, “You can’t catch two rabbits at the same time.” In the Netherlands, “To save both the cabbage and the goat” has been used to describe the phenomenon of our inability to cope with two mutually exclusive happenings at once.
As a founder of an AEC firm, or a long-time partner, one may be accustomed to having all the benefits of strong profit distributions, control, influence, status, perks, and having the ability to do as one pleases. But in the event of an ownership transition, one is confronted with this conundrum: How should I be compensated as an outgoing owner while also creating a program that makes it feasible for an internal transition to occur? For one, developing a value indication by either a formula or a formal valuation gives us a baseline for the magnitude of the offerings. This gives us an idea of how much one may have to sacrifice in the way of a bonus or profit distribution in a given year to free up capital for the incoming owner to purchase their ownership.
For some this seems preposterous or inefficient. Why would I “give” someone my money just so they can be taxed on the additional income while they then turn around and give it back to me? Good question! But this justification, among others, may be the primary reason why some leaders take so long to make the decision to sell internally. The fact is, almost anything being sold and purchased in the United States (or the world for that matter), has some legally binding consequence, like taxation. The formal buying and selling of ownership in a privately held company is no different. Owners grapple with the idea that the industry and the buyers in their “market” do not have the kinds of funds needed to outright purchase their ownership. The majority of internal transitions require some kind of financing through the firm using cash flow from operations. Navigating this slippery slope is the crux for many aging owners.
The idea of working less than 60 hours a week or not having the ability to have cart blanche access to control is difficult for some owners in the AEC industry. They think that if they are going to be involved in the business at all, then they are going to be the one making all the decisions even if they are not the majority owner. If they are still involved in the business as they sell down, they still need to have 100 percent of the rights that they used to have when they were the majority owner.
As aging owners enter into the final years of their careers, they have to make some concessions. You are being given the opportunity to be compensated for your equity, while potentially working part time and slowly stepping away from the business. For founders, their businesses are like their children and it’s a challenge to separate the emotional, financial, and operational obligations of leaving a business they helped build.
The answer, perhaps, lies somewhere in the preparation phase. We have to position the firm and ourselves so that the impacts and mechanics of the transition are not debilitating or surprising. It should be mapped out and some solid understating of the owner’s roles and rights should be communicated. This means we may have to bake additional cakes, learn how to catch two rabbits at the same time, or grow enough cabbage to feed ourselves and all those goats.
Will Swearingen is director of ownership transition advisory services at Zweig Group. He can be reached at firstname.lastname@example.org.