Succeeding at Succession
Succession plans should be more than schedules for transferring ownership— they should be integral to a firm’s strategic plan to recruit and develop talented staff
inancial components of a transition plan
The human-resources-related strategizing that one must do to put a transition plan together comes pretty naturally to most principals and their successors. The financial mechanics of the ownership transfer present the greatest potential for trouble. Firms really benefit from a specialist who is experienced in firm ownership transfers.
Lowell Getz, an accountant from Houston and a financial consultant specializing in ownership transition planning, has succinctly explained the three elements, as follows:
The financial transfer. The basic idea behind selling a firm is that ownership of the property is transferred from one generation of principals to the associates who will succeed them. The biggest issue is that younger associates don’t have a lot of money to buy into the firm, yet the owners deserve a fair price.
The schedule. This shows how much is divested by those who are selling and how much is acquired by those who are buying each year (see Table 1, page 60). If future successors are identified early, they are motivated to stay with the firm, contribute to its success in a substantive way, and have an opportunity to distribute their financial obligations over a longer period of time.
The communications program. This introduces the succession planning and ownership transition to all the stakeholders, and explains the benefits and risks of owning stock or a partnership interest—specifically, how the firm’s plan will transpire.
The value of the firm
Arriving at a rational price for the firm that is understandable and fair to both buyers and sellers is an art. There are a range of possible values. One is simply the conservative net worth, or “book value,’’ which is defined as assets minus liabilities. Another way of assessing worth is by a firm’s “premium value,” which includes net worth plus intangibles such as goodwill, reputation, the ease with which the firm is successful at acquiring new work, the staff’s experience and skills, and other factors, including backlog, history of returning clients, markets served, and financial history.
Getz suggests that a firm’s value is not a single number, but a range, depending on circumstances (see Table 2, page 64). Getz cites two examples. If a firm is in trouble, perhaps facing the loss of a key rainmaker, the firm may only be worth liquidation value. At the other end of the spectrum, a firm might be acquired at a premium value if it is of interest to a potential external buyer.
One way to recognize some of the firm’s ongoing business value is by applying a formula, typically incorporated into the company’s buy/sell agreements, such as net worth multiplied by a factor. According to several management consultants, today the fair market value of architecture firms that are being transferred internally is typically one to two times net worth. Boston lawyer Carl Sapers, Hon. AIA, provides an example of another valuation strategy: The “Boston formula” values a firm on the basis of net worth plus 15 percent of one year’s receipts. An independent, external appraisal may be a valuable assist in any negotiation, but there is an associated expense. Michael Strogoff, AIA, of Strogoff Consulting, states that “as with all business transactions, the ‘fair market value’ is eventually determined by discussions between a willing buyer and a willing seller and is subject to the actual terms of the ownership transfer.”