succession planning for a/e/c firms hugh hochberg the coxe group [email protected]
TRANSCRIPT
Practice Made Simple
Therightclients
Therighttalent
Leadership
Culture Process
Resources A
dmin
Management
Five Components of Transition~ Easiest to Most Difficult ~
1. Ownership Transition
2. Management Transition
3. Governance Transition
4. Marketing Transition
5. Leadership Transition
Generational Characteristics
First GenerationEntrepreneursExternally focusedWork gettersRisk takers
Second GenerationMaintainers
Internally focusedWork doers
Risk avoidersPatient
Third GenerationMuch like the first generation
Impatient
Founders
2nd
2nd
2nd
2nd
2nd
3rd
3rd
Potential Generational Issues
The 2nd generation connects more to the 1st than to each other.
The “Gen 2” members conclude that patience got them there…but patience = “blockage” to the entrepreneurs of the Gen 3
The 2nd generation resents the fast rise of the 3rd generation…because they see the “youngsters” becoming their bosses.
The reality?The 2nd and 3rd generations need each other…
just like the 1st and 2nd did.
Two Key Numbers
31Average age of founders when they start their firms
41Average age of second generation when they attain
ownership
Sellers and Buyers Have Different Drives
Sellers’ Drives
Fund Retirement
Commit to Key Staff
Retain Key Staff
Spread Risk
Commit to Continuity
Buyers’ Drives
Have a piece of the rock
Satisfy ego
Elevate marketing credibility
Express commitment
Increase compensation
Elevate financial security
Have more influence in shaping personal destiny
Firms’ Needs of their Leaders
Values and Vision
Contagious Enthusiasm
Confidence
Inspiration
Enablement
Bring in work via marketing, selling, and positioning others
Talent recruitment
Standards for quality of product, of service, andof internal results (profit, professional development, etc.)
Developing the Next Leaders
Identify the next leaders early
Set them up not to be in today’s leaders’ shadows
Allow them to fail
Encourage them to get into the community
Hone their communication skills ~SpeakingWriting
GraphicsSketching
GET OUT OF THEIR WAY
Take the risk that some might leave
External Public Relations Associated with Transition
1. Focus more on the future than on the history.
2. Reinforce the firm’s values and vision.
3. Emphasize new leaders’ strengths thatmeet clients’ needs
and fit clients’ future.
4. Make it public relations, not a one-shot thing.
5. Energize it!
6. Put the new generation in the forefront.
Internal Public Relations to Support Transition
1. Communicate inside first; then outside.
2. Make the message exciting and forward-looking.
3. Connect the message to the vision.
4. Keep staff informed of progress.
5. Emphasize time frames…
long time frame for leaders;
shorter time frame for others.
Tips for Today’s Leaders and Owners
1. Identify potential successors early.
2. Let them know they’ve been identified.
3. Set them up to succeed…
but give them opportunity to fail.
4. Hold the successors accountable…
for realistic things.
5. Get out of their way.
6. Carry your own damn briefcase.
7. Remember if they’re good enough to be your successors,
they’re good enough to be
your competitors.
Ownership Transition ~ The Mechanics
Price
Price it wherever you want…
as long as you allocate enough profit to the buyers.
Accrued book value x 1.0 to 1.3 is typical…
which equates to net revenue x .25 to .35.
The Financial Reality
Inside prices average half the outside prices.
At average profitability, and if nothing else changes,owners working five years or moreare better off NOT selling outside…in terms of compensation received.
An owner for 25 years receives over 95% of compensation in salary and bonus…
and less than 5% in ownership divestiture.
Ultimately PROFIT is the ONLY source of funding.
Some Alternatives
Shift Some of Acquisition Price into Before-Tax Dollars
Price ownership at/about cash basis net worth.
Handle the balance -- the majority -- as compensation.
How? Buyers forfeit bonus, and…
Sellers receive more ordinary income.
Taxes don’t disappear; they shift from buyer to seller...
Therefore, raise price to cover shifted tax burden.
Amount of increase?
15-20%
Recapitalize the Firm
Allows buyers to acquire significant ownership with minimal cash
Allocates firm’s value to date to current owners
Easily repetitive
Fix Seller’s Compensation
Fix owner’s compensation for winding down period, perhaps 5 to 10 years.
Compensation includes combination ofsalary,profit distribution, anddivestiture remuneration.
Reduces cash infusion by buyers.
Encourages seller to assure successors will succeed.
Today’s Leaders & Owners ~ Things to Remember
Identify tomorrow’s leaders early.
Let them know the path open to them.
Accelerate their leadership development.
Position them in the marketplace.
GET OUT OF THEIR WAY.
Don’t let mechanics become the biggest issue.
Expect some fall-out.
Remember most money comes from salary and bonus.
If they’re good enough to be your successors, they’re
good enough to be your competitors.
Tomorrow’s Leaders & Owners ~ Remember This
Get involved in the community and marketplace early.
Hone communication skills.
Don’t get overwhelmed by the price…
since you acquire ownership with money you wouldn’t otherwise have.
Understand the collective strengths and skills required for success.
If you dozed off…
Profitability is the only source to fund transition.
If they’re good enough to be your successors, they’re good enough to be your competitors.
Identify successors early…and let them know.
Leadership succession is the greatest challenge.
They don’t have to be like you were – you were perfect in every way – to be effective as your successors.
Just in case…
Hugh Hochberg
The Coxe Group
Cell: 206 399-8610
Office: 206 467-4040