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CASHING OUT: OPTIONS FOR DESIGN FIRM
OWNERS
Howard G. Birnberg
Like death and taxes, ownership transition
is inevitable. Whether voluntary or involuntary, all design firm
business owners need to plan for transition. While there are many
methods to achieve a transition, in reality, for most owners their
options are relatively few.
OPTIONS
1. For many owners, the most obvious
solution is to sell to existing staff, particularly those
with project management experience. Project managers often possess
necessary marketing, personnel, financial and other skills. What
they usually lack is the financial resources to acquire the business
from a current owner. Even where financing can be arranged, the
successors need to be sure that cash flow will be sufficient to
maintain operations and pay off the retiring owner. Many design
firms have been burdened with unmanageable cash outflows to pay
departed owners.
The retiring owners must have strong
confidence in the new owners ability to maintain the business at
least until they are paid off. Unfortunately, many successors have
been too long in the shadow of the retiring owner particularly if
this person founded the firm. The new owner's ability to operate
the organization without the guidance of the founder is often weak.
2. Some current owners may have children
or other family members who wish to assume ownership of
the business. It is a rare circumstance, however, where a family
member is both interested in owning the business and capable of
doing so. The additional issue of the morale of key staff who are
not given the opportunity to own all or some of the business must
be considered. Many may chose to leave when (as they perceive) a
less qualified son or daughter becomes the owner.
3. For many design firms particularly
smaller ones, the only viable option becomes termination of the
business. Lacking key staff interested and/or capable of purchasing
the firm and not finding an interested outsider, there is no other
alternative. Unfortunately, options may have existed when the owner
was younger, however, many wait until it is too late.
4. Where a design firm has value, selling
to existing staff may not be the only option. Many design practices
are sold to other design firms or to non-design companies. For
existing owners this is often the cleanest, safest and most lucrative
way of cashing out. Structured correctly and with the right buyer,
many existing design firm owners find this the best alternative.
Care must be taken to find the right buyer, negotiate a value-based
purchase, reassure current staff, and retain existing clients.
Your design firm may be of interest
to another because of a unique expertise, loyal client following,
location in a strong market area or for many other reasons. Often,
matching the right buyer and seller takes time. It may be necessary
to revamp the operations of the selling firm to make it more appealing
to a buyer. This could include improving your project management
system, enhancing information reporting systems, investing in better
technology, or taking many other actions.
Sales to outsiders can take many forms.
Some are mergers with other design firms where the synergy of the
combined firm is creating increased value. In other cases, a younger
individual is brought in from the outside and groomed as the successor.
Some sales are simply a total buyout by another firm allowing the
existing owner to retire or to move on to other ventures.
STEPS TO TAKE
Your first step should NOT be to hire
a valuation expert. The current value of your firm is not of significant
importance unless the sale is to be immediate. Time should be your
ally and you should use it to maximize your firm's value.
1. Perform a self-assessment on
yourself and on your business. This must be an objective look
at your goals, aspirations, plans, etc. Do you want to stay involved
in the practice? Do you have hobbies and other business interests?
When do you want out? If you sell to outsiders will your staff remain?
Are there viable outside buyers you know? Are your children interested
in continuing the business? Are they capable? How is your business
unique? Will your clients remain with new owners? What are the strengths
of your business? What are the weaknesses? These and dozens of other
questions need to be answered.
2. Have an outside assessment performed
on your fi rm. In answering the questions raised above, you
must be as objective as possible. You must also realize that objectivity
is very difficult to achieve. An outside advisor can bring objectivity,
outside experience with ownership transition, possible buyers, ideas
on how to improve the value of your business and many other benefits.
Some suggestions on finding the right
advisor will be discussed later in this article.
3. Seek to maximize value by improving
your firm's operations, profitability and organization. To maximize
the value of your business may require fundamental changes in operations
such as implementing a strong project management system. Other changes
may be more cosmetic such as cleaning up your office space or reorganizing
work areas. Some changes will require time and advance planning.
It's to your benefit to begin planning for a transition well in
advance.
4. Obtain a preliminary valuation.
A complete valuation is very expensive (at least $7000) and
likely to be unnecessary at this point. A preliminary valuation
based on general rules of thumb will give you a "ballpark"
idea as to your firm's value. While beyond the scope of this article,
information on valuation is available from "Ownership Transition:
Options and Strategies" by Lowell Getz, CPA and Paul Lurie.
This excellent book is published by the American Consulting Engineers
Council, (202) 347-7474.
When and if needed, a complete valuation
can be conducted in the matter of a few weeks. Valuations are often
conducted by a firm's own accountant who may have little experience
in valuing design firms. As a result, the accuracy of the valuation
can be in doubt. Seek an expert in valuing design firms.
5. Unless you are planning an internal
buyout or are selling to family members, you need to seek out
buyers. This is not an easy process for most firm owners. You
must be careful not to alarm or concern staff and clients. Some
competitors may use the knowledge that your firm is on the market
to turn potential clients away from you. You must recognize that
you are not objective in evaluating possible buyers and their offers.
It may be best for an outsider to confidentially seek buyers for
you.
WHO CAN HELP
Ownership transition is not a simple
process. Many advisor's help will be necessary for you to achieve
your goals. It is extremely unlikely that any one individual will
be able to successfully assist you in the entire transition.
Initially, you should consult with
your Certified Public Accountant (CPA). This individual will
review your tax options and general financial issues. At this point,
a full valuation should not be undertaken. Only a preliminary value
for the business needs to be determined.
A business advisor or management
consultant should
be retained to increase value in your business. This may be achieved
through a reorganization, by conducting a study of your existing
and potential market, by assisting you in evaluating your options,
by analyzing the capabilities of your current staff and through
a variety of other means.
Once your options are known and value
has been maximized, a business broker
business broker may
be of help. Obviously, for an internal transfer, shut down or sale
to a family member, a broker is not necessary. However, for an external
transfer, a credible broker can confidentially help to find a buyer
and ask the questions you cannot. Their fee is normally based on
a percentage of the sale price (typically 5%5%).
As a result, it is in their best interest
for you to maximize the price you receive for your business.
Finally, your attorney
attorney or one more
experienced in design firm ownership transition should be retained
to complete transfer documents. This individual should also advise
you on any continuing professional liability exposure you may have
after the sale.
Howard Birnberg is Executive Director
of the Association of Project Managers. He can be reached at (312)
664-2300 or by e-mail at Assocpm@ix.netcom.com.
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