Succession Planning for A/E/C Firms

1. Succession Planning for A/E/C Firms Hugh Hochberg The Coxe Group hhochberg@coxegroup.com

2. Practice Made Simple Leadership Resources Admin The right clients The right talent Culture Process Management

3. Five Components of Transition~ Easiest to Most Difficult ~ 1. Ownership Transition 2. Management Transition 3. Governance Transition 4. Marketing Transition 5. Leadership Transition

4. Generational Characteristics First Generation Entrepreneurs Externally focused Work getters Risk takers Second Generation Maintainers Internally focused Work doers Risk avoiders Patient Third Generation Much like the first generation Impatient

5. 3rd 2nd 2nd Founders 2nd 2nd 2nd 3rd

6. 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.

7. Two Key Numbers 31 Average age of founders when they start their firms 41 Average age of second generation when they attain ownership

8. Sellers and Buyers Have Different Drives

9. Sellers’ Drives Fund Retirement Commit to Key Staff Retain Key Staff Spread Risk Commit to Continuity

10. 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

11. 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, and of internal results (profit, professional development, etc.)

12. 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 ~ Speaking Writing Graphics Sketching GET OUT OF THEIR WAY Take the risk that some might leave

13. 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 that meet 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.

14. 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.

15. 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.

16. Ownership Transition ~ The Mechanics

17. 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.

18. The Financial Reality Inside prices average half the outside prices. At average profitability, and if nothing else changes, owners working five years or more are 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.

19. Some Alternatives

20. 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%

21. Recapitalize the Firm Allows buyers to acquire significant ownership with minimal cash Allocates firm’s value to date to current owners Easily repetitive

22. Fix Seller’s Compensation Fix owner’s compensation for winding down period, perhaps 5 to 10 years. Compensation includes combination of salary, profit distribution, and divestiture remuneration. Reduces cash infusion by buyers. Encourages seller to assure successors will succeed.

23. 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.

24. 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.

25. 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.

26. Just in case… Hugh Hochberg The Coxe Group hhochberg@coxegroup.com Cell: 206 399-8610 Office: 206 467-4040