Fools rush in

Ownership transition is not just about new owners taking over anymore

Here's a pair of observations culled from some 25 years in the design industry: 1. There are many fools who think they want to be company owners. 2. There are very few fools who become owners. . . and succeed.

Ownership of a well established, existing business carries no assurance of success. In fact, in today's climate of compressed corporate life cycles and rapid development, taking over an existing business may be the riskiest way to go, especially if the buyers are part of the current in-house management team.

Yet when buyers and sellers rush into an ownership transition, they will do foolish things; when they go more slowly with a map of where they are going, they can make calculated risks that pay off. Here are some ideas for mapping a successful ownership change in today's fast-changing world.

A few small repairs

If you build a successful small-to-mid-sized architectural or engineering business, you probably come from hardy stock. You're driven, competitive, disciplined, ambitious, and very good at what you do - both technically, and as a business manager. You are also sorely tempted to believe that your success can be replicated by others if they do what you did.

If you work for such an owner, and want what he or she has, you will intuitively try to absorb the qualities and behaviors that define the success you admire. It can look seductively easy. You may even imagine that the company you want to buy from your mentor can continue to succeed simply by maintaining its present state. Why fix what ain't broke?

One could say the same thing about a set of brakes that begin to squeak after 100,000 miles but haven't failed yet. Historically, you can point to a great track record. But only a fool is going to climb behind the wheel and start speeding down the new-world highway without making "a few small repairs." Most likely you are going to end up with a whole new car by the time you are done.

A new beast of burden

Ownership transition in the world of small and mid-sized design companies is an entirely different beast than it was even 10 years ago. Once upon a time, this beast had a more genteel quality: owners sold, buyers bought, and the incoming owners assumed similar roles while operating a company pretty much in the same form bequeathed by the founders. They were good stewards of their corporate heritage, applying lessons they learned as apprentices to their successful elders.

Today, incoming owners confront a cultural upheaval in our industry that simply demands a different focus and set of tactical skills than the founders required. That's because the means for success in design firms has changed radically over the last two decades, and change is accelerating exponentially. Some of the organizational qualities a competitive leader in today's environment include:

• An emphasis on "equity client" relationships. Successful firms and their core clients are forging deeper, more profound business relationships in which both sides develop a vested, interdependent interest. Rather than providing standard service products, these companies are customizing their services and organizing their businesses around the specific requirements of their key clients. The process requires a wholly different approach to organizational development, technical operations, and marketing.

• An insatiable organizational appetite for ongoing change and development. A broader range of client demands, customized services, changing product delivery processes, and emerging technologies require new staff skills, new training, new tools, new kinds of workers and recruitment strategies.

• A fundamental shift in marketing strategy. Many successful firms are moving away from the request-for-proposal-driven machinery for developing new projects and moving toward more sophisticated marketing resources that emphasize research, client service, information-management, and internal organizational development.

• A higher degree of management skill necessary to build and develop integrated teams of diverse specialty players, and deliver projects of increasing complexity.

• Huge infrastructure requirements (and investments) for network technologies, website services, production tools, and database systems - all of which require constant maintenance and updates.

• More sophisticated financial management skills to address highly pressured cashflow demands: unrelenting infrastructure investments, escalating salaries and increased staff investments for training, bonuses, retirement planning.

Small and mid-sized companies founded 15 and 20 years ago or more will today be frequently underfunded and largely undeveloped in some or many of these areas. Start-up owners back then could choose to stay uninitiated and still succeed on their own terms. Command and control management styles meant limiting service and growth to the specific abilities and interests that the founding owners brought to the organization. And technology "costs" could be limited to a few computers for accounting, CAD-work, and word-processing - i.e., a few new tools to replicate essentially the same output that had previously been produced manually.

New or second-generation would-be owners for these companies must rein in a transition beast whose burden includes some fairly heavy baggage carried in from the new world order of the architecture and engineering industry. In one bag is the true buyout price: the selling price of the outgoing owner's equity plus the cost of retooling the organization on many levels. In another bag is the daunting management challenge of rebuilding the company's infrastructure, operations, and staff while maintaining its core competitive advantages and key client relationships. And both bags seem to remain full no matter how much time you spend unpacking them.

Crisscrossing highways through time

Under these circumstances, ownership transition is less about changing company owners than it is about fundamental reinvention, reorganization, and cultural change within the company. The process deserves a lot of thought and planning; more importantly, it deserves an extended period of time - at least two to three years - to fully accomplish.

Like any business venture, you begin with a written plan - in this case, a company transition plan for mapping and tracking several crisscrossing highways along a timeline of, say, three years. It should include:

• Company Direction - to anticipate the range and rate of change and development for the company. Include goals, strategies, action steps, staff training and recruiting needs, client development and marketing activities, and a projected financial plan for the new organization.

• Investment Provisions - to detail the cash requirements and funding sources for the buy-sell transaction and for the expanded infrastructure and office space to support the rapid development needs of a new world, entrepreneurial organization.

• Ownership Distribution - a precursor to a formal shareholders agreement between the incoming owners: to set the terms and level of ownership that may be accrued over the transition period, based on specific performance measures (see below).

• Reorganization & Operations Plan - through which the company organization is rebuilt around the incoming ownership team, emphasizing a fluid and organic structure that encourages change and entrepreneurial development.

Of these particular mapping tools, outgoing owners tend to have the most difficulty with the last one: the reorganization and operations plan. It amounts to the clearest palpable form of yielding control and responsibility to others who are not yet technically in control or at risk. Yet it provides the clearest expression of support to prospective successors, commitment to developing them into an integrated, solid ownership team and dedication to a successful transition (reinvention) - which, in the end, serves the outgoing owner's best interests.

Performance measures

I favor a reorganization plan that creates discrete business units, or studios, that can be tracked as separate profit centers - each headed by one of the prospective buyers, and each with its own client base, projects, service specialties, and in-house team. Although they need to share resources and talent on key projects and have a common vision and set of values, the studios should be distinct from one another so that studio leaders (future owners) can better establish themselves as leaders in their company and their industry, separate from the company's founder. Each studio leader also gets hands on training in the key features of business ownership: creating and tracking a business plan for the studio, recruiting and training team members, establishing, maintaining and expanding a base of loyal clients, managing project operations and deliveries through the work of other people. Equally important, reorganization on this scale creates a dramatic break with the past and emphasizes the future of the company.

Another purpose for a reorganization plan is to help establish the performance-based measures that will pre-qualify prospective buyers as legitimate successors over a two-to three-year transition period. These measures should be developed from the company's transition plan and should track, at a minimum, each studio leader's ability to:

• Establish client relationships/trusts: build and maintain key clients. Requires a constant feedback loop - follow-up interviews, surveys, etc.

• Deliver project performance: maintain high quality performance and client satisfaction through the work of his or her studio team.

• Provide solid leadership: build and develop a credible team around a specific client base or a support operation.

• Promote a long-range focus: think and contribute strategically to the company's direction/success.

• Provide a financial return: deliver on or exceed specific sales/profitability or budget targets.

• Manage non-technical factors: deliver on specific operational targets for marketing, financial controls, technology needs, etc.

Why wise people fear to rush

Both the founder and the buyer team should be prepared to take a hard line on these measures. Some designated owner-prospects won't measure up to the level of their colleagues, and should not be included as principal owners at the end of the transition period. In which case, it may be necessary to extend the transition period, recruit other prospective buyer-candidates, and refine the studio reorganization plan to incorporate their involvement

None of which is easy or helps one sleep soundly at night. The goal, however, is not an overnight transition of the company's ownership. The goal is to recreate an organization for the new world.

The end-result should be mutual success on both sides of the buy-sell transaction: The seller gets a good price for his or her equity in the company with a reasonable assurance the company has the level of proven management depth to generate the cash reserves to complete the buy-out while making other necessary investments. The buyers get the training and confidence they will need to build a bright future for the new company.

Fools do rush in where wise people fear to go - in love songs, in life, even in business. But it's not that wise people are afraid to go there; they just take more time to make the trip. And they take a map. Not so useful in love, perhaps, but in business, it's a good thing.

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