When developing a business ownership transition plan, there are many factors to think about. What are your goals? Will you retain any involvement? How can you prepare your business? And the list goes on. If the business in question is an architecture and engineering (A/E) firm, there are many more considerations on the table than for the average company. If you’re starting to think about ownership transition for your A/E firm, be sure to take these three factors into account.
Women Business Enterprise / Minority Business Enterprise
Having a Women Business Enterprise (WBE) or Minority Business Enterprise (MBE) designation gives your firm access to certain contracts and set-asides that you otherwise wouldn’t be eligible for. It can give you an advantage if you’re qualified, but it can also make a transition more complicated as it’s another ownership aspect to consider. If your firm is registered as a WBE or MBE it’s up to you whether or not it’s important to keep the designation. If so, you have some options to maintain it during an ownership transition. Some firms may decide to sell to a party that would allow that designation to remain. Or, you may decide to have a current owner stay on after the transition, maybe in a reduced capacity.
Employee Stock Ownership Plan (ESOP)
An employee stock ownership plan, or ESOP, is a company structure in which the employees own shares of the organization. It’s a common organizational structure, as well as other employee ownership options that aren’t ESOP. In this plan, nearly everyone participates, and the focus is more on company stock. It is a retirement fund, so participants aren’t cashing out yearly, but it’s a long-term plan with vesting recruitments. An ESOP has structural requirements that must be considered as part of a potential sale. Typically, the ESOP is terminated once a sale occurs, which means that all participating employees would need to be paid. The process of terminating the ESOP and paying out all of the employees can take time, and that extra time should be considered in your transition plans.
Instead of operating with a true ESOP, some organizations want to instead target a small group of key employees for ownership. These employees must have the income to buy into the ownership up front, but they will receive income over time.
Key Team Members
Another thing to keep in mind when developing a transition plan is who are your key people and how will this affect them? Certain employees may hold essential patents that would be lost if they were to leave the company. Take stock of what your most valuable assets are and how they can be protected. Some employees may need to be incentivized through equity. Determine if these employees need to be included in transition discussions. Be sure to discuss the plan for transitioning and onboarding these employees.
When weighing your A/E firm’s ownership transfer options, it’s helpful to talk to a team experienced in these transitions, especially in your industry. RKL’s team of transaction advisors and A/E experts has decades of experience with managing transitions and can help prepare your firm for succession planning and ownership changes. Reach out to your RKL advisor or contact us using the form below.