Synopsis of the AIA Trust white paper: Selling, Merging, or Closing Your Practice? An Overview of the Many Processes and Factors to Consider When Choosing a Course of Action
Often overlooked until partners are considering retirement or otherwise moving on, the topic of ownership transition is a vital strategic planning step within a successful architecture firm. To realize a smooth transition, a firm owner must consider the firm’s future years in advance of making any transition – whether it will be to sell, merge, or close a firm. Each alternative presents differing financial and taxation consequences. To understand the impact to leaders, staff and clients, the seller and firm shareholders must review and agree upon expected changes to firm culture, leadership and autonomy.
Privately owned firms of all sizes must transition ownership and leadership of each generation if they wish to sustain themselves as independent entities. Uneven financial performance of many firms has made internal ownership transitions much more difficult to realize. While an improving economy fuels mergers and acquisitions, a stagnating economy contributes to a lack of preparedness within firms to transition to new leadership. The important question for firm leadership to determine is whether the firm has set up the internal processes to cultivate future leaders and pave the way to a smooth ownership transition.
Numerous hurdles exist for internal ownership transition and leadership succession program which must be addressed. A recession economy can inhibit the capability of younger owners to finance their purchase of shares, thus delaying typical paths for leadership succession. An improving economy will increase the likelihood of successful internal transitions since an infusion of profits is necessary to finance the purchase of shares from older leaders. The next generation of architects must possess both the inclination and the entrepreneurial business instincts and skills to lead a firm.
The factors that lead a firm to seek an external transaction include higher valuations, ownership transition or leadership succession failure, client demands, diminishing financial performance, and ongoing employment for firm owners and staff. When a firm is financially successful and can fund redemptions of senior owners, the firm may seek to attract leadership from outside the firm.
In determining whether to sell or merge, there are a multitude of issues to consider, such as: whether the cultures of the buyer and seller are compatible; how the personal property of seller shareholders will be handled; what are the tax ramifications to each party; whether there are retention agreements in place to motivate the seller’s employees to remain with the buyer with clear employment terms. Numerous post-closing determinations must also be made for operations, management, communications, and transition costs and related decisions.
The transaction process of a sale or merger may follow the chronological steps outlined in the paper. These steps start with getting all financial and HR records in order through until the sale is approved by the Board of Directors of the buyer, of the seller and by the shareholders of the seller.
When firm owners believe that neither an internal transition nor a sale/merger can be consummated successfully, they will decide to close the firm. The disadvantages to a firm closure include lower net proceeds to the owners and no continued employment for owners and staff. When closing a firm, there still may be contractual obligations for leases and other contracts and liabilities to be settled. In addition, the firm may need to retain staff to complete contract obligations and purchase professional liability tail insurance as required by contracts and to insure against claims arising after closing. The process of a firm closure illustrates substantial challenges and disadvantages and thus it is rarely the preferred course of action. A sale of assets dissolves the selling firm and firm leadership and employees become part of the culture and staff of the buyer.
Running a firm that is successful and profitable is not enough. To create real value in a firm that could later fund a founder’s retirement, great attention needs to be paid developing and retaining the next generation of leaders. Employees should be recruited and retained who have the potential to take the firm into the future. The final decision of whether to sell, merge, or close a firm will not only affect the financial return to the owners, but the employment of staff, and the firm culture. Whether internally changing the ownership of a firm, dealing with an external buyer, or merging architecture firms, the AIA Trust white paper addresses the practice and business issues that will ultimately determine success or failure. Change is inevitable. Understanding the various approaches and possible outcomes can help guide firm principals to chart the best path to their future and be prepared for it.
For more detailed definitions and explanations please refer to the entire white paper: Selling, Merging, or Closing Your Practice? An Overview of the Many Processes and Factors to Consider When Choosing a Course of Action. For more resources about ownership transition, visit the Ownership Transition Resources page on the AIA Trust website.