Culture clash in ownership transition

June 2012 » Columns » OWNERSHIP ADVISOR
W. Hobson Hogan

When transitioning ownership, sometimes the easier part to understand and plan for is the mechanics of the transition – who buys what, at what price, and when. Often, the more difficult thing to understand and plan for are cultural differences between generations in a firm. Typically, issues arise when ownership percentages or leadership is concentrated in one generation and a firm has to transition not only the financial ownership but also its way of making strategic and tactical decisions. I often see problems arise when the generation leaving the firm has maintained an ownership culture, while the up-and-coming generation has been instilled with a shareholder mentality. The competitive context in which the firm finds itself may require that the new generation act like owners, though they have been groomed to be passive investors in a firm for which they work.

The difference between an ownership and shareholder culture may not always be evident to those within a firm; however, it is often apparent to those outside looking in. To illustrate the difference, simply think about the ownership of your own home and a hypothetical fractional ownership in a vacation home that you pay a management company to operate and maintain. If something goes wrong with the vacation home, the management firm will take care of the issue with little or no effort on your part. Of course, you pay the management firm, but in return you expect them to take care of problems and manage your investment. Barring any major issues such as malfeasance, gross negligence, or poor management over a long period, the vacation management firm is likely to remain. The fractional owners may not like how things are managed, but they may not feel their stake is large enough to really change the situation. Instead of doing something about the management, a fractional owner is more likely to simply sell their stake and find another vacation investment.

On the flip side, your personal home is a completely different matter. If you do not like how your property is managed, you have one person to blame – you. The upside is once you decide to change how things are done at home, you can change them to your heart's content or until your bank account is bone dry. The same can be said for an engineering firm with concentrated ownership.

I often see issues arise in firms making their first ownership transition. The firm has been "run" by a handful of people and now must transition its leadership to a group that has until recently been dutiful followers. Since first-generation transitions typically involve more buyers than sellers, there is going to be change in the ownership dynamic. The culture of being a co-founder with 50 percent of a two-person firm is much different than being a 2-percent owner of a 100-person firm. Getting the 2-percent owner to think like the co-founder who grew his or her business from a card table to a multi-office firm does not happen overnight. Too often, they are either too aggressive because they do not yet have a full understanding of risk or they are too risk averse because the tough calls were always made by others.

Both the firm and the new owners must adapt to a new way of doing things. The firm must find a way to be more inclusive and give all owners some venue to express their opinions. The new generation must understand that companies are not democracies and someone has to step up into leadership roles. The new leaders must understand that financial risk and leadership go hand-in-hand. The exiting generation needs to be supportive and understand that the generation that is taking its place is different, not better and not worse, just different. Telling stories about how you risked your house and your wife's inheritance will not help you; finding ways to help them transition to leadership positions and being flexible in your transition planning will help.

Understanding the cultural differences between generations is one of the many steps you need to undertake to navigate a successful ownership transition. Once identified, bridging the differences with a plan that meets the needs of both buyer and seller is key to ensure that the firm will not just survive but thrive during the transition.

W Hobson Hogan, a principal at ZweigWhite, assists AEC firms with strategy formulation and ownership transfer issues, including buyer and seller representations. Contact him at hhogan@zweigwhite.com.


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