The Right Stuff (August 01, 2002)

“Iunderstand you help people with succession arrangements,” Harold Blakeney said. Harold is an old family friend. We were standing under a blue August sky watching the smoke curl up from the burgers he was broiling on his backyard barbecue.

“We have a problem that I’d like to get your thoughts on,”

“Shoot,” I said.

I’m 50 years old and my partner, Dan, is two years older. We’re trying to make plans for retirement and I’m wondering if we haven’t missed the boat already.”

“What do you mean?”

“We’ve just tried to merge with a larger firm and we couldn’t come to an agreement. I think the problem is that Dan and I went into business originally so we wouldn’t have a boss over us. Now the idea of having to report to someone is repellent.”

“How big is your firm?” I asked.

“We have nine professional staff and some administrators. Including the partners, there are 14 of us.”

“How old are the engineers you employ?”

“We have one guy who’s been with us almost since day one. He’s in his late 40s. Everyone else was hired after 1990, and they range from their early 40s to a woman who’s about 33.”

“Do they have equity in your business?”

“No they don’t. Dan and I really didn’t want the complications of dealing with other shareholders.”

“You could start thinking about the succession process by categorizing your prospective buyers. Most people in your position consider that the buyers for their company shares fall into three groups: other firms, their own employees, or in some cases their children.”

“Our kids aren’t in the business. They weren’t interested in engineering. And the people we were in discussions with were excellent. The reason we pulled back had nothing to do with them. Dan and I just realized we didn’t want to deal with a bunch of people we didn’t know.”

“That leaves your employees,” I said.

“I know,” Harold said. “That was my conclusion too. But we picked these people to be our subordinates — not to be partners. Maybe that was shortsighted of us. They don’t have the money to buy us out and I don’t think they have the expertise to take over running the business.”

“Are they bright?”

“Yes. A couple of them are very bright. Especially the woman who recently joined us.”

“Are they hardworking and honest?”

“Yes.”

“How do they get along with clients?”

“They’re fine.”

“So the only issue is that they don’t have money?”

“And they haven’t brought in much business.”

“Those are two important factors,” I said. “But if the money issue could be solved, could you teach some of these people to bring in clients? How do you and Dan get business, for instance?”

“We have four or five very good customers, municipalities, that give us a lot of work. The rest of our work is usually smaller stuff that comes to us because of our reputations.”

“It sounds like you don’t work very hard marketing the firm.”

“We don’t have a marketing department. We encourage everyone to promote. Dan gives a couple of talks a year and he writes articles. That lets people know we’re still around.”

“Do the talks bring in business?”

“I don’t think Dan would ever say that he got a certain job because of a specific speech or article he wrote — but it all helps.”

“Marketing is sometimes analyzed as two different activities,” I said. “One is awareness marketing. It sounds like that is what Dan is doing with his speeches. The second is acquisition marketing, or you could call it sales: actually facing a prospect face-to-face and trying to get the work.”

Harold nodded, “That’s a good way to think about it. The problem is our employees don’t tend to do either one. They join clubs and committees and they meet people, but I don’t really think they’ve had a noticeable impact on our business.”

“That could change,” I said. “To be a decent salesperson for a professional firm, you need to be personable and knowledgeable. Everything else can be taught. It doesn’t mean it will be easy. But if you and Dan want to make it a focus of your firm, it will work. You should seriously consider developing some or all of your people for partnership.”

“What about the money problem?”

“It may be easier to solve than you think. After all, people buy houses worth $500,000 with a family income of $200,000. They don’t have the money to buy the house on day one, but they’ll earn it over the next couple of decades. All they need is a lender.”

“But who will lend them the money to buy shares in our business?”

“You and Dan will, and you should begin planning for it now since you only have about 10 working years left. We can develop a program that will allow your employees gradually to buy your shares from you. By remaining with the firm, they can continue working in a business they’ve made an emotional and financial commitment to. It’s in their interest to maintain that relationship instead of having to look for a new job in 10 years when you and Dan pack it in. On the other side, it will mean that you will be compensated for the goodwill that you have built up over a lifetime of professional work. Everyone will benefit.”

“You make it sound awfully rosy.”

“I don’t mean to understate the difficulties. For one thing, you and Dan will have to work harder in order to coach your younger staff in developing a partner’s skill set and attitude. But the good side is that you will be well compensated for your efforts and you and your people will be able to keep your autonomy and maintain what makes your firm special.

Hank Bulmash is a principal of Bulmash Cullemore, chartered accountants of Toronto.