Expanding ownership

Adding employee owners to a firm can result in significant growth – so much so that often the original owner ends up with more than he or she had as the sole owner, according to Richard Schwartz, managing director of Charles Schwab & Co. Inc.’s Business Consulting Services.

Citing information from Schwab’s 2014 RIA Benchmarking Survey, Mr. Schwartz noted that 92% of advisers said they were considering internal succession plans. Such an employee ownership model can be a tremendous driver of the value for the firm and can have several advantages, he said, including:

• Reducing stress on original owners by allowing them to hand off tasks they are not interested in and focus on what they do best.
• Helping firms to attract and retain top-quality talent.
• Helping firms to expand beyond where original owners could take the firms on their own.

Yet many owners have trouble actually creating this kind of ownership model, Mr. Schwartz said. There are several reasons for this disconnect between intent and execution, including that the owners felt unprepared for the transition, didn’t start early enough, had not identified a strong internal successor or did not have a way to prepare new leaders.

In studying firms that successfully made the transition to an employee ownership model, “There was always some kind of trigger event,” such as missing an opportunity or losing a key employee, Mr. Schwartz said. Once these advisers decided to pull the trigger, they followed some common steps:

Get clear on what’s important. “This is the time to get a little selfish,” Mr. Schwartz said. He urged owners to think about what they want to get out of the new arrangement and to talk to trusted advisers such as their friends, attorney and CPA.

Create a shared vision. Mr. Schwartz urged owners to choose potential employee owners who share their basic values and vision, and then work to solidify those shared values.

Formalize the transition. Many owners fear that this could be the most difficult step. However, Mr. Schwartz said, “If they spent enough time in the first two steps, the third step went relatively easily.”

Critical to making a smooth transition to employee ownership is for the original owners to be clear about their goals. Owners should ask themselves why they want to make this change. Do they want to leave a legacy, create a sustainable business, maintain client trust, retain key employees, keep their control and independence, grow the firm?

The successful firms either identified potential owners who already were at the firm or, if there were no potential owners there, they committed to looking outside the firm. They also shared a commitment to fairness, affordability and transparency in dealing with potential owners.

Mr. Schwartz emphasized that in looking for potential owners, owners should recognize that, “The one thing you are not looking for is you.” Instead, they should be looking for someone who complements them.

Once potential owners are identified, the next step is to conceptualize roles and responsibilities; this is an especially important step if there are several owners, he said. Similarly, owners and potential owners need to assess their options, risks and the rewards. Everyone affected by the ownership change should participate in the discussion.

One of the last steps is to explore valuation, funding and timing. There are several possible options for each of these topics, and the ideas of the owner and the potential owners might seem to be conflicting. But, Mr. Schwartz said that among companies that had made the move successfully, “Again, fairness, affordability and transparency predominated.” He also urged all the parties to focus on the long-term plan and benefits as they work through these issues.

For example, he said, “Arrive at what you feel is a fair valuation, and don’t lose sight of what each other is getting from the deal.”

Finally comes formalizing the transition. Hard work in the earlier steps can make this step much easier. But still, Mr. Schwartz urged owners to involve third parties “because this is the most emotional thing you will do short of getting married and having children.”

He acknowledged that there will be disagreements and difficult discussions. But, he told advisers considering employee ownership, “It’s about trust. These people are your future partners. Do you trust them, or do you not trust them?”

Finally, he urged both original owners and future owners to be patient as the process unfolds. They should keep talking to each other — and keep listening.

“It’s a dance,” he said. “And the firms who did it as a slow dance were much more successful.”

This article is part of a special advertising section that appeared in the December 15, 2014 issue of InvestmentNews. It was written by the InvestmentNews Content Strategy Studio and does not reflect the views of the InvestmentNews editorial staff. To download the full supplement, please click here.