Herb Cannon

10. Making someone an owner for the wrong reasons.
You know they won't make a good owner. He has been with the company for a long time and is technically competent, but he can't sell and has no leadership skills. However, you are making some younger employees an owner and are afraid he would be offended and leave the company if you don't offer him ownership. You decide to make them an owner. Big mistake.

9. Using the wrong outside advisors
When you decide to start an internal ownership transition, you need to deal with advisors (Consultants, Attorneys, and Accountants) that have experience with A/E firm transitions. Unless they have experience in the A/E industry, there is a better than even chance they will screw up the deal.

Management by committee is overrated. -- Herb Cannon

8. Setting up an "Us vs. Them" Scenario
When offering ownership to a group of employees, it must be done on an individual basis. I have seen a group of potential owners, hire their own attorney and negotiate as a team. This only sets up the likelihood of a failed negotiation and hard feelings. Ownership is a personal issue.

7. Not separating ownership from employment compensation
Ownership receives a return on investment. Employment receives compensation based upon performance. Don't confuse the two.

6. Not dealing with the personal side
People want to feel important. Don't forget that fact when bringing in a new owner. Do your best to make them feel important, it is not a strictly business transaction.

5. Not dealing with the leadership side
When transitioning from a 1st generation firm to the second generation, you usually wind up with more owners. Management by committee is over rated. Clear lines of responsibility need to be established if the transition is to be successful.

4. Assuming the new owners will go along with whatever you offer
I am amazed that many owners expect the potential new owners to go along with whatever deal you offer. In fact the opposite is true. There is usually a sense of entitlement to deal with. Many potential new owners are offended that they are being asked to pay anything at all. After all haven't they worked here for the last 15 years?

3. Setting the price too high
Many owners have an unrealistic assumption on what their practice is worth. This is often fueled by an unrealistic valuation performed by someone with no experience in the industry.

2. Too short of a payback period
Seven to Ten years is realistic for a payback. Anything shorter sets up the risk of failure.

1. Waiting too long
I once received a call from a potential client who wanted to start an internal transition. While talking with him on the phone, I discovered that he was 74 years old, had just fired the person he intended to transition to, had no other employees with the leadership potential, and wanted to "get out" as soon as possible.

When I suggested a outside sale rather than an internal transition, he readily agreed and then mentioned he was an MBE firm. While he was proud of this fact, he didn't understand that it restricted the number of potential purchasers. In the end he wound up with a fraction of the value he should have received for his life's work.

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