For many architecture, engineering, and construction (AEC) firms, the past couple of years have been a period of significant growth and expansion. And, that’s a good thing…mostly. The unfortunate consequence of growth (and a hot M&A market) is that it puts increasing stress on many already-stressed stock redemption and ownership programs. The stock price is going up, aging owners will be wanting to cash out soon, prospective owners can’t afford to buy in. What happens next?

First, if your firm has not yet reached this level of pressure on your ownership program, it is absolutely critical to ensure that your firm’s buy/sell agreement (aka shareholders’ agreement or similar) has provisions that protect the company from unsustainable redemption liability obligations (check with your legal counsel before modifying your firm’s buy/sell agreement). Here are three common ways that a buy/sell agreement can prevent problems:

• Cap the amount of ownership that can be held by any single owner.

• Provide the company with the right, but not the obligation, to buy back shares when an owner reaches a stated age.

• Provide fair market value or the original purchase price (whichever is LESS) to voluntary (other than pre-defined circumstances such as retirement) owner departures (e.g. those leaving to become competition).

Of course, you also have tremendous opportunity for creativity when first designing an ownership program. This is when you decide if your firm is a “stock appreciation club” or an “earnings club” and have an opportunity to look at creative sustainable solutions that balance the interests of all stakeholders. Don’t fall into the trap of thinking the only option is the traditional buy/sell model. Seek out advisors who get this and are able to think differently rather than pushing you into an ownership program that looks the same as every other firm’s program.

Too late for these options? Feel like a busted ownership program might be lurking on the horizon. Facilitating ownership transition is the number one reason why firm leaders pursue an external sale. And, that upward pressure in valuations that is straining your internal ownership program is the exact reason why it can be a very attractive time to pursue an external sale.

Now, here’s the catch. No buyer wants to simply fund retirements. That wouldn’t be an investment that is going to create long-term value. So, don’t wait. Get in front of it. Explore external sale options when you still WANT to sell before you NEED to sell. Increased risk means decreased value. In other words, the sooner that key owners want to be out, the lower the valuation. But, every transaction is different and there can always be win-win options if both sides bring some creativity and flexibility to the table.

So, if you see a capitalization problem looming ahead, don’t be afraid to start exploring some external sale conversations. There are some fantastic active buyers out there right now that get it, that aren’t going to destroy everything you’ve built, and that can create opportunity for current and future owners in your firm.

Not sure where to start on getting informed about an external sale? Join me at PSMJ’s AEC M&A Summit on February 26-28, 2025 at The Atlantis on Paradise Island in the Bahamas. Step away from the day-to-day and join your peers, industry visionaries, and the AEC M&A movers and shakers to map out your strategy for the road ahead. And, here’s one more reason to join me.
Use promo code GREG to save $250 on your registration when you reserve your spot by January 31, 2025.