Your Legacy or Your Money – Fehr and Peers

Posted on September 6, 2006

Companies don’t need to sacrifice their reputation for money. By planning ahead for an ownership transition and hiring possible successors, the founders can build long-term value in the enterprise. Matt Henry, now President and CEO of Fehr and Peers, shows us how it worked in their case.

Most ownership transitions are a disaster. That’s not surprising since each of us rarely do them and because change at the top sends tremors through the entire organization. Amazingly, I’ve found an example of an ownership transition that worked extremely well. Fehr and Peers, a transportation engineering firm, now led by Matt Henry, President and CEO, went from a three founder/owner firm to 12 owners today, and everyone involved was very pleased.

It wasn’t a quick transition. The founders of the firm decided in 1994 that they’d rather sell to employees who would carry the firm forward rather than be bought up by a larger firm. This decision was made when the founders still planned to work for another ten years! They focused on hiring quality people capable of leadership. They looked for those with long-range goals – a requirement given the short term sacrifices those owners often make.

Looking Ahead

Having a long-term perspective for any transition is critical, and Fehr and Peers did just that. They planned for it early. Preparing the legal structures takes time, but even more so, finding the right successor(s) can take several attempts, and years can be lost with a disappointment. Once the right people are identified, the harnessing of the business’s ability to buy the founder’s interests on behalf of the next group of founders usually takes years.

As the prospective new partners at Fehr and Peers proved their worth, they were told about the transition plan and how it worked. This plan was well-defined and well-written. It required some cash contribution by the future partner at the start (a show of commitment), but then gave the future partner extra benefits which were then reinvested in the company in exchange for ownership interests.

Yes, the founders paid extra to their transition team so they could afford to buy in. It sounds kind of crazy, but this is generally true. Most businesses that want employees to become owners help those employees financially. It’s true that the founders could have just pocketed that money and possibly increased their income. In part, that is the sacrifice that many owners make to keep their legacy (the company they built) alive and independent. But be assured that employees that are on the partner track and are being treated generously work harder and contribute more than the average employee. Many top contributors will leave to found firms of their own if they are not shown a path to ownership. That certainly hurts the bottom line!

The Fehr and Peers’ corporate culture – which emphasized fairness, generosity, and concern for other people’s interests (as opposed to self interest), was enforced, and those that didn’t fit would never become partners

Keep the Focus on Company Values

This importance of this culture cannot be underemphasized. So long as everyone on the team was looking out for each other’s interests, no one had to fight to get their fair share. Everyone could stay positive and still be treated fairly. But let one greedy person in, and the entire dynamics are shifted. That person begins trying to shift the advantage their way, and so, sadly, in response, others try to offset it by trying to pull for their interests. Soon, everyone is pulling for themselves, which makes everyone else an opponent. Greed begets greed, and the transition will founder.

There were some difficult times at the firm, especially early on. At one point, the projection of cash payments to the founders looked quite difficult for the upcoming two years. The founders and new partners met, discussed the situation and the options to deal with the issue. They decided agreed on a solution, and ultimately excellent growth in those years provided sufficient cash to meet all obligations.

Meeting and resolving differences among partners is no easy task. Too often, two different partners looking at the same set of facts see two entirely different realities. One of the most important qualities in selecting new leadership is their willingness to view the realities of any situation objectively, without personal biases. The only way to assess this quality is to work through some problems that create a conflict of interest, and observe their behavior. Try and do this before they are on the partner track!

The act of founders letting go is emotionally challenging. New leadership needs to understand the struggle, and give credit where credit is due. After all, the founder is likely leaving money on the table to allow the new leadership to buy in. Tolerance of some behavioral quirks, such as hanging on to a few too many details, or not contributing as much as the younger leaders, should be overlooked, if possible. On the other hand, the founders get to set the rules of the transition. Attempts to change them after the fact, or to get greedy, shouldn’t be tolerated.

Takeaways:

• Be prepared to pay your future leaders extra so they can afford to buy into ownership positions.
• Support and instill your company’s culture and values among future leaders.
• Be ready to let go.