President’s Update # 5 – September 20, 2021

By: Tom Blackburn, P.E. G.E, F. ASCE, F. ACEC
GBA President

Blackburn’s Ownership Transition Journey

Greetings GBA Members! I hope you enjoy this article on Blackburn’s Ownership Transition journey. Ownership transition forces you to define your goals and face your strengths, weaknesses, and mortality. It is one of the most difficult parts of the Founders’ journey. However, all of us have a finite amount of time at the helm, and we either plan for a successful transition or we get run over by an unplanned transition. We feel blessed to have had the good health and firm stability take this journey.

In the Beginning

I came from another GBA firm that struggled with ownership transition. They had an initial internal ownership transition plan that ultimately included a partially funded ESOP. However, that ESOP plan was not successful from the employee perspective, and when the founder wanted to retire, he ultimately sold the firm in an external sale. My take-aways were to start an S-Corp so we could pay owners dividends, start ownership transition early, and sell stock internally to key principals so we would all pull for the same goals.

Grace and I started Blackburn Consulting in October 1998 (we were 38 years old). A few weeks after we opened Blackburn Consulting, our business partner (and lifelong friend), Bob Lokteff CE, GE joined us, and things started to take more shape. At first, Grace and I mainly wanted to pay our bills and start collecting a salary (I remember running out to the mailbox hoping for a check!), but after about 6-months we started taking a salary and had a little momentum. We started to plan. At that time, the extent of our planning was to focus on public works projects. We wanted to grow professionally, provide excellent work, work on interesting projects, and build an excellent reputation. In line with our goals, we joined GBA (then ASFE) right away. Next, we joined Terra Insurance because we were impressed by their risk retention group business model and personal approach to loss prevention training and advice when questions came up. David Coduto, Hal Arditti and Lisa Gamblin at Terra have helped us with many insurance and business issues over the years.

From the beginning, we recognized that ownership transition was crucial, and we wanted to get it started early and reward those that put in the long, hard work to make Blackburn grow.

First External Transition Effort

In 2003, we had stayed the course on public works projects, and had ~15 employees. Like other small boutique firms, we were profitable and felt good about our ability to control our work deliverables.

During 2003, a GBA (then ASFE) firm from the Pacific Northwest explored acquiring us. They wanted to establish a stronger presence in northern CA. At that time, we were not really looking to sell, but an offer stirs the ego and your financial dreams. We flew there, they flew down to CA and we checked each other out. They were (and are) wonderful people. We still stay in touch with some of them. The discussions made us think deeply about our business goals, personal aspirations, and mortality. Our kids were young, and it seemed like a nice “safety net” to achieve some financial independence and security in case the economy turned down. Plus, they offered a way to broaden our abilities and provide growth for our staff. In the end, when we faced each other, I simply don’t think we (or maybe just me) were ready to step off the rollercoaster and go to the tamer ride and give up control of the work environment. Plus, we forced the other firm to give us a “ballpark” offer, and that came in below our financial goal for a sale. So, we gracefully bowed out with a promise that we might re-start the process later.

First Internal Ownership Transition

From our affiliation with GBA and Terra, we understood that successful internal ownership transition took many years. Further, we had personal experience with firms that waited too long to transition, and then had to sell externally at an unplanned “fire sale” price when the owner(s) became ill or too old to be effective. Plus, we wanted to share the ownership experience (risk and reward) with other principals. Therefore, in 2007 we commissioned a transition specialist firm in San Francisco to meet with our senior staff and help us with an internal transition. Then, we commissioned a transition specialist law firm to help us draft up the necessary internal ownership transition documents.

We sold just under 28% of Blackburn stock to 7 principals. We bonused them the money (plus enough to pay their taxes) to buy their stock. Three of those principals received ~22% of the stock. Our transition specialist advised us to set a stock price at a low multiple of book value, thus providing an “easy in” and “easy out” stock price. We had an S-Corp, so we paid them an annual dividend on their stock that was outside their merit bonuses. We had mostly positive experience with this approach. Initially, the stock and dividends motivated the principals, and we were flying high.

Alas, in 2012-13, our public work started to slow down, and we became less profitable. Our stock dividends and merit bonuses became lower. Over the next ~3-years, 3 stock owners left the firm and Blackburn bought back their stock quickly (about 11%). Happily, we are still good friends with all of those that left the firm. In 2014, we picked back up, and those that stayed enjoyed handsome dividends and stock value growth.

Second External Transition Effort

In 2015, our Board of Directors felt that Blackburn lacked enough emerging leaders to successfully transition internally. Also, we wanted to expand our scope of services. Therefore, we talked with various engineering business brokers and made a list of firms within GBA that impressed us. Coincidentally, one of those firms approached us because they wanted to expand into California (we never hired a business broker). We were excited about this opportunity, but it took a long time to develop because both firms were busy, and the other firm was undergoing a large internal ownership and leadership transition. In 2017, both firms got more serious about a deal. Again, we flew there, and they flew here, and we checked each other out. Ultimately, the deal fell apart in 2018 when the other firm only wanted part of our business and their offer was below our expectations. At the time, this was very disappointing. However, we have remained good friends with the other firm and we occasionally work together. Looking back, we believe it was a blessing in disguise, because it pushed us into our current internal ownership transition trajectory.

Second, Refreshed Internal Ownership Transition

In 2017, our Board re-focused for a few months after the second deal fell apart. Then, we revisited our list of other firms. Ultimately however, we decided that we have something unique, and we had the time to work hard and transition it internally.

We worked on a new internal ownership transition plan that included an Employee Stock Ownership Plan (ESOP), internal stock sale (outside the ESOP), more targeted recruiting and a focused leadership transition plan. We felt energized when we again had a plan.

ESOP
Blackburn started funding the ESOP in 2018. Our principals talked to a few special GBA friends (that have ESOPs) and past peer reviewers to help us set up the ESOP and we are grateful to them. We are also grateful to our accountant and ESOP advisors who have helped us through this complex and highly regulated process. We are on the small side of businesses to set up an ESOP, but since our firm has a solid history of profitability and we are growing, we are optimistic that it will become an asset in our transition plan. Since our current owners are not in a big hurry to sell, we decided to take a more conservative approach and set the ESOP up on a “pay-as-you-go” basis, using yearly profits, so we can manage costs and not take on significant debt. Since neither the company nor the employee pays taxes on the stock sale within the ESOP, Blackburn can move stock faster than outside the ESOP. The most valuable benefit of the ESOP is when employees feel empowered by their stock ownership and all start pulling a little harder for company success. This is a work in progress for us, and it appears that it can work!

Internal Stock Sale

We are selling stock outside of the ESOP to a handful of emerging leaders. We set this up, so we maintain control while we see how the ESOP works out. This is a slower and more expensive process since the stock buyers must pay taxes when they buy Blackburn stock outside the ESOP.

More Targeted Recruiting
We designated one emerging leader to head this up. From his leadership, we have improved our recruiting outreach and we have made several key hires for operations and administration personnel.

Leadership Transition Plan
Our Board has designated two emerging leaders. We developed a plan to train them and help them understand our firm and their new position responsibilities. We also have identified other emerging leaders and we plan to start their transition plans into leadership this year.

Family Connection
Grace and I have been blessed with three wonderful children (many of you know them from past ASFE/GBA meetings). One of our kids, Donald, came to work for us during this second internal ownership transition period. Over the last couple years, he has taken over most of Grace’s duties at Blackburn. He has good ideas and energy, which have helped us push forward with the transition.

Conclusions

Some form of planning and/or ownership transition has been with us for most of our business life. Some of our lessons learned are:
  • We went through fits and starts, but essentially planned for Ownership Transition from the beginning.
  • Get good advice to set up ownership transition plans (GBA is a good place to find some help). This has not been easy for us. We are specialized, and no one is exactly like us. This made both internal and external sales difficult.
  • We had to decide:
    • If we wanted to control our work environment or work for someone else.
    • If we could let someone else run “our baby”. A real founders’ dilemma.
    • How long we wanted to wait for a pay-out.
    • If we wanted to put in the work to find and develop emerging leaders.
    • If we could watch emerging leaders make mistakes as they emerge.
  • Ownership transition takes years, especially internal ownership transition and internal ownership transition is never done.
  • It is difficult to work, to take care of your family, and successfully transition ownership.
  • Not all our ownership transition efforts worked well.
  • Ownership transition is expensive but essential.
  • As we aged, we became better, more patient leaders and were more capable to plan the internal leadership and ownership transition.
  • Ownership transition is highly emotional. We all have deep feelings about our career path, technical ability, financial goals, work environment and each other.
  • Not everyone is excited to be an owner, and we spend a lot of time explaining ownership benefits.
  • There is no rest for the weary. No matter what transition you select, your firm must grow and be profitable. The catch 22 is that as you grow and become more profitable, your firm becomes more valuable, which drives up the stock value and makes it more costly to move the stock.
  • It is a real joy to work with your adult child.