Navigating Ownership: John R. McAdams' Legacy of Transition and Growth TZL Open: Welcome to the Zweig Letter Podcast. Putting architectural engineering, planning and environmental consulting advice and guidance in your ear, Zweig Group's team of experts has spent more than three decades elevating the industry by helping AEP and environmental consulting firms thrive. These podcasts deliver invaluable management, industry client marketing, and HR advice directly to you free of charge. The Zweig Letter podcasts elevate the design industry one episode at a time. John R. McAdams: I'm going to tell you my story of our company. I founded the John R. McAdams Company in 1979. I wanted it to be not a practice. I was deliberate about not hanging out my shingle. I wanted to create a professional services firm. So, you've already seen it, but here we go. I capitalized the firm with $5,000. This is a check I wrote in 1979. You can see it there. $5,000 payable to the John R. McAdams Company. And for that, I got stock certificate number one. In the upper left, it says number one, and it's for 5,000 shares of the John R. McAdams Company, as it says down there. And lo and behold, we, were funded, to begin. That is how it started. But I was deliberate about the starting of this firm. I resigned from the little firm I was in in Chapel Hill, North Carolina. I resigned in February. And in March. I spent that time planning out this firm. I prepared a manual of, the organization. and on the left here is just a chart I drew up in one of my bedrooms about how someday we may be organized. By the way, it was just me alone doing this. So this was the grand view of it from that chart. Then I immediately decided, well, if that's the firm, then that should be the logo in the middle. So that became our logo. And then in 2013, we, with Chad Kleinan's help, cleaned up the logo so it's easier to reproduce and use. And we've shortened the name by which we do business as McAdams. We're still the John R. McAdams Company, Incorporated, doing business as McAdams. Maybe you have seen this logo. That's what we go by now. So I opened the doors. Oh, wait a minute. I also rented some class A office space in which I rented two rooms in this building. This is the back of the building, but that's, that's our entrance. Around the front is a convenience store and you know, gas pumps and all that. And on
Tuesdays, the tanker truck would come to download the gas and oh boy, you could hardly stand the fumes in the building. But anyway, that's, that's where this enterprise, started. In starting it, I'll tell you, I had a sense of destiny. I did not know what would result from this. I didn't know what we would grow to be. But I wanted to keep alive the possibility that maybe this could become something. And indeed we have become a successful medium-sized firm. So I was careful not to do anything in the initial steps that I would later regret. I wanted to have a clean start. But that firm that I was with, that I left, I took no one with me. I beckoned no clients to come to me. I was just starting, me against the world, me against the market. I wanted to see what I could do. So I also wanted to have a firm that would grow. Growth was very important. However, it was difficult to grow the firm very much in the early years because of my youth. I was 30 years old when I started the firm. I wasn't that well-established in the industry, the profession, or the market. But I stayed at it. And 15 years in, we began to attract some good talent, some capable people, some other engineers, and not just drafter people. And I did my first ownership transition in 1995 so the firm was growing to 50 people or so. And I got advice. Hey, you know, if you were to, if something were to happen to you, there'd be a message. You need someone else designated to take it over. So I sold for $50. 00:05:00 John R. McAdams: 1% of the firm to another person in the firm. And lo and behold, the ownership transition was underway. But selling that 1% hurt. Wow, this isn't all my baby. But, as we went on in the 90s, we enjoyed other growth and attracted some good people. And I came to understand that some of these people are good. Project managers were conferring value on the firm. And so I sold some of them, some stock, some of my stock out of here. By the way, for 5,000 shares of stock, we did a 20-for-one split of stock. And I got another 20 times 5,000 is 100,000. I got another stock certificate number two for 95,000 shares. So as I was selling shares off I was selling out of the 95,000, shares, keeping the precious original stock certificate number one. But I sold some stock to others and they came by and put, put checks on my desk. And I came to understand that our growing success was the result of the efforts of many people. And that value is being created here, and not just by me, that it's appropriate that I share back that value. and that is appropriate because that is fairness. They are creating the value, not just me. So what has evolved from that has been a systematic program of inclusion in ownership at McAdams. Inclusion in the transitioning of that ownership enables a wealth accumulation vehicle for our top talent and also enables the ability to transition leadership. Therefore we can remain a legacy firm and not have to sell out at the founder's 100% owner's retirement. It is that program that I, am going to talk about here today. So, here we go. That's still me. Okay, a preamble to this. Our ownership transition program is a continuous cycling of ownership. It's a process. Retaining
enables us to retain talent and therefore to grow the firm. And enables us to avoid having to sell out at the owner's retirement. So in creating a continuous ownership program, I'm not the world's biggest authority on this. Again, this is how we have done it in our firm. Understand first of all, we are a professional services corporation like attorneys, physicians, accountants, architects, engineers, and landscape architects. These professionals perform and deliver the services using their expertise. The professionals within the firm are creating this value. They are the ones creating it. So reasons for transitioning the ownership, this is somewhat repetitious of the past, but retention of talent, avoiding having to rebuild the firm due to some talented person, leaving somebody managing a lot of clients, whoops, we were doing great, but now we have to drop back and find somebody else to serve these clients to enable growth of the firm. The retention of talent enables you to grow the firm again. Fairness to the value creators and the endurance of the firm having a legacy firm. Those are the reasons. The internal transition of ownership is about inclusion in wealth building for those employees who are creating value here rooted in fairness. And the value creators are truly those who are excellent at firm management or even at internal services, such as the chief finance financial officer or human, resources officer, and the very direct client-facing delivery service people within the firm. They are creating value in the firm. By the way, ownership transition is not about percentages of ownership. That's a zero-sum game. It's about the value, the dollar value of this transition of ownership is best done over time. It's an event. I mean it's not an event, it's a process. It's very difficult to accomplish this internally, only at the end of the owner's career. We figure it takes about 20 years to transition ownership 100% of the time. We got going in our ownership transition program about the year 2000. So we've been at it for 24 years now. We figure people acquire stock, professionals acquire stock in their 30s and 40s and they divest stock in their 50s and 60s. The average share of stock is held for a period of 20 years. That's an average, of course. And so if they hold it for 20 years then you can. We are deliberate about trying to turn over 5% of our ownership every year so that in 20 years we can do a complete 00:10:00 John R. McAdams: transition. All right. As we see it, to establish an ownership transition program, there are four things to get right in it. First of all, a means of valuation of the firm. The firm has got to have a known agreed-upon value. The second is to craft a shareholder's agreement. It is sometimes called a buy-sell agreement. I don't think that's nearly as good a name as an ownership, as a shareholders agreement because it has to do with so much more than buying and selling. It has to do with how we will all behave within this. The third is to establish criteria for whom to invite into the ownership program year by year as you go along. And fourth is to establish the procedures for the continuous nature of it. So we're going to talk through those four
steps here. Determine evaluation of the firm. The firms have the potential to create profit. They're this black box and they spit out their golden eggs. And so because they can generate profit, they do have an economic value in the marketplace or to just internal shareholders. That value is held by the owners of the firm. So determining a valuation of your firm is very important. And I cite a couple of ways to do this. One is by appraisal, by professional business appraisal. If you do do that and it's one way to do it. Indeed, I strongly advocate that you use a business appraiser who is specific in the design firm industry. A lot of them will say, oh, any firm, yeah, I know how to do this, I'll evaluate. Go stay within the industry. I have a comment here. ESOPs, which, I think was talked about in this room just prior to this session. We don't know anything about ESOPs. We have avoided ESOPs because our maybe not totally well thought out impression of it is that ESOPs take ownership and spread it too thin. What we want to do is we want to take the entrepreneurial type of people in our firm who are working hard to create value to build our firm and concentrate ownership more heavily on those people and not spread it out to folks who are just good serving employees. There are valuation, ratios available in the industry and Zweig Group has excellent ratios. And we subscribe to Zweig's ratios. More on that in a second. But they do some continuous ended research. Is Tracy Eaves in? Okay, all right. She can say it very efficiently about how they put all this research to understand the ratios of value to the firm's metrics. So they Zweig. I'm not intending to shill for Zweig, although I'm very happy to. But we subscribe to Zweig's program every year we get their valuation report which has a number of ratios for valuing your firm. So here's how that looks. The Zweig has a lot of different categories of valuation. The Z3 value they publish is for internal transitions of firms. They've done a lot of research on different firms' internal transition valuations. They've come up with a value per full-time equivalent employee per FTE of $96,000. By the way. We get their report every year and boy, that has grown from about $52,000 to $96,000 in 20 years. The value per net service revenue is 63%. Somebody is doing $10 million a year. Well, then their firm is probably worth $6.3 million. The value per backlog is 58%. The value per earnings before interest, taxes, depreciation, and amortization is four times. And the value per profit is 3.8. And the value per book value is 1.8. Four times the book value. Each one of those criteria represents a total firm value. they don't interact with each other, but each one is an indicator of what this firm is perhaps worth. And so you average these things. We don't use all of these. We don't bother to track backlog. And we'll go with EBITDA rather than profit. So those are not highlighted. The four that are highlighted are what we use. This is how the computation works. Down the left are those valuation metrics. And then in the next column are those ratios that we've just talked through. And then I have made up a firm out of the thinnest possible Air. And I've said, you know what, this firm has 45 people in it. And so the number of people in the firm, you multiply that times the 96,000 and this firm is worth four points, what is it? $328 million. 308, yeah. $328 million. The net service revenue. This is a firm that did
$6.8 million in revenue. And I'm going to here6 $.8 million in revenue. And at 0.63 per net service revenue, that indicates this Firm is worth 4.284 million. The earnings 00:15:00 John R. McAdams: of the firm. I made these numbers up $1,000,000. And therefore that's 4,040,000. And the book value is let's say 1,000,850. And therefore the book value indication is 3.4 million. Then in yellow below that is $4,014,000 is the firm value. That's the average of the four numbers above. Ah, we do think it is very wise to use more than just one indicator here. Then I made up the number of shares is 64,000 shares. And so you know what a share is worth? $62.72. So that's how we value our firm. All right. The craft to the shareholders’ agreement. If you want to call it a buy-sell agreement, okay, fine. But a lot of deliberate attention needs to be put into this. This is in green on the slide. This is a covenant among all of us shareholders. We're all entering into this group, which is the group that is the ownership of this precious company. And we are not going to have any fights among us in that a shareholder is a shareholder. We're all going to behave accordingly. We will always transact our stock according to what we call the asb, the agreed stock value. And that's according to what that computation that we just had up, says it is. We get the new ratios every year but we always will transact our stock according to our agreed stock value. ASP and there are many other things. It includes non-competes and many many other aspects in there. However, examples of the shareholder agreement can be found in the public domain. But do hire an attorney to craft this agreement and do hire an industry-specific attorney. It does really matter. This is quite a big issue and we're not going to go into the depth of this unless in question and answer people want to do so. But this is not about crafting a shareholders agreement. It's just that you need one criterion for inviting into ownership examples of things that an organization might use, or for persons who are rising in the ranks. Can they lead a group or a department? Can they book work? Are they a rainmaker? Can they hunt? Can they cross-sell? Are they somebody who's an expert, outstanding in their field? These are just examples of criteria you might use. The next one is a journeyman. And let me explain. This is one that we have created. I don't know if we're even using the word correctly, but this is what we've adopted. This is for people who in our firm are not real leaders and they are not taking our firm to higher levels by directly serving clients or bringing in work. They are excellent at performing the work. They are efficient, they are upbeat about doing it. They are accurate. They've been with us a long time. And so occasionally and deliberately we take some of those in. Let's include this person in. Boy, they serve. Well, if they are a person who, when you land a big project and you're the project manager, you say, I, I want Joe on this project. We've got to really hum for this client that we've got, then that's the kind of person that over time you say, you know what, let's cut Joe in on. He's helping us create some value. That's a journeyman. These are our criteria. Everybody must have a company-first
attitude, by the way, that pervades our company. A, company first attitude. This is not about any one person. The company has got to stay healthy and then we'll all do fine. Also some situational things like the length of tenure with a firm and the time span until retirement. The final thing, establish the procedures for continuously transitioning ownership. I'm about to go into how we do that. We do that annually in January and the decision-making process for all the small details in the annual, what we call the churn of ownership annually. So how do we do it? We have developed this and tweaked it since about 1998. We deal in our stock in and out of our company's treasury. We're actually not selling shareholder to shareholder. Late career shareholders sell off some of their holdings each year and we call those divestors. And those shares are then offered out to the early and mid-career, members of our firm who are growing in our firm in their value and they are the acquirers. And in between those are the static members who have gotten a large enough share of the pie. But they will work to make the pie more valuable still to create additional, value within our Firm. So here is a diagram about this and I'll talk about this, but I also may come back to it later. 00:20:00 John R. McAdams: You can tell this person is later in their career because of the gray streaks in their hair. For shareholders who want to sell some stock, I'll sell 500 shareholders. I'll still sell a thousand. Those shares are sold into the company. And you see that the cash coming the other way. The company pays that investor that money. Congratulations, you've helped to build all this wealth. Here's, here's your payoff. You're into your payoff period in here. The company then takes that stock and bonuses it, bonuses it to acquirers. And so the acquirers get it, but the acquirers do not have to pay for it. But the acquirers have some skin in the game. That bonus of stock is a taxable event. That stock, every share of that stock has a very defined value down to the cent. So 100 shares of stock, sometimes. What was the other number? $62.72. That's income. And actually, that gets added to the W2 at tax time. So you receive your W2 and it will show all the withholdings of tax. But it has as an income number, a higher number because the value of that stock bonus is, is in that number. So the shareholder, ah, the, the acquirer does have to pay for the tax. We do this because it is 100% tax efficient. An alternative is we could give somebody $10,000 worth of stock and how do they pay for it? I mean shareholders, I mean employees don't have stockpiles of investable cash. So, well, let's give them a bonus in order for them to pay the company back. $10,000. We got a bonus on $15,000. That is so tax inefficient. So really around a conference table one day a couple of decades ago, we said, why don't we just give them the stock and then, then it's done. This is a very tax-efficient system. All right. Another way to look at this is here's a diagram, of annual wealth accumulation. These shouldn't be in equal one thirds, but they are. That doesn't matter, too much. But at the bottom is a divestor, or the group of divestors, I should say. And those investors
collectively have decided to sell, off some of their, part of the pie. And that goes to the acquirers and the statics people share. The pie does not increase now, some things about this are the green center of this is the value of the company on January 1st. The red outer rim is the value of the company on December 31st. The company grew in value. We push growth strongly. So a couple of things about that. Hey, look at these static people. Their slice of the pie didn't get any bigger or smaller, but the value of it did grow. Okay. The acquirers are winning doubly, though. They've got to pay tax on the new stuff. They don't have to pay taxes along the way as it grows in value. And the divestors. The investors(??) have certainly, less of the pie, but they got a lot of cash. And if you look outside of that skinny slice with the dashed lines, they also got a growth on the stock they haven't yet sold. So they're doing well in our system, a lot of times investors sell an amount that equals less than the growth of the stock that they were holding. It goes on and on long enough. Perpetual money machine. But at some time we will, you know, manage a little pressure into there and say it's time for you to sell down a little, little more quickly and allow for other people to do this. A comment, if I may. In fact, I'm going to go back. Yeah. About this, just to illustrate how this might get started. Let's say that I have a company and I'm the sole owner of it, and I get these ratios for the company, and the company is worth a, million dollars. On January 1st and December 31st, we've grown 15%. And that million dollars is a million $150. But I haven't, I haven't done that all, by myself. So, what do I do here? You know, Bob, if you'll, if you'll bear up. Look, we, I want to talk to you. Bob. We have done well this year, and you are the reason for much of it. You're serving clients well. You're growing the accounts that you are in. I would like to offer you some ownership in this entity. All right? I would like to give you $25,000 worth of the company. we can work out how many shares there are, but you get $25,000. Are you okay with that? By the way? There is a catch to it. You'll have to pay the tax. 00:25:00 John R. McAdams: On the $25,000. All right. You can adjust your withholdings with the accounting department if you want to so that it's not that big hit next April 15th. But what we feel is right is for you to have $25,000 worth of value. That value will grow and we'll come back next year and perhaps add some more to it. So maybe Bob says, yeah, well, thanks, I'll do that. I'm going to go back. You, know, I just lost $25,000. I'm going to go back to accounting before you get there to adjust your withholdings and I'm going to say cut me a check for $25,000. Okay, so I didn't lose. I'm not sad. I used to own 100%, now I own 99. No, I got $25,000. That's mine. And the tax treatment on that is going to be capital gains, not income tax rates. All right, so the owner gets cash of $25,000. The owner then holds a value not of a million 150, but a million 125. That ain't so bad. And what else does the owner have? The owner has an employee who will stay alright bound to the company. Hey, I'm liking this. The shareholder, the new shareholder does
get $25,000 worth of stock, but, but must pay the taxes on it. But that value will grow and the opportunities to acquire more will come along. So that's, that's how this starts on a small scale. And now for us it has, it has grown to a larger scale thing. So this actually is a slightly dumbed-down version of McAdams Company's annual transition of ownership. We don't have any names in it, but what's on the left up at the top is some investors. 1, 2, 3, 4, and 4. I think they're brothers and they're both named Darrell. and then only one static person in here and all below are the acquirers. And so at the left of the shares and the value of the shares before the transition, this is the December 31st valuation of the prior year. This is 2020. So it's 2019, December 31st valuation of our company. What were our revenues for the year? What was our headcount of employees, our profits and our book value? You apply those Y ratios, you average those things. And up in yellow, you see $127.29 is the value of our company. Okay. And so one divestor has raised his hand and said, I'll sell 2,280, shares and so on down the line. The negative numbers are in the blue, the blue is all the transitions going on. The negative numbers are the sales and the below that. The positive numbers are the acquisitions going on here. Now a lot of thought goes into who gets how much of this stock. This is, this is in a ladder here. But one of the main factors of who's at the top of the ladder is tenure in the program. How long have you been in the program? But another one is year by year by year, how much are you contributing to the growth of our organization? The growth and the profitability? That one is very. I'm sorry, I'm having a senior moment here. Subjective. Okay, sorry. That one is very subjective. Well, it just seems like George is really knocking it down. Well, George is going to get more stock bonuses than somebody else who is not perceived to be contributing as much. The ownership transition committee of our board and it is the all the internal board members. We have some externals but the ownership transition committee spends a lot of time reviewing this and talking with the supervisors of some of these shareholders. In here too we start people out just as we did with Bob with somewhere around 20 to $25,000 worth of stock. So here at the bottom of this chart, you see 180 shares and that's $22,912. Those are two newbies that we brought in this year. that year 2020 and going up from that we gave two of last year's people. Well, one is last year and one is an addition to that. We also just gave them 180 shares as well. But here at close, to the bottom of this stack, you see there 1, 2, 3, 4, 180s, and immediately you hit a 500, 500 share person. That is somebody who has come to us as a mid-career professional and they are really good at what they do and they're really into building the company. They're maybe creating a new service area. The Director of Transportation, something that we got into a few years ago is going on fire. somebody else came and did a public spaces initiation.
00:30:00 John R. McAdams: I'm going to build that here in this company and I don't like to lose and I'm going to make it happen. People like that have to wait two three or four years before they're actually brought into ownership. But then they are a bonus to higher amounts and they climb this ladder faster. They are creating more value than other people. We work hard to have fairness in how we dole out the ownership of the company. there was one other thing too, and I don't have my notes for it, so we will go on. Oh, here it is. Managerial hierarchy within the firm is important and we have a good one. But ownership is different. Ownership is unattached. You can't say, I own $82,000 worth, of the company and you own 60, thousand dollars worth of the company. And so I don't have to do what you say? No, no. If that person is your supervisor, you know, it's just completely different. All right. The $82,000 person has probably gotten a lower, lesser amount of stock bonuses, but has been in the company for longer. So let's not confuse ownership proportions with the managerial rankings in the firm. Any shareholder who is coasting gets little or no new stock. The late career people who have probably been static for a while are then encouraged to begin divesting so that there is a flow of stock off of them and able to be put to the others. Again, we don't want to create any, new. We're getting rid of the 1,800-pound gorilla. And so that's why at some point we have people become static and say, hey, look, just work for making this more valuable for yourself and everybody else. And then at some point, out of the concern for keeping the ownership transitioning, how about you become a divestor? In this final point here is how do the acquirers, pay for stock? As I said earlier, the employees don't have stockpiles of investable cash. They can come up. Maybe they do. Maybe they have a rich family or some other means to sell something off and they can come up with the cash to pay. The company could do annual bonuses of cash. But I've already told you why, we're averse to doing that because we have to pay out more. Just seems silly to send somebody $15,000 knowing that they need to pay us $10,000 back. So we, we do bonus the stock. It may be a little hard for everybody to get their, head around, but it sure works really well for us. So that is, that is the conclusion of my description of how we do this and why. And I wonder if I have caused any questions. Yes. Randy Wilburn: How do you decide how much cash to keep in your company for the buyback? John R. McAdams: Okay, there are so many things to talk about. First of all, we are a C corporation, not a subchapter S. We elected to go with C because the federal tax rates as of about 2018 dropped down to 21% for corporations. So our tax expense on our earnings is 21%. If we were an S corp then the S corp has to pay out dividends and those dividends are not a taxed event. But the holders of shares of the S corp of course
have to pay the tax. So if the top owners are in the top tax rate, then those dividends have got to be at 37% or 35 anyway. The money that flows out of us is just that, 21%, or in North Carolina 24 because we've got a 3% state tax. But also it is the case here. Again, this may shock you, but so pervasive is our intent to grow and growth costs money that to the shareholders we don't pay dividends. And that's why being a C corp for us doesn't hurt us. If we paid dividends, those also would be taxable double taxation. But we don't pay dividends. The late-career people are sure to get some nice checks at the end of their careers. But we leave that money in the company because growth costs money and we are totally intent on growth. So I'm right here. Randy Wilburn: Do you all have different classes of stock, let's say like voting and non-voting? John R. McAdams: We do not, we keep it just totally traditional. Stock is stock. The, you know, the CEO runs the company but is subject to the board of directors on which he serves. 00:35:00 John R. McAdams: Ex officio voting. And no, it's just all straight up. The firm is run well so that everybody appreciates the firm. Frankly, there's a lot of love there and we don't want this kind of different hierarchy. You own some stock, but it's not voting stock. Stock is stock. We keep it simple. Yes. Okay, so employees that leave your organization, sell back their stock? Yes, yes. Our shareholders' agreement specifies this. Our shareholders' agreement specifies that the company has certain options if certain things occur. The number one thing triggering a possible option to buy is cessation of employment. And the company always does that. Maybe later I'm going to talk about one exception to that. But so yeah, you're leaving, you've divested for a few years, but now you've got the rest of your chunk left there. And we'll put them on a five-year payout, that is 60 months of checks to pay down what their value was. Enforcing a non-compete agreement makes it important that you pay that over time because if they leave the firm and then start competing with this, the shareholders' Agreement says you don't get 100% of this. If you leave and join a competing firm, you get 60%. If indeed you directly compete with us and try to pull our people or our clients away from us, it's not a 60% payout, it's a 35% payout. Okay? You enjoyed that benefit in our company and we are not going to pay you out 60 checks at full value when you're turning around and hurting us. So that's in the shareholders' agreement. Okay, question two. No, we do do bonuses. And, for some of the leaders, there's an incentive compensation plan. And yes, indeed, that does help them with their taxes, but it's just an incentive compensation plan. And those tend to be the same people who are getting some of the larger tax bonuses. So that does help. It actually, it is not. It is not. We don't
have any names here, and we're not passing this out to you, but this is to illustrate how the process works. We did that for a while, but in the last couple of years or three or four, we have ceased doing that because of the difference in the amount of shares that somebody owns. Okay, 3, 055. 3, 035. Yeah. 250 shares came there. That's equivalent to a raise. And why show to all the other shareholders that, oh, this person got the. Oh, I didn't get that much. So, yeah, we, we don't quite do that. Yeah. Yes. Right. How do you make sure that's fair and transparent? well, to some extent, certainly to invite newbies in. Any shareholder can nominate somebody and has to write up why. And there are even guidelines to tell us about this aspect and this and this. To invite somebody new in, there's that as to the annual spread of the redeemed stock back out to others, that's a different process and it's relative. We want to find a home for all the stock. So we're going to give all of it out but in various proportions. And again, that's just subjective this time. I retained the word. That's a subjective process that a lot of people in the firm get involved in, and members of the board of directors, internal, who are the ownership transition committee, go to various supervisors to have a discussion, about people. So there's some deliberateness to that, but ultimately it is just subjective. That's right. That's right. We, however many shares this is, and I don't have totals on it, but this equals those shares and that's why that's zero. And again, there's some encouragement. It doesn't take much, to encourage somebody to cash in some shares and get those checks every month. Some. Yeah. Okay. Yes. Yeah. Nowhere is that written. So again, that's one of the subjective things. But we, want to manage the system so that again, we don't create some problem down the road that the only way we can cash Billy out is that we have to sell the firm or do something else. So, you know, we manage this and it's in our culture. We talk about it, we preach it all the time. Company first, company first. Okay. You may wish you had a little bit more than you have, but you have a good thing here. We all have a good thing. Let's keep it healthy. So that's how we run the program. 00:40:00 John R. McAdams: We'd be surprised if somebody down in these ranks wanted to turn and be an investor and we do have a soft policy that we don't always administer that says, look, if you're going to be a divestor, decline bonuses for two years, okay, and become static and then become a divestor. What we don't want is somebody to get a bonus of stock and turn right around and say, I'd like to divest. That would, that would ruin the system if that occurred. I mean everybody's saying, just give me the cash, just give me the cash every year. Well, we can't just give you the cash. We can give you, We've given the cash to the seller, to the investor. Well, at some point there will be secession of employment and the company will invoke the option that we have all agreed to in the shareholders agreement. It. So, yep. Bob, how are you enjoying your $25,000 of ownership? Isn't it then? Is it?
Randy Wilburn: My person sitting next to me had 25,000 offered to them, but they were reluctant to take it. Have you ever had that?
John R. McAdams: Yeah, yeah, yeah, I guess.
Randy Wilburn: Not wanting to be a shareholder.
John R. McAdams: Yeah.
Randy Wilburn: As far as that retention concerned .
John R. McAdams: Yeah. But we have mostly that shows up in declines on the total amount, total amount offered here. If somebody's being offered $70,000, they're going to have to pay tax on $89,000. Now these are high-ranking people up here in the 700 shares in the $89,000 tax bonuses. But, there are people who say, you know, thank you, but can, I take 60% of that, and then we do a second round offering. And we say, okay, we need to define home for the remaining. Again, as I think I may have said, we want to keep the amount of outstanding shares roughly even. There may be a little bit of noise in it as somebody departs, but roughly even. Because if the number of shares goes down, that's concentration. You know that divider at the, in the spreadsheet where we compute the value, instead of 64,000 shares, there's less. Well, their share value went up not because we became more valuable, but because we concentrated the shares on people so that share value goes up. Conversely, if we bonus out more shares than we bought in, then that dilutes everybody. Everybody's shares got less valuable. So we work hard to keep that in balance. Yes. Wait a minute. okay. Was there a question here? Dana? Do you have a question?
Randy Wilburn: Right.
John R. McAdams: Yeah. Okay. Sean Gleason has been in the program for, I don't know, a dozen years.
Randy Wilburn: So mid-year, somebody resigns and they're implementing.
John R. McAdams: Yeah, the company is a holder.
Randy Wilburn: That point as well, on the divestor.
John R. McAdams: Of this, holder. Well, yeah, yeah. The company has redeemed that stock and bought it for half a year. For half a year there is concentration. But come January, the very next year, that goes right back into circulation. Randy Wilburn: So it seems like you've got a model that works really well for you if you don't mind the context of how big is your firm. John R. McAdams: I don't mind at all. We have a headcount of 460 people in the firm. We were, 70 or 80 people when we really got this program underway. And that was at a point in time, maybe it was 80 people. That was at a point in time in ‘02 or so ‘03. And along came the great recession. And boy, did that hurt us. We were 100% in land development design work. And it's no fun to be running a land development design firm when there isn't any of it to do. And so our firm lost all kinds of value in two-thirds of our people, and not voluntarily. So anyway, we have grown from about 55 people in 2009 to 460 people in 2024. Randy Wilburn: Would you say that it has scaled well across that growth, your program? John R. McAdams: Oh, yeah, I think so. Well, the great recession had an effect. we have 171,000 shares, outstanding now. And that is because I redistributed ownership. In the great recession, I owned too much of the firm. I had sold down to others who were putting checks on my desk. I had sold down to where I owned 82%. But some of the people that we [inaudible} were shareholders. We promised them that if we survive we'll pay you for these shares after the great recession, but we can't spare any money now, so. Those shareholders leaving the firm resulted in my degree of ownership going from 82% to 89% or so. 00:45:00 John R. McAdams: But I went to some other critical leaders inside the firm who are very capable, well thought of, and probably marketable, and even in those conditions, could have left our firm and gone to others. And they did not do that. They stayed at their 60% salary rate. I was working for free. I was guaranteeing all the debt in this ham and eggs thing. I was the pig, they were the chicken. Anyway, they, okay, they, they loyally stayed through there and pulled us through that. Our strategic plan was down to one word, survive. And so I, I just took some more treasury stock and I said, you get this much stock and you get this, this, this. And so for five other people, six of us in that group, I diluted myself down to about 45% ownership. And so really, I have been. Once we got this program revved back up. And it was at that juncture, though, that we also came up with the idea of why don't we just bonus the stock out, don't make people pay
it, because we have to give them the money too. You know, we did a lot of inventing of the program then. Yeah, yeah. Wait a minute. Yeah, there are two. Brian's here, so. Brian Selaf. Randy Wilburn: So, John, you've always reached our group to focus on the value and not the percentage.
John R. McAdams: I think it's always been great.
Randy Wilburn: Point out something I've taken away from you. The system's worked out well over the years, but I think if you just talk a little about what you shared with us in our group as you've lowered your stock, your value with what you do with your employees, and the retention rates and all that. Yeah, it just continually keeps growing the value. John R. McAdams: Ah, yeah, yeah. Well, this program is of central importance to McAdams Co. It's, not a very well-kept secret. Only, you know, one out of eight people is in the program. But a lot of thought goes into it, and there's a lot of appreciation for it. But yeah, Brian, you're right. I have Preached. And I know I've said it and you've repeated it back to me. Don't focus on percentages. this isn't about percentages. It's about value. I just offered Bob $25,000, and who knew what the percentage was? All right, but you have $25,000 of value now. Let's grow that value. percentages just don't work. How do you move somebody up this line as the percentages are always, always changing? And if you say, okay, hey, I'm, I'm the owner of this small company, but some other people are helping. So person number one, you have 10% in persons two and three, you have 5 and 5%, and I have 80%. Okay, that's great. What happens three years later when the contribution of those people is different and you need to cut somebody else in? I don't know how you handle that with percentages. If somebody else has been cut in, out of whose percentage does that cut come? Let's just focus on dollars. It's so much easier, so much more fine-grained. okay, this is just John McAdam's feelings about these things. I'm just throwing this out for people to ponder. Yes. No, no, no, no. Their stock is. Stock value is growing. And if they own a few hundred thousand dollars of McAdams stock, in almost all cases that way exceeds the equity they have in their house. I mean, that's a good thing. And it grows, you know, from 2012 to 2023, we grow. Grew at an annual rate. Our stock value grew at an annual rate of about 22%. I mean, it doubles in three years at 22% compounded. So, no, we don't feel like we need to, hey, you know, come stroking. I'm so sorry that we're not giving you more stock here. Here's a consolation prize. No, no, no, no. let's just all take this great company that we love and let's make it bigger and better. Let's, let's grow it. Our jobs do get bigger as the company gets bigger. You promote people from within.
Salaries, therefore grow. And as the company gets bigger and more impactful, we also can land. We can land talent, and we can land bigger and more iconic projects as well. There are so many good things that come from growth. It's disconnected from the stock program. Randy Wilburn: There are cash bonuses and those people that are high owners and, and static, and they're done at different times of the year. They really are. John R. McAdams: Yeah. Randy Wilburn: We aggregate the first three quarters and bonus out after that and then take a four-quarter hold into the next year. John, if you could just note a little bit about. I forget the term that we have now signed it. But kind of the on-deck folks.
John R. McAdams: Oh, okay. We, call them associates. Yeah.
Randy Wilburn: We don't want them to look out beyond. The pastors of McAvins and others like they can move themselves up. They certainly have those options.
00:50:00 Randy Wilburn: here. But talk to them about kind of an advanced invitation.
John R. McAdams: Yeah, yeah, we don't want our people to get picked off and frankly we enjoy a good reputation. We work, work hard on that. We have a good time among ourselves. But yeah, somebody who's coming up in as Brian just said this, Brian just said that they're not quite at the level where the ownership transition committee is ready to invite them in. A representative of that group goes to them and says let's talk to you about your getting into the ownership transition program. You know, the company ownership program. We've decided that you are what's called an associate. And so you. We used to call it on deck. And so we are going to invest in some extra training and guidance and mentoring of you to get you up to a level where in a year or two from now we can bring you into the ownership program and it's continuous and we explain about it. Also, we have had a few people in recent years who have left our firm have gotten picked off just before we were about to go to them and that never works. We never have gotten anybody to stay because we then offer them stock. we also don't want to take somebody who's walking out the door and go and wave some stock and say, oh, come back, come back. Okay, we'll include you in some stock. We don't want to do that. Even if we were going to do it, we still don't want to behave in that way and have them thinking, well, they never really were going to give me stock. I had to threaten them with departure for them to do so. And we're not going to go there. Yeah, first it's a much
smaller firm. something like this could be done. I mean for one thing to bonus the stock to somebody rather than pay the money for them to pay it back to you. That's something that could fit any size firm. Yeah, we don't have our firm valued. We buy Zweig's annual valuation report and use the updated ratios. So actually we date Our stock redemptions and our stock bonuses. We date on January 1, but it takes until March to get this all figured out and really do the transaction. Because Zweig takes until early to mid-March to get all of the data figured out. And I think it would take that time. I'm not criticizing Zweig at all. But we're waiting for the 2024 valuation to come out. That is the 2024 ratio. And by then, we have long figured out what our. Our numbers were as of December 31st of the prior year. The revenues, profit, book value, and headcount. Yeah. Yes. Randy Wilburn: Have you ever had a case where you've got a competitor that would really provide value to your company?
John R. McAdams: Yeah.
Randy Wilburn: You have to break their golden handcuffs to get them across to you. So I think there was a slide saying usually they've got to be in the company for three or four years or something like that.
John R. McAdams: Yeah.
Randy Wilburn: Have you ever had the example where you've said, yep, you can come in as a shareholder? John R. McAdams: Yes. Glad that you brought that up. we do grow by acquisition. Not much. Most of it is organic. But we, so far have done one acquisition. It was in Dallas, Fort Worth. We're in Raleigh, North Carolina, but in Dallas, Fort Worth because that's an excellent market for what we do. And so, in 2018, we got them to join us. we bought the firm from the one sole owner, but then four other people. The owners number two, as he called him, and three other people that were heads of three departments. Planning, landscape architecture, and surveying. even though we were buying the firm from this owner, who was soon to depart, three years later, departed, we also gave some of our stock to those people. Those folks then had something they never had before. They had ownership in the firm that employs them. They had never had that before. And we felt like that was important. They are, after all, 1200 miles away from us. We're paying this guy. He's leaving. We don't want these people to leave. So, yes, ownership stock is a, hugely important tool, in growth by acquisition. It is. Since that time, we have kissed so many frogs, and we have not acquired anybody else, but we're still looking and still trying, and we will use stock in it. Yeah, there was another question. Maybe. I'm happy to stay and talk. It is 4:30, so. Okay. Yeah, Great. Thank you.
00:55:00 John R. McAdams: Thank you. I hope you got something out of this. If I may give a postscript if I may give a postscript about this, and this is personal, but I told you at the beginning of the session about my starting the firm and capitalizing it with the five, thousand dollars. Well, I founded the firm on April 2nd of 1979 and I opened the doors at 8 am I'm going to retire in January of 2025, just a few months hence. And I own 14,000 shares of this company. In January, I intend to sell 9,000 of the 14,000 shares. And. Come on, this one right there. I will hold on, to this. I will hold on to these five and I will remain a shareholder. The shareholder group has got to agree to this. I have to agree not to exercise the option to purchase upon my secession of employment. I'm having one-on-one discussions with that. And I did Sean Gleason last night and I did Brian Purdy this morning. The other way. Yeah, yeah. And yeah. So to make sure that no shareholder or the company itself doesn't buy those 5,000. Yes, the 9,000. Yes, but the 5,000. I'm the biggest sentimentalist and nostalgist and you see that, you know, it's got my name everywhere. I mean I signed it and it's got here and it's here and it's here. And did you see the date? It's 1979. I would like to keep that. But, then here's the plan. It'll be 2025 when I retire. I want to keep this until 2029. And on April 2nd of 2029 at 8 am, 50 years to the hour of my having started this company, I will take this firm, this stock certificate into the firm, and then I will redeem it. So that's the end of the story. Thank you. Thank you very much. TZL Open Thanks for tuning in to the Zweigletter podcast. We hope that you can be part of elevating the industry and that you can apply our advice and information to your daily professional life. For a free digital subscription to the Zweig Letter, please visit thezweigletter.com. Subscribe to gain more wisdom and inspiration in addition to information about leadership, finance, HR and marketing. Subscribe today.
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