| Disneyland Resort Paris. The Smithsonian National Museum of Natural History in Washington, D.C. The Ballpark at Arlington. The Toyota Center in Houston.
These are only a few of the high-profile clients that have hired design entrepreneur Frank F. Douglas and his Houston-based company, The Douglas Group.
The private company specializes in two areas: environmental graphics and exhibit design. On the environmental graphics side, Chief Executive Officer Douglas and his team of graphic designers, industrial designers and architects create facility signage for buildings ranging from hospitals and corporate headquarters to airports and stadiums. The messages of these signs are thematic and functional, he explains, which means they convey information such as what team is playing and where to exit in the event of fire. On the exhibit design side, Douglas says the company works with museums to construct interiors and site-specific installations.
He enjoys the work, and clearly his firm is good at it — 2008 was a banner year, he says, and the company, which has a second office in Washington, D.C., boasts an annual gross revenue of more than $2.5 million. Things are going so well, in fact, that Douglas says he has occasional moments when he rethinks his decision to retire.
Douglas, 63, says he committed to planning his exit strategy in mid-2007. There was no aha moment, he says — more like a gradual realization of an assumption. "I always thought I'd retire at some point," he says, "and this seemed like a good time."
But Douglas didn't want to just quit the company he'd started back in 1987, the company that began with just six employees and has grown to 20 people working on about 100 projects at any one time. So he turned to the company's longtime lawyer and outside general counsel, Randy Burton, to help create a succession plan.
"My goal was for there to be some legacy. I didn't want to walk away from this and have it disappear," Douglas says. "It was important for us to create a way for the firm to be able to continue and to grow."
The solution: A succession plan that gradually turned over all of the company stock — and the corresponding ownership status and management responsibilities — to a dedicated group of eight core employees.
"I think that I've got some really good young folks here, and I want to give them a chance," Douglas says. "If I don't develop a way for them to see their future, then there's a good chance I'll lose them. I could work until I am 90 and have no one who will work with me, or I can go off and enjoy retirement."
Last December marked the end of the first full year of the five-year withdrawal plan they created. Burton made the first distribution of shares independent of the buy-sell agreement executed on Dec. 31, 2008, and the physical transfer was made in January. Douglas and Burton say they're pleased with how everything is unfolding.
"It's working and everyone is happy with it. The transition continues to move forward," Burton says.
Sketching it Out
Douglas says he first met with Burton during the summer of 2007 to discuss his decision to hand over the corporate reins and retire.
Burton, a partner in the Houston firm Burleson Cooke, says he had been doing legal work for The Douglas Group since the early 1990s, handling everything from contract review and negotiation to employment matters and keeping the corporate record book.
Going forward, Burton says one of the first orders of business was getting Douglas a lawyer to represent his personal interests in the succession plan. Although for all practical purposes Douglas was the company, Burton says there remained "a legal distinction between Frank and the shareholders," and he was retained to represent the company.
"I was a little bit surprised," Douglas admits of Burton's directive to find separate counsel. "But I understand why he was saying it."
The goal, says Burton, was to create a "good deal for the company and its new shareholders and for Frank." In his experience, Burton says deals like this that end up favoring one side or the other "never work out."
Douglas says friends recommended Houston lawyer Craig M. Bergez, a partner in the tax department at Porter & Hedges. Bergez did not return telephone calls seeking comment before presstime on Jan. 14.
Burton says he did not get heavily involved in helping Douglas find a lawyer. "I did not want him to feel like whoever I recommended was someone who was so close to me that [Douglas] would be concerned that he wouldn't get truly independent representation."
But for Douglas, bringing in another lawyer was merely a formality. "I don't have any concerns about Randy or anyone at his firm that they would propose anything that wasn't in everyone's best interest," he says.
Then, the hard part started: determining how to best turn Douglas' 100 percent ownership of the C Corporation over to an employee group that included the firm's managing principal and senior vice president, Lee Jones, Chief Financial Officer Gigi Hancock, marketing director Carol Devlin and five other senior project managers.
"That's essentially the focus of the whole transition plan, to acknowledge those leaders and encourage them to succeed," Douglas says.
Burton and Douglas say they considered myriad scenarios. Should Douglas sell his 100 percent of company shares directly to the group of eight employees? Should the stock vest immediately or over time? Should there be a buy-in or should the stock be given as a bonus? How long should the transition last? What tax liability would attach to each type of transfer?
Douglas and Burton finally arrived at this solution: The stock transfer from Douglas to the group would play out over five years, and the stock maturation process would last an additional five years.
Each year between December 2007 and December 2011, Douglas would sell the company one-fifth of his stock. The company would then turn around and issue an equivalent amount of stock from its treasury to the eight employees as a performance bonus. The amount of each employee's bonus, however, might not be equal. Jones would receive a set 51 percent of each stock distribution — Douglas says he "thought it was important that someone have 51 percent to control issues" — but the percentage that the remaining seven got would depend on seniority and performance.
Douglas says the company did maintain the option to reduce the size of the group if, for example, one of the eight decided to leave the company. The agreement also contemplates scenarios such as death, divorce and bankruptcy.
In addition to the stock bonus, Douglas says the company also gave each new shareholder money to offset the tax liability triggered by the transfer.
By January 2012, Douglas would own no more company stock, and the new owners would finalize Douglas' new position as a retired professional by executing the sale of Douglas' remaining business assets, Burton says, including his name and goodwill, for consideration such as health insurance.
That's also when the bonused stock would start its five-year vesting process, Douglas says, with the 2007 distribution reaching its full value in 2012, the 2008 distribution maturing in 2013 and so on.
The purpose of the gradual maturation process was to motivate the company's new owners to stay with the company and to continue their strong performance, Burton says. "You want to maximize the value of the company, and this incentivizes everyone to go out and work as hard as they can to improve the company's position in the market, because they directly benefit in terms of the value of the shares."
In total, comments Burton, the plan is "the most generous ownership transition I have ever heard of."
Once the two men had decided on the plan, Burton began drafting the buy-sell agreement. But there was still one crucial piece missing: The eight employees needed to sign it.
Filling in the Blanks
But first, Douglas wanted to give his protégés a crash course in business ownership — something Douglas says was "critical to the success of the program."
"It was something Frank insisted on," Burton recalls. "He wanted them to understand what some of the ramifications of being a business owner were so they felt like they were willing partners in the ownership transition."
Burton thinks it was a terrific idea. "It's somewhat different when you're dealing with a group of people who are fundamentally artists — creative types — especially for something like this, where most of the new shareholders have never been company owners or business owners. It's a very different thing to go from managing a design project to managing a company."
The group of would-be owners met offsite, at a local conference center. "It gave us a space where people weren't going to be interrupted by everyday business, and it provided some privacy, because there were a lot of employees who were not involved in this process," Burton says.
Burton says the meeting, which also included a presentation from the company's accounting firm about tax issues, was like "corporate law 101."
"I still have my old chart paper from the meeting where we outlined the process," he says.
On Burton's syllabus: an explanation of corporate versus personal liability, how stock acquisition works and the responsibilities of the board of directors.
"One of the things we made clear is that [the ownership opportunity] is reflective of their contribution to the company not only in the past, but in the future, it's ongoing. With ownership comes responsibility," Burton says.
Jones says he appreciated the seminar. "I knew all about the [company's] projects and all about legal contracts with clients, but it's a whole different story when you start talking about legal responsibility to the firm and tax liability with end-of-year closeouts. That's not something I learned about in school," says Jones, who joined the company in 1992 as a project designer.
Jones says Burton "basically went through all the steps and the other options they were considering, and why [they] settled on this course of action," fielding "basically every sort of question, and believe me, there were a lot." The gist of these questions, he recalls were, "What does this mean for me?"
Burton says the group returned to the conference center a few weeks later. He had distributed the draft buy-sell agreement to the group prior to this meeting, he says, and he used the time to personally go over its provisions. "Then they had several weeks to go and look at it, cogitate on it and ask questions," he says, before signing the final document.
What happened from there was unremarkable, Burton says. "Once we got through this learning phase and we got down to decision-making and we got to preparing the buy-sell agreement, things flowed smoothly — everyone's questions were answered."
Looking back on the first year of his retirement plan, Douglas admits he's "sort of surprised that it's come together as neatly as it has." Jones confirms the plan's success. Despite the impending changing of the guard at the top, he says no one at the firm has left because of it. "That just goes to show how smart Frank's move was, in terms of alleviating any fears and doubts that may have come up."
Burton says the buy-sell agreement was executed on Dec. 31, 2007, and the first round of shares were legally distributed the same day. Since then, he says, "everything's been quiet."
Quiet yes, but idle, no. Douglas says the firm has been working double-time on a full tablet of design projects. Jones says the idea of heading the company is "extremely exciting — so much so that "it's starting to keep me up at night, wanting us to do well."
All that's left, says Burton, is deciding on a champagne to uncork in 2012.
"Frank is a very hard worker, but he also plays well, and he also rewards people very generously," Burton notes. "So I am sure it will be Cristal or a better Dom Perignon."
