Advice wanted for buying into a Engineering/Land Surveying Firm

[NYyotekiller]

The time has come in my professional career when it’s time to put my money where my mouth is as they say. I’ve been given the opportunity to buy/invest into a Engineering/Land Surveying firm that I have been at now for going on 12 years and plan on retiring from.

My question is for anyone who has been given the opportunity to do something like this, what if anything would you have done differently when buying in, and why?

Any type of advice that would relate to a related business venture is also welcomed.

 

[ignorethefringes]

I had an opportunity to expand my ownership in a business with a limited number of employees that I worked for full time. A very good, and successful, friend of mine told me something along these lines when I inquired about his opinion, "The value of the business is largely based on you since your work generates the income. Why would you pay someone else for your own value?"

Unless the ownership comes with an appropriate share of other income, dividends, etc. there may be less value to the ownership than you think.

Obviously this is situation specific but that's all I got lol

 

[Trial153]

The numbers have to work. If they dont then dont spin them to work because you want them to work...good luck

 

[npaden]

Buying into an accounting partnership 20 years ago has by far been the best financial decision I've made.

Look above and below you (future partners, current employees) to see what to expect as things progress over the next few decades. Right now finding good people at the beginning level can be a challenge in service industries.

There are definitely pros and cons to being a part owner of your own business, I personally think there are more pros than cons.

It is good advice to not go into it blind, there are lots of options on business valuations, etc. do a little homework to make sure you are in a fair transaction.

 

[MTGomer]

Although I’m not faced with this dilemma at the moment, I’m sure it will be an option at some point.
I too am interested in how to properly perform due diligence before deciding. Obviously as an employee already you have a lot of inside knowledge, so that’s a plus.

 

[npaden]

In service type industries succession planning is critical. Generally it is in the interest of the current owners to create a path to ownership for employees that they feel will be able to continue the company. Some companies are set up very well for this and some are not. As the current baby boomers are approaching retirement a lot of these smaller service type companies are having a hard time finding current employees that are capable of buying them out and continuing the company.

Doing a quick look, surveyor type companies have a pretty wide valuation basis. Anywhere from 50% to 100% of gross revenues. Where an individual company stands on that scale is going to have things like local competitors, any recurring type revenues, how the buy in is structured (owner financed at very low interest rate vs. having to go borrow), lots of different things.

As corny as this sounds, a "trusted business adviser" is worth every penny in this type of situation.

 

[NYyotekiller]

The issues so far that I’m wondering about are:

• Company value determination.
• Buy/sell agreement with correct/wanted verbiage.
• percentage of company ownership that is wanted.

A business adviser is probably worth their weight in gold for pointing out things that I’m overlooking like @npaden mentioned.

 

[ignorethefringes]

The issues so far that I’m wondering about are:

• Company value determination.
• Buy/sell agreement with correct/wanted verbiage.
• percentage of company ownership that is wanted.

A business adviser is probably worth their weight in gold for pointing out things that I’m overlooking like @npaden mentioned.

Value should absolutely be determined by professional unrelated to the company or transaction in any way. There is a big difference between 1x gross revenue and 2.5x gross revenue, but the differences that make a company one of the other can be subtle.

From there, you might be able to negotiate a discount based upon years of service or some other factor. Additionally, the ownership can consist of business capital and/or business profit and loss. In your scenario you'd want your ownership reflected across the board, as a percentage of capital and cash flow.

Have an attorney draw up the contract. It's a protection for all parties involved. The company might want a non - compete clause but I would avoid it if possible. You need to be able to work in your industry still if something goes wrong here. Something about not poaching clients is reasonable however.

The percentage purchased will be based on benefits gained :are you just securing your employment and supporting the firm, or can you calculate a return on investment (ROI) due to income gained through ownership?

 

[NYyotekiller]

The percentage purchased will be based on benefits gained :are you just securing your employment and supporting the firm, or can you calculate a return on investment (ROI) due to income gained through ownership?

Yes, there will be a very significant gain in income by acquiring ownership. Short term there will be a large salary increase, but I’m not sure how to determine how the long term investment will play out. I’m guessing that the buy/sell agreement will have terms to determine that, but I’m not sure.

 

[SD_Prairie_Goat]

I once spoke with a guy who owned a consulting firm, a portion of it, and later sold it. When I asked him why he sold he told me that it was a whole different level of stress for him. He was no longer worried about providing for his family, now he was worried about securing enough work to keep fifteen other people busy and to keep their families fed. At the end of the day, he was happy to sell and just be a worker bee. Ownership was too much stress for what he wanted.


Now I know a couple of people who were allowed to "buy" into a 100 million a year in revenue engineering firm. They didn't have those issues because the firm was big enough to not worry about all work drying up, but man the gossip and back stabbing people will do when put in a position of power is unreal. Just be aware that power realty does corrupt good people.


Other than that, it's probably a good business move for you if you plan to retire with the company Any way, but make sure the numbers make sense.

 

[Steiny]

I bought a general contracting company with two partners from the owner in 84' and my partners and I recently sold it to several of our key managers.
It was the best financial decision of my life getting in, and a very good deal also (for all parties) when I got out.

The value in companies like this includes: any cash left in the business, the profit potential of any work on the books, the real and current value of all equipment and vehicles, and any real estate that is included. Things like "good name" are not worth much as who knows where it will go when the present owners leave? Good, reliable, repeat clients are worth a little more if you think you will be able to hang on to them and keep their business, but don't put a huge value on it.

All the finances have to be transparent, no secrets, no surprises and routine meetings to review finances.
Salaries paid should be commensurate with the industry norm for your region. Just because you are equal partners in ownership does not mean equal pay, the salary is based on your level of responsibility in the business .... for instance a field guy probably isn't worth as much as the company president.
Determine a set formula for owner dividend / bonuses. No money gets handed out to owners until the accounting is done and all bills are paid per a plan. We got fully out of debt before we took anything over our salaries, then normal distribution was 1/3 went to the owners, 1/3 to the employees, 1/3 stays in the business for growth.
You also need a firm exit plan for the current owner(s). They can't hang around forever taking a fat salary and staying on expensive company health insurance or that will absorb much of your potential profits.
There needs to be a reasonable pay-off plan. Employees buying are unlikely to have enough on hand to pay cash, and banks shy away from this sort of thing. Current owner financing the deal for a set time period is the most likely route to take.

Our last buy out deal probably took close to 7-8 years from the time we started gathering the group, got the deal done and they paid us off. This will take some time.

One last thing .... Don't haggle over nickels and dimes, such as we want this tool, but not this tool, the interest rate is 1/2% too high, etc. Take the whole darned thing lump sum and focus on the big picture which is long term business growth and success.

 

[noharleyyet]

Steiny nailed it.

 

[Bulldog0156]

Keep in mind, your exit plan relies on someone else buying in when you're ready to be done. Is there a good market/will there be a good market for you to get bought out?