Anyone here an owner/partner/principle of their firm? 1

[Todd S.]

Is anyone here an owner/partner/principle in their engineering firm? I was asked to become a partner in my transportation engineering company. The two owners are retiring and one owner will stay on. I was asked to become a partner, along with 3 other people. The problem is that I don't know the questions I need to ask financially and legally to protect myself. Any insight?

 

[IRstuff]

Please refrain from double posting


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[SWComposites]

This has been discussed many times on these forums.

 

[IRstuff]

And there are resources on the web, in general, such as

https://www.score.org/resource/questions-ask-when-buying-existing-business

https://www.upflip.com/learn/questions-to-ask-when-buying-a-business

The top questions would be things like
bookings
billings
collection rate
free cash flow
repeat customers

etc.

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[Todd S.]

I saw one thread about it, but do you have the link to the other threads?

 

[IRstuff]

thread507-463959
thread784-470594
thread784-473869

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[LittleInch]

"The two owners are retiring and one owner will stay on."

So are there three owners?

Basically sounds like two want to sell up and take the money?

Those other threads provide a good deal of caution - take and pay for some good advice locally and don't be pressured into anything fast or to do it all.

Many engineering companies have little to no residual value and are "worth" very little, especially if the original owners take a lot of goodwill and client loyalty with them into retirement.

Also doing it with 3 others new to the game is tricky, especially if one or two just decide to now take it easy and don't pull their weight.

But equally it could be the chance of a lifetime. The devil really is in the detail on this one.

Remember - More details = better answers
Also: If you get a response it's polite to respond to it.

 

[phamENG]

If you're paying for the stake, then look very carefully at the valuation. Things that make sense to pay for:

- Physical assets (computers, plotters, furniture, real estate, etc.)
- Accounts receivable (projects completed and billed, but not yet paid)
- Projects under contract and in progress

You shouldn't be paying for anything else. You shouldn't pay for Good Will. You shouldn't pay for some portion of the expected earnings over the next few years, etc. Small engineering firms (like the one you're talking about) are based on relationships and name recognition. Those relationships and names are about to walk out the door, so there's little "guarantee" of future work, and most of the future work is going to be won by you and your new partners. You should also keep in mind that you are buying the residual risk from projects completed in the past several years (depending on the statute of limitations for the jurisdiction(s) where the firm has worked).

For the physical assets, pay no more than the depreciated value.
For accounts receivable, keep a few things in mind: the money is owed to the firm, but there's no guarantee you'll get all the checks. So in buying that debt, you're assuming some of the risk. The original owners should get something - enough to cover the cost they put forward in paying wages and overhead for those projects, and some portion of the profit. But as you are buying some of the risk, you should still receive some profit from it.
For the projects under contract and in progress, you should look at it in a similar fashion to accounts receivable. But keep in mind here that the outgoing owners have only covered a portion of the expenses and you'll be picking up the rest. There's also the chance that projects will get cancelled, clients won't pay, etc.

For the last two, you have to figure out what a "fair" allocation of that risk and profit is between you and the outgoing owners.

 

[jorton]

I'd ask hard questions about who owns what and future changes in ownership. Is this a one time buy-in? Can you increase your share in the future? How will they decide pricing now and in the future? How will they decide who owns what? Will you have any say in who buys other shares? How are decisions made? Will you own enough to have any say?

When I was presented a similar opportunity at a transportation engineering firm, I thought hard about my potential partners. I ran a lot of financial projections including initial buy-in, potential future buy-ins, borrowing costs, growth, returns, etc. I quickly realized that I would be cash poor but wealthy on paper for many years. Most of my financial resources would be tied up on the company. I looked at how my potential partners operated, resolved conflicts, treated each other, treated me, etc., and I concluded that I couldn't trust them with essentially all of my financial resources. Also, they also wanted me to sign a noncompete. If enforceable, I essentially couldn't work for a year if I chose to leave. I ran some financial projections, and I realized it would be many years before my earnings as an owner (after paying back their borrowing costs) would offset the cost of the noncompete.

 

[EnergyProfessional]

What you really buy is a company structure and a reputation based on the name of the old owners. The structure can disappear into nothing when main employees quit. You can bet that if there is the first rumor of the sale to a yet unknown person appears, the highly qualified people will start sending out resumes. The reputation also can disappear when old clients all of sudden don't like the new owner. And unlike an accounting firm, each engineering project is a new bid or procedure to get hired. So for the next job, it is easy for the client just to hire someone lese.

Physical assets can be questionable. Most software is on subscription, used electronics have not much value. And I bet the old owners stopped all "unnecessary" investments in assets once they decided to sell. Is the office leased, or owned?

I also wouldn't value outstanding accounts receivable as an asset. Who knows why this is still outstanding. Maybe the client didn't like the work. Maybe the work isn't completed yet, so you still have to pay employees to complete it. I would just tell the old owners to keep the rights to the outstanding payments, then it is their problem if they don't appear.

Ultimately you commit to pay them a lot of money. Could you use that same amount to start your own firm and not deal with being "married" to a partner?

Is the name of the company worth anything? If the company is called Smith, and your name is Johnson, it may be worthless. If the name is "Siemens", it may be wroth something.

How well do you know the owners and the firm? It would be easier if you already would a an employee or some sort of manager there. Maybe start by asking what their first proposal is. Many transitions are based on the old owner staying on and getting a cut of payments. So they have an interest in the company succeeding after the sale.

It is like someone selling an old car. The seller has exactly zero interest what happens to the car after they received payment. And they will tell you it is the best car ever.