How to appraise a Geotech firm 3

[vorafr]

I am in the process of acquiring an existing geotech firm. The firm has been in the business for approx 15 yrs. The owner (registered eng) has health issues and is unable to work. The firm has currently no work (poor economy + no engineer) and the staff has been laid off. They have material testing lab and office equipment and furniture.

I would like to have an appraisal done by a third party; however, because of the specialized field, most business brokers are reluctant to spend time.

My thoughts are this:
1. From the income approach, it is difficult to put a value since there is no backlog of work. There are past tax records however, i feel that service business is tied mainly to the owner (or engineer in-charge).
2. I feel that more realistic approach is to do an asset-based evaluation where the current market value of the equipment, furniture, etc can be added.
The goodwill value of the company is a difficult to appraise.

If anyone can shed some light on how to appraise this business would be much appreciated.

Thanks.
Frank

 

[Ron]

You have two things to look at....the hard assets (equipment/facilities if any) and the soft assets (goodwill, client list, name/reputation).

Value the hard assets at some specific amount...inventory, age, quality, function...probably in the range of 20 to 30% of the original value.

Value the soft assets differently...does the firm have a good reputation? Since they have laid off employees and the owner is not active, does the engineering "public" perceive the firm as having closed its doors? If so, the goodwill is nil. If not, then the reputation value is negotiable, mostly in the form of paying the owner a royalty or fee for consultation.

If you started a similar firm today, would you have the same or similar market penetration/exposure as the firm you are considering? If so, then the soft assets are worthless.

 

[BigH]

Please refer to my comments to your question that was also posted under the Soil Testing Engineering Forum (do not double post).

 

[fattdad]

Buy the assets rather than the firm. Don't think liabilities from past work convey when you just buy the assets.

Not that I'm an expert.

f-d

¡papá gordo ain’t no madre flaca!

 

[iandig]

I think I just posted a reply to this in Soils Testing

 

[Ron]

fattdad brought up an excellent point....liability. Make sure you get and indemnification of prior professional and general liability. You have to be careful of buying a named entity and maintaining that name and entity. You might want to consider a slight change when the purchase is made, just to stop one entity and start a new one...with similar names if the recognition is a factor in the sale.

As an example, let's say the name of the business is XYZ Engineering, Inc. You might change it to XYZ Engineering Associates, LLC. or something similar, but still be generally known to the public as XYZ Engineering.

 

[vorafr]

Thank you kindly for all your responses!! First of, i want to apologize regarding the posting in multiple forums. This is my first post and did not realize how does it work. My intention was to get feedback from related soil-geotech-soil testing forums. I will not post multiple posts in the future.

Again, great comments and very useful website!! I hope i can contribute and help others thru this forum platform in the future.

Frank

 

[Ron]

Frank,
Welcome to the site...you won't find any better information anywhere on the internet.

Ron

 

[vorafr]

Ron-
I agree with you 100%. This site has been a tremendous help. Kudos to those started it and continue supporting the activities!!

A quick update on my situation-
In the middle of our negotiation, unfortunately the owner/engineer of the firm has passed away. The widow is still interested in selling the business; however, it is becoming more of an asset-only purchase more than ever since the principal of the firm is no longer there.

My focus has been primarily in the environmental engineering field (water, wastewater, stormwater). With this news, i feel that i will be relying on the staff (which currently have been laid off) in the short-term. They are one of the biggest assets of this firm.

I see that there is still a lot of merit/potential in the business as the economy slightly getting better. I am hoping that while we slowly pick up the pace, it will allow me time to learn the trade as well focus on sales/marketing.

So, i am structuring the purchase deal with a fixed priced and the seller wants to carry it in order to have a steady income source as well as to avoid capital gain taxes. I take over as the primary registered engineer. I can combined my experience along with current to offer additional services and cross-train the staff as we move forward.

I really like the idea of slightly changing name of the firm to avoid liabilities arising from the past work.

ANY SUGGESTIONS REGARDING THE STRUCTURE OF THIS DEAL WOULD BE MUCH APPRECIATED!!

Thank you all in advance.

 

[msquared48]

Sounds like you better get a lawyer involved at this point, one specializing in contracts.

Also, you might want to check with the state board and see if the firm can be sold as an engineering corporation. Depending on how many engineers were there and the structure and percentage of ownership by a LIVE and LICENSED engineer, it may not be considered a viable engineering corporation anymore, and, hence, could not be sold as such. In Washington state, to be an engineering corporation, a minimum of 51% of the company must be owned by a licensed engineer(s).

I may be all wet, so check with your lawyer.

Mike McCann
MMC Engineering
Motto: KISS
Motivation: Don't ask