Looking for opinions on buying out my MEP company 16

[MemoryME]

Hello all,
I’ve been looking through a bunch of old threads and I’m very impressed with the quality of the responses here. I’ve been quite a lurker and am now ready to throw a question in. I appreciate any input.

I’m considering buying my current MEP consultant company. I’ve been out of undergraduate school for six years. California based school, family, work. Mechanical licensed PE. I’ve been in my current company for five years. Over the last three years the sole owner has been looking for me to buy him out when I’m ready. We had an evaluation done. Value came back at $1.1m including accounts receivable and accounts payable. Value was $700k for everything minus the accounts receivable and payable.

Owner and I have agreed upon a $500,000 price that I will pay off over ten years. I pay ~$50,000 per year and each year I get larger salary (up to $150,000 by year five). For the first five years I just the get profit I’m allocated (i.e. in year three I’m 30% owner and will have paid around $150,000, thereby getting 30% profit). At year five I receive total 100% ownership and pay the remaining $250,000 off over five years with minimal interest to the owner. Owner will NOT be taking account receivable with him when he leaves. Although we will likely negotiate making a draw form the company that leaves me enough to run it and give us both profit at 50% level.

I have a great relationship with most of our clients. I’m not at all concerned about losing work when the owner leaves. The owner will stay employed with us for the first five years and retire after five. At year three or four (still need to nail in) he might move down to four days a week, but will take a salary cut to do so.
Lets get to my questions:

1. I’m concerned ownership isn’t for me. I have a small but growing family and I worry about how much extra work I will have to do as owner vs right now as just a project manager. I love my kid and my wife and stress about being away from them more to do owner things besides just work things.
2. I worry about our staff. We have slowly deteriorating in quality staff. We are about 12 people. Electrical is run by a guy who will retire in the next few years. He is our only PE and I will have to find a replacement along with the owner to keep that side of business open. WE have no potential Electrical PE in line at the moment. M&P: our good folk have retired over the years and our current staff is lacking in motivation (near retirement) and skills (newly hired – but have potential). What keeps me up at night is people leaving the company and I’m left holding the bag. The hardest part about being an owner it seems (as I daily imagine what its like and try to get in my bosses head) is dealing with employees and helping them do work. A good chunk I wouldn’t hire myself. But most will be retiring in the next five or six years anyways.
3. I have an alternate opportunity right now that I could go work for my county. Unfortunately, I think I’ll like the work less than my current job. It’s more like a pure project manager and scope/estimator. I’ve loved my current job just because I manage work but also play a good role in staying in design and continuing to learn. I do have a call with the person who retired from that job this afternoon. I’m going to probe him many questions to ask about what his actual day to day is like. I’m attracted to county stability, no overtime, not having to manage a large staff, and getting paid well there (details at end of post).
4. Lastly, and some of the other threads I’ve read allude to this: I wonder I’m even making the right call entertaining buying a company. I could start my own after the owner retires, however I’m under a two year non-compete. The assets of the company are likely around $100,000 currently for physical things but by the time I’m a 50% owner I think that will be deteriorated and items will somewhat need replacing. Because out accounts receivable right now is ~$600,000 and that would NOT be transferred to the owner when he sells, It’s all a bit murky.
I don’t have many folk in my life who have been in a situation like this that I can hear opinions on. I do love my current company. The folks are nice enough, whilst not motivated. I am comfortable here. With the owner needing to leave I’m in a bit of identity crisis. I see myself potentially moving into his role (along with his guidance and help) but I can’t help feeling I might be stepping into something that either a bad bargain or something I just don’t think I’ll want to do in five -ten years. I also see myself working for my county and hating my job because It’s all desk work and kicking myself for not going out and missing the opportunity that was right in front of me.
Lastly, and please be gentile with this: I’m a rockstar at my work. I’m extremely self motivated, I work very hard, and have no doubt that If I wanted to run a company (in any way that comes about) I could likely do it. However, Money isn’t everything to me. My wife has full time work (Makes about $80,000 and will make around $110,000 in next decade with regular pay increases, very stable job). I feel I’ve passed the threshold to where my time is having a lot of value and an extra $40,000 per year, is that life changing or just situation changing?

County benefits are $~135k per year after a few years in, 15 days sick leave per year that becomes years of service, 5 weeks PTO after a few years, basic pension, 11 holidays per year.
If I work for the county and my wife work, we’ll be pulling in $200,000 per year in the next five years. Why work harder and more just to make more money?

Thank you, I’ll try and monitor the thread to help answer questions and provide updates, but during the work day can be a challenge.

 

[MemoryME]

And sorry, my realm is building MEP design. Non residential construction. Education, high rise, higher Ed, civic, Commercial, some labs, clinics

 

[phamENG]

I’ve haven’t yet figured out how to respond in quotes here like others, I’ll dig into it.

If you were running full tilt, turning clients away, and still losing money, I'd be hesitant. And if $600k was the receivables for the entire year...yikes. A 12 person operation should be bringing in closer to $2.5-3M/year. We have a structural engineer on the forum with a 2 man operation who regularly breaks $500k/year revenue...and he lives in a city that probably has a cost of living 1/3 of the average California city. Add that to what is projected to be a downturn in the next few years, and the County job looks mighty enticing to me...

 

[MemoryME]

No the $600,000 is just what is outstanding. I haven't seen the totals for the year but we did make enough to break more than even. Think it would be around $1.7m in revenue which is close to our expenses. We actually expected a lot more money to come in at the end of the year than it did. People usually send us tons of checks by years end to get the balance of their books. We expected to get at least $200,000 extra, which would have essentially all been profit. We've already received some check totally $70,000 since the start of the year. Kind of odd to me actually.

It's tough to gauge the market right now like that because you never really know where things are going to go. for example, CA still has massive housing issue. We're getting tons of jobs right now in multifamily and I personally don't see that slowing down. I'm sure it could, and we might let a designer go because of that, but I imagine they would be the low picking fruit of the employees here so not a big loss.

Good point about single man operation. It's tough because I look at myself and see that I could likely stomach running an established company that I slowly shift to how I like more than wanting to jump in no holds back to working on my own like you and that structural you mention. That second option to me seems even more risky.

I think If I buy this company, there is a pretty good safety net of clients to at least keep the $150,000 salary. I was planning on using the salary increase (currently make $100,000) to offset the buy in. By year four or five of the buy I'm expecting the company profits and the work to handle the $50,000 expense at that point of debt. I would essentially just be cash poor in the first years. But the business owner won't wont the company to fail as I slowly by him out because he's going to be getting profit and some of that will be his.

I don't feed jaded yet, and maybe I'm naïve, but the owner really seems like he would do everything in his power to help me succeed. I know all his clients, which is scary thing for him. The transition of clients I would expect to be keeping almost all of them. I know them all and the relationships we've built have been growing these past five years.

Working for the county is more project management, which has always turned me away from it. That just doesn't' seem as engaging as design. I do like being in design. I admit I don't know enough and will be talking to the county retiree today. He's been quite friendly to me and I expect a lot of candid thoughts.

 

[phamENG]

Okay - I guess I misunderstood the $600k number. Be sure to look at it in terms of both cash and accrual accounting - if there's a large delta, there's a decent chance that the receivables are carrying some bad debt (as you suggested already). I only brought up the smaller operation as a comparison in terms of revenue, a moot point now.

Sounds like a difficult spot - too bad he can't wait another 5 years to start the process. You'd probably be in a better place (financially, family, etc.) to do it and likely on the other side of the business cycle. Cest la vie.

Whatever you do, keep your eyes wide open and take nothing for granted. Make sure you have your own lawyer and your own CPA go through everything. Good luck!

 

[AZPete]

May want to hire a banker to provide a buy side opinion or sign up to be the financier of the deal. From that you should get a third party assessment of buyer's valuation. The financier will price it for risk, so that should give you an indication of what you're taking on. Of course, if the financier won't do the deal...

 

[MemoryME]

too bad he can't wait another 5 years to start the process.

Actually he most certainly can wait to 3-4 years before I buy in. He doesn't plan to retire right away. I could easily keep working for him, help him with the transition to employees and direction and then pay a lump sum for half the company and finance the rest over five years. Owner would probably want to renegotiation price later on which is both good or bad depending on how the company shapes up. I still have the risk of staying on for that time with not a clear direction of where its going.

May want to hire a banker to provide a buy side opinion or sign up to be the financier of the deal.

Yes that's in the plan. I mention above I planned on getting accounting advise as I pursue from someone who would be in my court. The evaluation was actually done by a third party evaluator. I didn't find their interpretation that much helpful honestly, and don't really see getting ANOTHER evaluation to be of great value...

 

[LittleInch]

I can understand the owner wanting to sell up and get $500,000 for this company.

But you buying it seems like a poisoned chalice.

From what you say above in your posts, in the next 5 years or so, you're going to have to replace 80% of the staff. That's hard. ON top of now being responsible for getting new work in.

My guess / worry is that as soon as you sign the deal, the owner will mentally retire and within 6 months won't be putting in the hard yards to renew or get contracts, hire new people or replace anything. Hell he might just bring forward his 3 day a week operation. But you'll still be under the S&P agreement.

To be in that position at what sounds like just under 30 is very good, but the balance needs to be right and with only 6 years experience you may not really understand what business is and how hard it is. Being your own boss / running a company may not be what you're really set up to do right now. 5-10 years time maybe.

Is there a third option? Just keep working there?

I'll be frank here that at present this doesn't sound like a company going places and in 5 years or less could have eaten you up and spat you out.

Maybe wait 12 to 18 months and then look again. By that time the owner may have more of a realistic attitude about the "value" of the company.

I don't understand what C corp and S corp are?? Maybe not relevant.

Also why this examination of accounts payable?? That's just part of the value of the company and relvant to the profits no?

I would approach this differently is possible. Say yes you're interested in taking this on, but need to understand much more about the accounts, the profitability and how this company will look in 5 years time, what with needing to recruit all the staff you're going to need. You're going to need min 6 months to do this before you're ready to actually pay anything or change control. Maybe just accept the ownership, but agree a falling percent of the profits to the owner. Say falling 20% a year. He converts to a paid employee / winds down.

Whatever you do, don't borrow any money to do this. Be able to wind the company up if it all gets too hard on you or your family without loosing capital money.

If you've read anything here you'll find the value of consultancies is vastly overblown by the owner(s). Offer 10% of their valuation. Who else is going to buy it??

I was typing this whilst you were so some of this has been addressed....

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

 

[phamENG]

Another possibility:

Inform him that you're very much interested, but you're not quite ready to take on the mantle of ownership. You'd like to push that out 3 to 4 years. You do, however, want to take a more active roll in management. That "owner salary" has nothing to do with being the owner, it has everything to do with management. So take your salary increase incrementally as you take on more leadership and management responsibilities. He'll have an opportunity to slow down a little.

He may not love the idea - most entrepreneurs don't. The idea that owner = manager is the Albatross around many a small business owner's neck. And while he'd still be involved and provide guidance and overall direction, you'd be the one making sure the gears are greased and the machine keeps humming along.

This will boost your pay and get you closer to seeing if owning/managing a consulting firm is right for you. And in 3 years time if the company is on a better footing and you like what your doing...buy him out. If not...go elsewhere with a wealth of experience that will make you a hot commodity at any other firm.

 

[MemoryME]

Thanks LittleInch. I do agree with a lot of what you're saying to the point its not even worth it to respond to each item. I've got my work cut out for me to analyze this appreciate all (and others) input. Getting that gut reaction from so so many has been immensely helpful. I have more options than I initially considered too. My boss doesn't want me to leave. He's going to keep the company going. I can certainly put this in a holding pattern, he just may decide to do something else and that might be for the best.

I will say I was in no way going to need to take a loan out do any of the buyout. I calc'd that I needed to put in a monthly stipend of $1,500 out of my own budget plus the salary increases to meet his number. However that would make me essentially take my $100,000 salary, subtract out eh $1,500 per month and then not see a "raise" for the next ten years because all the extra goes to buyout of the company.

 

[MemoryME]

And in 3 years time if the company is on a better footing and you like what your doing

I think this going to be the most likely scenario right now if I want to stay and not jump to another firm or go to the county. The owner doesn't' have anything else lined up so his options are limited.

 

[AZPete]

I honestly don't have my own accountant, but have lined up talking to a family accountant.

Family may be too close. Recommend true 3rd party for cold analysis.

Buy side evaluation would be a reviewer who is preparing to consummate the deal; i.e., eat their own cooking. If you have a lender who will agree to lend on the deal, they will be on the lookout for risk--including your fitness to own up to it. They'll be able to highlight the weaknesses (from their standpoint). If they won't do the deal, then maybe you should consider what you're signing up for. Whether you finance or sign a promissory note, you're acquiring debt. May as well get a very thorough scrubbing by a sophisticated party. Your questions indicate that valuation, risk, tolerance, inclination, and ability are not ironed out anywhere clearly enough to proceed confidently.

The deal is worth $X00,000+ to your pocket book, gain and loss apparently, so why not spend a $X,000 to get solid accounting and risk advice.

 

[GregLocock]

You need to find a business accountant or financial advisor. Yes they are expensive, but you are about to blow a million dollars.

Cheers

Greg Locock


New here? Try reading these, they might help FAQ731-376

http://eng-tips.com/market.cfm?

 

[structSU10]

From the above the revenue numbers are quite small considering you are saying you are totally booked. I would think along the lines of Pham, at least 2.5-3M revenue. How many jobs is fully booked? how many of the 12 are engineers? We have about 15 people - 12 engineers - and do 300-350 jobs a year. Granted there are many half day jobs in that number but also quite a few multi year large projects.

Are all your jobs a fixed fee and you get killed by more time spent than budgeted?

 

[fel3]

MemoryME…

Earlier today you said, "Working for the county is more project management, which has always turned me away from it. That just doesn't' seem as engaging as design. I do like being in design. I admit I don't know enough and will be talking to the county retiree today. He's been quite friendly to me and I expect a lot of candid thoughts."

If you become the owner, you will almost certainly spend a lot more time doing business and project management and a lot less time doing design. Are you willing to make that transition?

============
"Is it the only lesson of history that mankind is unteachable?"
--Winston S. Churchill

 

[SWComposites]

I haven't seen the totals for the year

If you haven't (and the above statement implies it) you need to see the entire company financial info for the past 3 years at a minimum. Every $ in and out. And see the complete tax returns for those years. Also, all of the info provided to the person/company that did the valuation.

 

[MemoryME]

I think the best course of action here is to get additional information on the financial state of the company. I have the evaluation report that shows the tax return data for the last four years. I don’t have all the supplemental s that created the report. The owner has offered me to talk to the company account to get more up to speed and then I can hire my own accountant to more fully get a risk analysis and help me find questions I haven’t realized I should ask yet.

My talk with the county reitree was really insightful. The job is mainly project management like I expected. It entails creating RFPs, cost estimating work, assisting county management staff to solve sight issues, manages consultants the county hires who do actual work, and review those plans, provide general guidance to inspectors and sometimes review installations. There is about as much county travel as I have travel at my current work and would expect as a company owner. The biggest differences are that the county position is a one-off. I will not have a staff to manage. They currently give all the mechanical jobs to county architects who are struggling with that. I would be a bit of a solo as far as work loads, but still have options to deflect work if I get too much. The retiree did have periods where he did design. Maybe about 10% of his time, but super common.

Comparing to the ownership position , a lot of the work types elements are similar. As an owner I would be guiding marketing, writing proposals (like I already do) but also managing staff. Our current staff is three PEs and about 7 designers, and two admin. That’s probably why our “metrics” are lower compared to others. We pay staff less because we don’t have many PEs. We usually do about 100-120 jobs per years. Average job price is $20-$40k. All really fixed fee.

Reviewing work like I would do as an owner has would be analogous to reviewing work of consultants as the county employee. However I wouldn’t have the responsibility for the PE stamp needed unless I did the design. The county job does seem safer, but obviously comes with cons of no profit benefit. I don’t really have all the details on the pension, but I would need to contribute around 10% or paychecks.

I feel myself leaning towards the county position just because it sounds quite a bit more simple. But I’ve also read account of many employees of county groups feeling trapped by the pension and wishing they could do something else.

 

[Fischstabchen]

Engineering companies are never worth what people think they should be because they are not at all like passive wealth generating assets. In my opinion, yu should really consider the value of a company to be profits from its backlog. I have seen and heard of numerous cases of firms getting bought out and then they basically just dissolve as the employees don't like the knew owner, they follow the old owner, or they lose clients. I would say that often it seems worst than cutthroat industries like the restaurant industry because there are very few assets that can't just pick up their shit and leave. With a restuarant, you at least got the land, building, and equipment that has physical value. Let me put it this way, I think when your boss retires, if he doesn't find someone to buy the business in a timely manner, he will just run out the backlog and shutter it.

 

[GregLocock]

A friend of mine was looking at buying an engineering company. He looked at several. Stock was mostly dusty stuff on shelves that had been ordered and then cancelled. Most of the value was in the owner's contact list. Typically they were hoping for a price of the order of 1 year's cashflow.

Cheers

Greg Locock


New here? Try reading these, they might help FAQ731-376

http://eng-tips.com/market.cfm?

 

[SJBombero]

I recently bought a business. We do consulting and fabrication. My recommendation is if you like the work you are doing, buy the business but hire an accountant to make sure the deal is equitable. It is a long process between signing a letter of intent and closing on the business. However, don't have any illusions that the business will run itself anytime soon. That should be your goal but it might take a while to get your team to that level.

 

[NorthCivil]

let me get the numbers straight from all this text:

revenue: 1.7M/year
owners salary: 150K/year
employees: 12
profit after all salarys (incl. owners salary): 150K-200K
sale price: 500K (3X profit)

doesnt seem like a very profitable company. profit margins way too thin.

I was offered to buy out my old boss (50% share). the stats on his company
revenue: 1.4M
owners salary: 200K
employees: 4
profit after all salarys: 700K
sale price: 1.4M

& i turned it down. mostly cause i didnt like the partner remaining. started my own gig. kinda regretted it for a bit, but 3 years in, no regrets.