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.

 

[Aesur]

@NorthCivil - 1.7M/year with 12 employees sadly isn't that far off normal. Typical operating profits are 5% to 13% and actually dropped about 6% across the industry this past year per the most recent Deltek survey. Civil and Environmental based on what I have seen are usually on the higher end of profits with better fees for the work being done, structural is probably on the lowest end with mechanical somewhere in the middle, at least on the west coast of the US. As most engineers will say, we (engineers) are stupid when it comes to running businesses and are in a race to the bottom undercutting each other constantly to get the project. Architects, contractors and owners know this an often shop around, because few care about quality or if it's designed correctly, they will just sue you if it fails and with such few design events, failures are rare.

As to the original posting, I personally wouldn't consider buying an engineering business because the business is only worth accounts receivable as there is no guarantee of continuing relationships with clients once the person their relationship is with is gone. This is typically the time the clients see the opportunity to easily start shopping other options. Starting a business is IMO better as you are building those relationships and right now there is more work than can be done so it's a great time to do so.

 

[MemoryME]

Thank you so much all who have posted. I told my boss today I would not be buying his company. He asked me if there was anything else he could show me financially that would encourage me to change my mind. I told him, the company doesn’t seem as profitable to me as it does to him. He has already paid for it. If I had $500,000 today I would not be investing into this company, I would feel safer just investing in the stock market.

The other reasons I told him I wouldn’t be buying is because I have very strong concerns about the future of our company regarding staffing and it just felt like too big a risk to take on for the value it was worth.

I ended saying I would be happy to keep working there for the time being.

Frankly, I feel sick to my stomach about it all. I can’t shake the feeling that even when I look at it all on paper, I’m passing on an opportunity. It’s hard not to get wrapped up in the emotions too. I genuinely like my boss and want him to succeed, but I won’t put him over myself or my family in this area.

I don’t have to have my whole life figured out in this moment, but I’m just trying to be ok with the decision I made, knowing I considered it for as long as I did and couldn’t bring my self to jump in. I’m going with my gut and my gut said no.

 

[AgMechEngr]

I think you made the right decision. I know it was difficult given your relationship with your boss, but you still have some agency over your life now. You can do something else or start your own gig. If you were committed to purchasing the business, you would not have that freedom. Best of luck!

 

[MemoryME]

This is a really great forum. It’s definitely encouraged me to play a more active role in it when I can weigh in.

 

[NorthCivil]

I agree, right decision to pass. Not really a good opportunity.

if you want to chase money, look at potentially shifting/bridging into more lucrative industries. sounds like there is no money in MEP.

I would hesitate to take on that company for free. (but you might find your boss tries to give it to you for free)

 

[LittleInch]

Memory ME,

First, thanks for coming back to us to let us all know what you decided to do. I do think it is the right overall choice and sometimes not being able to come to a decision tells you it isn't the right choice for you.

You know your industry and company far far better than anyone here so you can see if this would actually be a useful avenue for your money and more importantly time.

Some of us are not really cut out to be business type people and your posts make me think you fall on the engineer / technical side.

Don't know what your contacts are like, but this sounds to me a bit like you need to join forces with someone in the same line of business but who wants to expand their business or is better at running businesses than engineers tend to be. Then it might make sense.

I've no doubt you could make it work and struggle on, but at what price? Both monetary and personal cost it looks too high for you to do on your own or at the moment.

But live your life and NO REGRETS!


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

 

[MemoryME]

I agree and thank you the encouragement. What I feel the best about it as I’m going to pursue some other sides of MEP work for now and the opportunity to ownership could always present itself in the future.

What really sealed the deal was realizing all the man hours and sweet it would take beyond the typical 40 hour work week to start attaining a higher financial threshold in my life. With my wife working right now and my daughter in day care, it’s so hard to put a dollar value on the time I have outside of work. For now, if I can get a pretty decent wage and benefits all for maxing out a 40 hour week, on top of not having the personal stress of maintaining staff, it just seems like the right call. Even better is I’m not dropping $500k and exposing financial risk to have that.

Hopefully I return to this thread in some months time with an update that I was hired at the county. They already have my resume. Haha

 

[TLHS]

Honestly, the only way engineering companies really feel like they have a lot of intrinsic value is if they're large enough to self sustain. If they have a management structure below the owner and groups of people in charge of things so that when you lose one or two people new ones get brought in and the structure supports them.

On a smaller scale, they're a collection of skilled people and the value comes from those individuals. There's some inertia to having a client base, but that's only 3 months to 18 months of grace depending on the type of work. You need to be constantly replenishing that.

You're basically buying a starting point and some inertia at the lower end. The company itself is a money making process that you operate, rather than a machine that you buy that automates the process.

I think the type of succession planning that works better for these types of companies is probably bringing in partners a lot earlier. If you're going to retire in ten years, start promoting people to partner and getting a buy in from them, or pull it from their profits. Then by the time you're leaving, it's not one person selling off, it's just another day in the office because there's already structure.

 

[GibbsDuhem]

Very interesting thread. I worked 12 years for Jacobs. The Corporation had a slogan: "People are our greatest asset". Incorrect. People are its only asset. Dedicated competent engineers and designers is what our clients pay us for and in turn our companies provide an environment where we can deliver safe and accurate designs on cost and on schedule.

Owning such a company is a multi-faceted undertaking requiring vision and dedication and never a day off, whether it's big like Bechtel or just a dozen folks.

24/7 365 is what you get when you own the company. There is no free lunch. If you can take pleasure in blocks of time with your wife and kids mixed in with sequential blocks of time for your company then do it! You're young and kicking ass and you'll never be another day younger! Meh, working for the county: nope! Don't do it! The first thing to go will be that rock star feeling! Now is the time to spin that energy up!

You can set the terms with this guy. You could start your own gig with just one project from his clients - which actually belong to all of you. But if you're constrained by a non-compete, you could go work for one of your clients. Have you not had any discussions with any of your clients about such a path? No offers or at least some indication from them that they'd be interested in having you join their team?

As the owner, you would have the opportunity to employee the talent yourself and to really succeed, in my opinion, you'd have to be not just willing, but enthusiastic, about hiring other rock stars and compensating them and selling their compensation as value added to your clients' projects. Sadly, clients don't get all that excited when their projects go according to plan, regardless of the miracles performed along the way to get them there in spite of the often times self-made obstacles provided by less than competent project teams from the client organization. So you'd have to champion the success of your projects and do everything within your power to make sure every project will be a success. Sometimes you'd need to turn away work for purely ethical reasons like Jacobs should have done with their Limetree Bay contracts.

Especially do it if you have any big visions, like making it an even bigger business. Design build I bet is an opportunity for you. Merge in an HVAC, Electrical or Plumbing team and differentiate your engineering services with this. It is a huge gap that almost no one is even beginning to close. Engineering designs I've seen come out of the commercial side of Jacobs have pretty substantial details left to the construction guys. Similarly for the super detailed deliverables in Petrochem, packaging them for construction is a huge gap that has only begun to be closed in the past decade or so. Sure this will be easier said than done when working with existing clients that are used to getting the engineering and design done separately and then moving on to work with their preferred construction partners. Develop the concept for new clients where it would be a better fit and then sell it to larger clients from the success of smaller new clients might be one way to make it work.

Ah, just some thoughts is all. I have no idea really, but I do recommend seriously against the government job. Then again I've got a good friend that does PM work for USACE and he likes it quite well!

 

[NorthCivil]

If you could swing it, a good option would be to take the job at the county, and do a bit of moonlighting. if they would allow it. start with one client, and go from there.

have your cake and eat it too.

steady salary, good health benefits for you and the family (i imagine), low stress environment, and a bit of moonlighting to keep your hunting skills & killer instinct alive.

whatever is best for you and your family, is the best choice.

a divorce will rob you of any monetary gains sacrificing your family might have made you

 

[glass99]

Late to this thread but agree with the conclusion that the margins at this business are thin - if you have a 12 person company there are going to be times where you are faced with laying someone off and losing a lot of investment vs keeping them on partially paid. Also litigation risk, etc. I would want to make >$300k for that kind of risk and investment. The question is whether it is possible to sharpen things up a bit so you do create that kind of profit, because it should be. You are also getting almost your whole investment back as accounts receivable, which does justify the purchase price pretty well.