New Partner or Selling an Existing Consulting Engineering Business 1

[slipstick50]

We have a successful 25 year old consulting engineering business providing engineering services for bulk materials handling, storage and processing structures, equipment and systems. Projects involve bins, silos, towers, conveyors, process equipment, etc. Since we are located in a small north central city, we provide general engineering services for a variety of other types of projects.

We need licensed engineers capable of learning and taking over the management and operation of the business on a partnership and ownership track...

With the rural area we are located in, we have had no success in finding applicants when we have worked with Universities, Job Services and friends in the business..

Does anyone here have any experience with this type of problem??? Any works of wisdom would be appreciated.

 

[GregLocock]

I know someone who is trying to buy into the sort of situation you describe. I think the problem you face is that the market is very small.

I'll summarise the problems he's seen

1)old stock hopelessly overvalued
2)A lot of the contacts are in the owner's head
3)Asking price well in excess of any hope of covering the interest payments, never mind a living wage
4)Employees who have 'specal' working arrangements
5)Poor documentation of knowledge and methods and procedure.

Typically I see businesses are over-valued by 200-300% by the incumbents.


Let's see say you've got a light engineering co. with 4 employees, and an owner. You are paying them 50k and yourself 100k, and are charging them out at 300%.

That's about 600k a year income. I'd pay you half a million for that.

That'll slug me 50k in interest, which basically comes out of my pay, so I have taken on a half million dollar debt and the opportunity to half my take home pay, as a gamble against which I might be able to grow the business.

Now, you might think that ten months earnings is on the low side for an estimate of the value of a company, but then, I'm buying, you are selling. I think RDK said more like 1 year's earnings.




Cheers

Greg Locock

Please see FAQ731-376 for tips on how to make the best use of Eng-Tips.

 

[GregLamberson]

It's not quite that simple. There is more that goes into valuation of a company.

Cash flow and how that cash flow is treated is critical, as are many other factors. Economic as well as finanical analysis is needed.

Many of the variables that go into cash flow models are uncertain, so you have to choose to incorporate probabilities into the cash flow modeling. The goal of developing the cash flow is to compare the timing and magnitude of the flow with the timing and magnitude of flows resulting from alternative uses of your money(speaking from a buyers standpoint).

Cash flow is made up of: 1) Revenue (from goods or services), 2) Cost (cash spent in making, operating, and marketing), and 3) Terms (how the revenue and costs are treated (i.e. taxes, financing, payment terms, etc.)

Revenue - Cost - Taxes = net cash flow.

Revenue needs to be looked at and a simple forecast model developed. Costs need to be looked at in the same way. Cash flow risk needs to be considered as well as taxes (never forget to consider taxes in ANY decision you make). Once you determine the cash flow you will need to look at cash flow treatment which is a whole other issue. What are the contract terms with suppliers? Customers?

Bottom line is you will need to, after analyzing all of the inputs to the equation R - C - T = NCF, still need to determine the effecieny of the investment. Calculating NPV (Excel does that easily, you'll need to select a discounting rate, 10% seems to be the commonly acceptable rate) - but this will only tell you the magnitude of the investment. In other words, NPV is an indicator of the value generated by an investment, but gives no indication of the relative investment efficiency, other than generating greater than a 10% return if the NPV is positive.

You also need to look at ROR (rate of return), ROI (return on investment) DPI (discounted profitability index), IRR (internal rate of return), or there are a multitude of other ratios that will tell you what the effeciency of the investment is based on a number of factors. There is no silver bullet to dtermine yea or ney. Personally, DPI and NPV I think are the best conbination of primary metrics to use for investment decision-making, because they cause alternatives to be evaluated with the mindset of the highest efficiency for the investment (DPI) and for adding value (NPV).

Spending additional investment as long as it adds positive NPV or value at a ten percent discount rate does not indicate good investment efficiency, as value may only be added at a 10% effective rate or a 1.0 DPI. DPI values above 1.0 indicaet that value is being added at a rate higher than the 10% disconnt rate.

To take the example above and assume the $300K in salaries @ 300% billing = $900K, assume 10% net profit = $90k/yr. What would you pay for that cashflow? Again, have to make many broad assumptions here, but at 10% discount rate, assume you'll keep the business 25 years, no residual value (all of these are very broad assumptions), a normal investor would pay $800k for the business.

GregLocock summary of the problem areas is unfortunatle yaccurate. All of this only underscores the fact, that if you want to sell, get some professional input.

Greg Lamberson, BS, MBA
Consultant - Upstream Energy
Website:

http://www.oil-gas-consulting.com

 

[slipstick50]

Thanks for the comments on "selling" an engineering business. As much as we would like lots of $ for the business. we figure that probably won't practically be in the cards.

Continuity with clients and with employees could be more important to us combined with the opportunity for me to continue doing special consulting as long as the buyer can put up with me.

Also keeping the company health insurance plan available to my wife and me is a big consideration. I can work out and do a tail end error and omission insurance plan.

The office building and larger assets like the building, vehicles, some equipment would have to be sold off, but the business, that could be worked out with no or very little loan/contract value.

The local real estate and job service brokers have been little help. Next week we look into a broker in Omaha.

r.

 

[GregLamberson]

slipstick50

Keep in mind, my back of the napkin numbers take into account no hard assets owned and was based on nothing more than uninformed guesses - really only a SWAG.

If after your discussions with the broker you have any questions or want to run anything he tells you up the flag pole, maybe give it a sanity check, just post it here.

Good luck on it.

Greg Lamberson, BS, MBA
Consultant - Upstream Energy
Website:

http://www.oil-gas-consulting.com

 

[slipstick50]

Our website is nohrengineering.com

It's been difficult to recruit engineers to come to smaller cities like some in Dakota we find.. It's a 3 hour drive to a decent airport and pay scales are low for wives with professions.

r