Offered 50% share in company. 27

[NorthCivil]

I work at a small specialty structural consulting firm. 2 owners, both early 60s. 3 employees. 2 smart young juniors, and myself, mid 30's. just been offered to take over from one of the owners who wants to retire.

We are in a HCOL area, in a niche business, right now the construction market is booming. Company is only 6 years old. for the past few years, books show annual profits of 700k before the bosses pay themselves. I'm being offered to buy the retiring partners half for 700k (initial offer).

My main concern is the nature of the existing partnership.

The partner looking to retire is the technical guru, day to day manager, who brings in all of our value clients and lucrative projects from his contacts and relationships.

The partner to remain owns a separate engineering company, much larger, that occupies all of his time. He is not technically skilled in our area of practice. He is not involved one bit in the operation of our business. Sometimes he will bring in work to our business - he will pitch combined engineering services to clients, in conjunction with his other business - but usually that work is not the kind of work that is good for our business. The two businesses operate at two different ends of the market.

That said, we do operate using the infrastructure of the larger company. Office, legal, admin, reception, IT, its all provided from the larger corp. Though it is tracked and we do pay for it - and not a discounted rate! quite expensive, actually. but taking care of those operational headaches though obviously has some value.

I do not know how this business partnership has propogated. it has become very one sided, in my opinion. I can visualize how it may have started as a partnership between the retiring partner who was a solo practitioner, and the remaining partner who already had a business - and then over time became lop-sided. The retiring partner is a very conflict averse guy, I'm imagining he just let things slide to where they are today. Prior to being offered shares and getting a peek at the books, I was under the impression the shareholding was an 80/20 deal or similar between the two partners.

I always visualized starting my own consulting company, with a partner of the same age, where we could together tough out the hardtimes and enjoy the victories. I am leery to get into a partnership where the other guy doesnt lift a finger. No load-sharing, so to speak. In my mind, I feel like the only way I could go forward would be if significant shares were stripped from the do-nothing partner. But I dont imagine such a conversation will go over well with dr do-little.

Am i passing up a good opportunity? any thoughts?

One additional fact: Maybe its just me being cocky, but i cannot see a reasonable alternative succession plan for this business, that could be carried out in the next few years, outside of locking me in. Specialists in our field are very few and far in between. The two juniors, though very bright, are just too young, inexperienced, and not licensed.

 

[rowingengineer]

One last thought, make sure you have a non compete agreement with the retiring partner both business and personal. In my state in aust it is limited to about 2 years after end of employment and 5 years for business. I have seen many a time someone move on only to get bored and show up again, full of energy.

http://www.nceng.com.au/

"Programming today is a race between software engineers striving to build bigger and better idiot-proof programs, and the Universe trying to produce bigger and better idiots. So far, the Universe is winning."

 

[NorthCivil]

Following up here.

I have had discussions with the two existing partners, regarding the future. I laid out my thoughts honestly. That I liked the business, but not the price, and not the partnership with the uninvolved partner.

The partner to retire was quite disappointed, I think he was looking for a quick exit, that will not be happening now. I outlined that I just did not want to partner with the absent partner in any capacity that would likely be acceptable for him (maybe a 90/10 deal?).

The outcome with the partner retiring was that the deal presented was fully open to discussion, because in reality, there is no other option for him. If there is no way for us to do a deal, we could look at winding the business down, and if i was interested to start my own office, we could transition projects/clients to me as part of that.

The partner "to remain" is furious with me, because its evident now his golden gooses days of laying eggs are numbered.

Its a tough decision, because at the moment I don't have the capacity in life to start a business (home and family life is a bit busy for the minute). maybe in one or two years time i will be in a position to put the energy needed. So how things proceed for the next couple years (and even months) are up in the air.

Will keep you all in the loop as we go.

Thanks all for your time and interest.

 

[azcats]

Thanks for the update.

Out of curiosity, could you tell what partner-to-remain expected your response to be? Furious seems like an odd reaction for someone who needs help to keep his golden goose alive.

 

[BAretired]

I did not comment earlier because I didn't want to influence your decision. I was in a somewhat similar situation in the late 1960s and elected to start my own company. I have no regrets about that. I believe you have made the correct decision.

BA

 

[r13]

Furious about - instead of going out to have a nice Martini, now have to drink homemade wine

 

[oldestguy]

Keep this in mind. It won't change.

The partner "to remain" is furious with me, because its evident now his golden gooses days of laying eggs are numbered.

 

[Bill West]

Sometimes it can be hard to retire and get one's sweat equity back out.

I'm wondering if a slower buyout of the retiree will give him a better tax angle. He does progressively less work, you get progressively more of the profit, you concede some of that back as your buyout of him and/or use some more of your take to carry a progressively increasing minor debt to complete making his buyout a fair deal. A friend did this to ease a new partner in, not risk the company's value and still get out. There were also land assets which he kept initially and slowly sold to the business, sort of protecting his stake.

For separating your company's remaining partner, could you and the retiree:
-form a new company
-get new premises and support services
-invite the customers and staff to move over

For this the retiree would have to break it to the remainee that he's been left with no choice. That the only alternative way to permit retirement would be to close the shop now. Either way the remainee's income is winding down. There isn't a meaningful physical equity to liquidate and split with him either. Nor does he really own any of the goodwill because it wasn't his sweat that built it. Any appraisal would credit the goodwill to the retiree's efforts and the company doesn't have an employment lock on that so it's not a company asset.

Bill

 

[Bill West]

Oops, I should have said more about only making a buy from one partner, not the other and still being above board. Also the remainee will speak to others, it would be better if they first hear a complete story and about the limits on choices.

Bill

 

[nmerr]

That said, we do operate using the infrastructure of the larger company. Office, legal, admin, reception, IT, its all provided from the larger corp. Though it is tracked and we do pay for it - and not a discounted rate! quite expensive, actually. but taking care of those operational headaches though obviously has some value.

Regardless of whether the rest of the deal is equitable or not this one statement seems super bizarre to me. If resources from the other partner's company are used I understand paying the other company for them but not at typical billing rate. Your company should be charged the actual cost to the partner's other company for the salaries and benefits, otherwise he is profiting from that deal on top of his 50% share of the profits of your company.

 

[XR250]

We are in a HCOL area, in a niche business, right now the construction market is booming.

Its a tough decision, because at the moment I don't have the capacity in life to start a business (home and family life is a bit busy for the minute). maybe in one or two years time i will be in a position to put the energy needed. So how things proceed for the next couple years (and even months) are up in the air.

I say go out on your own now. It is probably not much more time than dealing with the redtape of buying into a partnership.
Sounds like they are a sinking ship. You can likely work 1/2 as many hours and make the same money as you are now.

 

[KootK]

Unfortunately, once one has these types of conversations with their employer at a serious level, you often have to consummate or part ways. It's an easy situation in which to hurt feelings and, once either party tops seeing the other as a long term prospect, the employment gig is kind of up.

A former coworker of mine moved away to work at the only structural firm in a really nice resort-ish community a few years ago. Her boss was of a certain age and she'd always intended to buy him out when the time came. When the time came, she decided to do the buy out with a couple of partners of her own: me(external capital) & the other hot-shot engineer at her firm. After endless haggling, a deal could not be worked out. By then however, nobody was really vested in each other so my friend and the other hot-shot left the firm for other opportunities. It was all really quite sad as the owner of the firm was a wonderful person who'd built an impressive little business that is likely just going to have to be wound down. And, of course, he's lost his two best employees and he'll probably not recover his sweat equity.

In the case that I just mentioned, I came to feel that there was only one workable arrangement:

1) New owners get 100% operational control even if the buyout is gradual.

2) New owners get healthy salaries and something like 50% of the profits after salaries are paid.

3) Old owners get 50% of the profits after salaries are paid until a certain total buyout is achieved.

The end.

Out of the gate, owners will invariably feel that this is unfair. And it may in fact be. Unfortunately, something like this may be all that is realistically available to them given that they have not already set up succession planning in a robust way.

 

[NorthCivil]

>Unfortunately, once one has these types of conversations with their employer at a serious level, you often have to consummate or part ways. It's an easy situation in which to hurt feelings and, once either party tops seeing the other as a long term prospect, the employment gig is kind of up.

This is exactly where my head is at. I've shunned these guys, this business is now in wind down mode. How long should I stay at a business that is closing? There is no future here.

 

[KootK]

Yeah, it's tough as it complicates your startup calculus with respect to your busy family situation. You now have the second decision to make, below, rather than the first.

1) Endure extreme discomfort of startup VS stay at cozy job.

2) Endure extreme discomfort of startup VS Endure moderate discomfort of job change.

And, of course, there's almost no way to job hunt while currently employed without generally feeling like a faithless bastard. To that end, if you've been at your current job for less than five years, consider it a real possibility that your employer had this situation in mind the day you got hired.

 

[PROFR]

Some questions before you do any step:
- Any current or previous claims on the company that would make insurance very high?
- Any lawsuit pending that this guy is trying to avoid by selling his share?
If any of these are true, I would not even pay a penny for this company.

Generally speaking, if you really need to own a consulting engineering firm, START YOUR OWN...

 

[bones206]

One potential pitfall of starting your own firm in the midst of all these hurt feelings and consternation that you've "caused" by not allowing yourself to be taken advantage of, is that the old partners might try to tarnish your potential client pool's opinion of you out of spite. Human nature... unfortunately something you need to guard against. You might have to give them some kind of consolation prize to ensure they keep saying nice things about you to their old client buddies. It might not end up being an issue in your case, but I wouldn't dismiss the possibility.

 

[Bill West]

KootK, your resort town story sadly sounds like the most probable outcome if the owners don't go for a slow withdrawal of their gain. I even saw a case of something as simple as a profitable small town cafe close because there wasn't a plan. They wanted a lump sum buyout, assets and goodwill, all in a one horse town. Any newcomer could just buy new assets, start from scratch and still get all the business. If the owners had eased a younger partner in they could have eased out something for the goodwill.

NorthCivil, your retiring partner may have indeed had your rise in mind when you started but it appears he never articulated it. Or else he plain just didn't condsider succesion until now, a mere two years from retirement. Either way this thread becomes a suggestion to other owners to look far ahead at how they will get their value out. The friend I mentioned seemed quite candid with his existing partner and the new one about doing this in a patient manner and succeeded nicely at getting out. I only ever worked for a salary but by my mid 40's I had peeked at when could I retire and what would I have, it actually encouraged me to leave in good time and enjoy life rather than hanging on. My first reaction about your retiring partner was that he too had decided it's the right personal time to go but unfortunately as an owner he needs the exit plan too.

How about if you tell the partners you did some anonymous research into what others do for change-overs and got these replies about it easily being a failure. Maybe they need to consider that at this late date an initially dissapointing deal will still be better than closure. The candidacy and consideration for their plight might counter some of their disapointment.

Bill

 

[DM61850]

Couldn't you just take that initial 700k offer money and hire a few hot shot engineers? The firm only has value as to what the customer perceives as adding value. Having hot shot engineers is the only thing that will add value and make it easier to get work.

 

[MOJOJOHN]

Deal might be acceptable if designer partner was staying. Paying a non participating partner is not reasonable to me.

 

[bookowski]

Hijacking here. What do people think a good plan would be to maximize cash out if you were in the owner's shoes and had time to plan ahead. Say you've got a small firm, 3 to 10 people, with a good reputation and plenty of good work. This type of business seems to be fundamentally tied to the name and contacts of the ownership but there should be some way to at least get some final cash out for what's been built. Asking for a friend.

 

[LittleInch]

Don't hijack.

Start a new thread.

There's a lot of advice on this if you read the entire thread.

Start with a really low expectation of what the equity is really worth and be preoared to let the profits buy you out over a period of 5 years.

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