Partnership Opportunity 3

[WARose]

I've been out beating the bushes to get some new work.....and a chance conversation between me and a former employer resulted in him discussing him retiring and me buying into the company. (Essentially taking his place.) I was intrigued....but he wants the buy out money all at once. I feel that is a little risky and I'd rather structure it as him getting a percentage of my salary. (My worry is clients staying after he is gone.)

Is that how you would do it?

 

[Lomarandil]

Buyout aside, I would certainly want an overlap period (guessing around 2 years) where you both are working (maybe a reduced schedule for him) to transition work practices and clients.

I think the risk of clients leaving depends on the industry and size of clients. Is he working for small residential contractors or big international conglomerates?

----
The name is a long story -- just call me Lo.

 

[FreddyNurk]

There is also the associated risk of them offloading the business, getting a big cash payment, and starting up all over again the day after the sale.

I know of a Building Services consultancy with a good reputation, that was acquired by one of the multinational engineering firms. The day the 'must stay with company' clause expired, they all walked out and started their own enterprise again. I'd imagine they made quite a bit of money out of it too.

EDMS Australia

 

[IRstuff]

There are things you can put into the contract to limit poaching.

A transition period sounds reasonable, as that provides some level of continuity. My wife bought out an existing practice without any transition, but luckily, she was able to retain the bulk of the patients and picked up news in the meantime.

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[WARose]

Buyout aside, I would certainly want an overlap period (guessing around 2 years) where you both are working (maybe a reduced schedule for him) to transition work practices and clients.

I don't know if he is going to hang around for that long......but it would help.

I think the risk of clients leaving depends on the industry and size of clients. Is he working for small residential contractors or big international conglomerates?

Medium sized industrial clients.

 

[Sparweb]

I was once made that kind of offer, but the seller wanted no transition, just cash and go. I suffered for a while about the choice, but had to turn it down.
I knew I wasn't prepared to run it all on my own on day 1 without the former owner there to show me where the landmines are.

STF

 

[CarolinaPE]

I certainly would not borrow money from a bank and give it to him to buy him out. One way I have heard it structured is to give him a percentage of the profits for a period of time (as an example 30% of the profits for 4 years). That way if the clients do not go with you and there is no profit the damage is limited.

Years ago I discussed buying out a senior partner but it never materialized. I struggled with the thought that clients would be now coming to me for my knowledge (consultant) and no longer the retired engineer I was to buy out.

 

[Sparweb]

One way I have heard it structured is to give him a percentage of the profits for a period of time

That's an excellent way to keep the current owner personally invested in the business until the transition is over. And a good litmus test that the current owner isn't bailing out because he knows it ISN'T profitable any more!

STF

 

[GregLocock]

A friend of mine was looking around at local engineering related businesses that were for sale. Typically these were single owner businesses hoping to retire with a big nest egg. The net assets of the business were typically some shelves of out dated or unwanted spare parts that'll come in handy some time, and the owner's address book. To be honest if it is a zero asset business then I'd be hard pushed to justify paying more than double the net annual cashflow (income-direct expenses) for it, if that.

Cheers

Greg Locock


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[Terratek]

I've looked into this type of arrangement myself and thought a lot about it. The only real value I see here is your former employer's client list and reputation. Being a former employer, you likely already know the best practices he's developed. Without him being on board for a few years to transition the clients, your basically buying a client list and hoping some may be responsive to you when you make sales calls. There is certainly value in the list, but nothing along the lines of the value of a business.

 

[Ron]

The only asset in a typical engineering service business is its "book of business"....the clients and receivables. There are usually few physical assets unless there is a fair amount of testing done with associated equipment. The "book of business" is usually dependent upon the reputation of one or more of the principals of the business. It is imperative that those individuals remain for a transition period....otherwise clients will flee!

 

[lacajun]

What happens to his company when he retires and no one has stepped in to buy out his position in the company? As others have pointed out, you'd be buying his Client list. How valuable is that? If his company cannot run without him or someone in his position, what happens to it? Do you know enough about his Client list to sell your services to them, if they cannot remain in business?

Ultimately, I would talk to an attorney, with experience in this area, before making any decisions. I've learned they know a lot of things we do not and understand language much better leading to stronger contracts.

Pamela K. Quillin, P.E.
Quillin Engineering, LLC
NSPE-CO, Central Chapter
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[TravisMack]

Yes, if it is a single man operation, or similar, the current owner needs to stay on for as long of a transition period that you can get, but I would say no less than 3 years. The schedule would obviously be scaling back for him. The idea is to have him there to keep the business coming in while he introduces you to all of the clients during the transitional period.

I have a friend who had a 20 man firm at one point, and eventually, by the end, it was just him as people retired or moved on. He was unable to sell the business for anything as he wanted out at time of sale, but there was nothing more than "goodwill" from his name.

That is one of the concerns for those of us that are single or couple man operations. The business generally can't run without the main guys in place, so with them gone, the value is very limited.

Travis Mack
MFP Design, LLC

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[Terratek]

Oh and further to Lacajun's point, when you buy an existing business, not only do you buy their book of business, you also buy their book of liability.