Retiring Owner & Existing Clients 7

[FixedEarth]

A retiring engineer has decided to close his business. I became aware of it at the last minute. If we were to come to an agreement and once the original owner has retired (few weeks to go), could I realistically inherit his clientele? It is very small practice and I have never been affiliated with this firm. Also not much of assets to purchase. What is the best way to make a transaction that is fair for both parties? Thank you.

 

[casseopeia]

If you mean that you intend to purchase the business, then the existing client base is yours if those clients choose to stay with the business that you just purchase. Evaluating how much of that client base will stay is part of your due diligence. For starters you need to look at how much revenue comes from each client and incidence of repeat business.

Generally the purchaser and owner will get a professional business valuation report made and then reach an agreement on the price and financial details of the transaction. There are a number of ways to value a business and different multipliers depending on type of business.


"Gorgeous hair is the best revenge." Ivana Trump

 

[Ron]

In a service business such as consulting engineering, the most significant asset we have is our "book of business". That is our client list and reputation with those clients. Granted, a geotechnical engineering firm might have more hard assets such as drilling and lab equipment, but for the most part you are buying those clients and the receivables (which hopefully are not hanging out there very long).

Be careful with name changes for the business and with the transition of these clients. Encourage the retiring engineer to remain onboard as a consultant and to introduce you to his clients. If he remains onboard in some capacity, you can typically maintain the name if it is related to his name (under the engineering laws of many states in the US this is possible).

An initial name change can kill the goodwill of the business. It is usually better to maintain the name for continuity (unless there is some legal reason that you cannot do so). A slow transition to a name change, occuring over a year or so as you develop rapport with the existing clients, is usually better.

Good luck and keep us posted on the status.

 

[woodman88]

If you "purchase" the business you may become responsible to carry E&O for it. Not sure if as a purchase you can tag it to your existing. I would contact your Insurance and lawyer about this.

Garth Dreger PE - AZ Phoenix area
As EOR's we should take the responsibility to design our structures to support the components we allow in our design per that industry standards.

 

[FixedEarth]

Thanks for the helpful responses. They have great reputation and they have two decades of repeat business. My only concern is, the owner is in a hurry to retire and close shop & none of his clients know me or have ever met me.

If there is no transition time for client introduction, would it not be better to have him as a business development part-time contractor? As you can imagine, without any introduction to the clients, how will they stick around?

Good points on valuation by others, keeping the name & E&O. I am counting on some clients staying to "feel us" and of course few that will not continue with us. This brings me to what is this business worth. If there are no hard assets like an equipped geotechnical lab, few drill rigs, etc., and the existing clients don't get time to see me as part of the new team for continuity, what am I buying?

 

[casseopeia]

What you are purchasing is the Business Goodwill established by the retiring owner. Goodwill is measured by in-place business systems (record-keeping, accounting, business protocols, etc), relationships with clients, repeat business, solid business development policies, steady workflow, steady cash flow, etc.

At the very least you should have in introduction to the major clients arranged and attended by the out-going owner. It can be written into the sale agreement if needed. Offer to do some lunchtime seminars on appropriate topics. Bring lunch for the seminar attendees and invite everyone at the Client's firm to attend. Don't change the business name right away. Let them get used to seeing your face and making the connection.

Do some reading about business valuations. Google 'business goodwill and blue sky' to get an idea of what you need to look at and where to expect the pitfalls.

"Gorgeous hair is the best revenge." Ivana Trump

 

[Ron]

In this case, the current client base has a value, but it could go away quickly. I would structure a buy-out based on a sliding scale of client retention. This would also give the current owner an incentive to stick around and help.

What is the value of the business? Discounting hard assets, I would look at a multiplier of annual revenue, say 1.5 to 2.0 time revenue. There was a time when that multiplier would be in the 3 to 4 range, but not these days.

Another consideration is 8 to 10 times annual profit.

Keep the receivables...it will give you an opportunity to meet your new clients (though not always on a positive note!)

 

[FixedEarth]

I am waiting to get the financials from them. Safe to say about 500k a year- they were bigger than that few years earlier. Thanks.

 

[MacGyverS2000]

Does no one else wonder why the current owner is in such a rush to retire? Barring health issues, surely he'd be willing to help ease the transition over 6 months or so, not just a few weeks...

Dan - Owner

http://www.Hi-TecDesigns.com

 

[Ron]

$500k a year?

How many people? Breakdown of engineers vs. technicians vs. admin.?

What is primary business? Geotech consulting, subcontract drilling, lab, construction materials testing....?

 

[FixedEarth]

Ron- Only owner left, no employees are left. Pure geotechnical consulting with small office. Lab and CMT is farmed out to another vendor. Subsurface is done through contracted drillers. Only old job files, few desks/computers and a lot of contacts are available.

I am after the contacts, as this is the only tangible item. I have just started my due diligence. Agree with your point about making payments based on future earnings from existing client base. Since it is in the same field, training would not be necessary- just need to interact with clients. Would be open to taking over lease, keeping name and even having owner as a p/t consultant during the transition.

In a nutshell, I want to inherit a repeat client list that will otherwise take me 7+ years to build from scratch. Counting on only 50% of clients swithching over and staying for good.

 

[Ron]

FE...sounds like you have a good handle on it, just don't "over-value" the client list.

How many employees did it take to generate the $500k?

Good luck.

 

[FixedEarth]

Thank you. I think it may have taken two full time engineers and 2 part time administrative, but will know later this month. I will keep you posted once I know more info. Thanks- I need all the luck.

 

[MiketheEngineer]

If one guys was doing $500,000 a year - you just found a gold mine. Watch your P&Qs and get a good lawyer, accountant, etc.

 

[FixedEarth]

As a recap, I met with the owners and it is a great practice that they have built. They are not ready to retire right away- they would like to take few years to wind down. So no sale this month, but try try I did! On the good side, my existing practice is getting more referral work and may be I should be patient and keep plugging it away. Thank you for your contributions.

 

[MiketheEngineer]

On the devious side - spread the rumor they are going out of business - but that violates the Code of Ethics.....

 

[FixedEarth]

They were really nice to me by meeting on a short notice and explain to me their situation. We might get some referrals from them and I think I made new friends. It was a great learning experience.

 

[ZTGR]

Hi FixedEarth,
I am in the geotechnical field and starting up my own consulting. If you are in Southern California and interested in meeting how can we get in touch? let me know.

 

[FixedEarth]

I am not the best person to do business coaching having only few years under my belt. Try SCORE.org and talking to someone with at least 15 years of business ownership background.

 

[ZTGR]

I am not looking for business coaching, i am looking to team up with another geotechnical engineer who's willing to start on his own as well, because two strong resumes strengthify the portfolio. thanks for the referral.