Small startup partnership or buying partnership 4

[EngineeringDr]

This is my first post here and I don't know where to start. I am looking for advise on business start up partnership or buying an existing engineering small business. I have extensive experience since 1994 both academic and practical however my practical knowledge was not as a manager. I do not have clients and that is why I wish to partner with someone with good networking/clients or someone who can successfully market the business or better to partner with a business. What would you do if you were in my shoes?

PhD Mechanical/Industrial Engineering
Licensed professional engineer

 

[phamENG]

I would either
a) get a job that would allow me to start developing those contacts that can turn into clients OR
b) set up shop if you have the resources and start advertising.

Option a will be a long road, but if you pick the right company you may be able to get into the succession lineup and not have to worry about it. Option b will be a rough start - by "have the resources" I mean be able to cover personal and business expenses out of pocket for at least 4 to 6 months - longer if you'll be working long term contracts.

I'd be very cautious about "finding" a business partner. Especially if they hold all of the business connections. If they have them, they probably have some technical ability to service them. So, in effect, you'll be working for your partner. Unless you're offering a hyper-specialized consulting service, your PhD may not mean as much to the client. So without you, your partner has the clients and the ability to serve them. Without your partner you have....a lot of knowledge? That's a pretty unequal power dynamic. It can work, but I'd think it would be tough between people who don't really know each other and just got together to start the business.

I'd also be hesitant to buy a firm, unless you're looking at dropping $10-20M on a seriously established brand. In which case, why are you investing in engineering? There are better markets to put that kind of cash. I say this because, especially for smaller outfits, the number one asset isn't the clients, per se. It's the RELATIONSHIP between the principals and the clients. Non-competes are nice, but don't always work (you have to be willing and able to take them to court if they violate it). So what are you really buying for your $500k or so for a small firm? Essentially, you're buying the good will of the previous owner to promote you to their clients. If they don't do it wholeheartedly, or you don't provide quite the same service they're used to, they all run for the hills and you're left with a worthless firm you just dropped a ton of cash on.

There are a few horror stories if you scroll down through this forum. I'd recommend reading through them.

 

[LittleInch]

Well first you have to determine if you have a skill that can be sold to clients.

It's all very vague at the moment so difficult to add anything.

Essentially what will you bring to the business?
A specific skill set?
Lots of money? If so what will the money be used for other than to line the pockets of the current owner(s)?

A business or engineering company doing what exactly?

At the moment I would say it doesn't look good - You don't seem to have (much) relevant practical experience (academic counts for zilch in the real world), you don't have any clients or contacts, you can't come in as the management side and let the engineering side do the technical stuff, so why exactly would anyone want to partner with you?

Anyone you approach will be asking the same questions so please don't take it personally.

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

 

[EngineeringDr]

I would either
a) get a job that would allow me to start developing those contacts that can turn into clients OR
b) set up shop if you have the resources and start advertising.

Option a will be a long road, but if you pick the right company you may be able to get into the succession lineup and not have to worry about it. Option b will be a rough start - by "have the resources" I mean be able to cover personal and business expenses out of pocket for at least 4 to 6 months - longer if you'll be working long term contracts.

First, let me thank you for your response.
Option A is a long road as you said and I have to admit I am not young any more.
Option B is difficult which I totally understand and accept since I am a hard worker.
I can have a small source of income with a part time job to cover my family and start up the business for the first 4-6 months.

I'd be very cautious about "finding" a business partner. Especially if they hold all of the business connections. If they have them, they probably have some technical ability to service them. So, in effect, you'll be working for your partner. Unless you're offering a hyper-specialized consulting service, your PhD may not mean as much to the client. So without you, your partner has the clients and the ability to serve them. Without your partner you have....a lot of knowledge? That's a pretty unequal power dynamic. It can work, but I'd think it would be tough between people who don't really know each other and just got together to start the business.

You have a real good point and I appreciate pointing me out. I will look for a marketing business partner someone without engineering background or with non conflicting background.

I'd also be hesitant to buy a firm, unless you're looking at dropping $10-20M on a seriously established brand. In which case, why are you investing in engineering? There are better markets to put that kind of cash. I say this because, especially for smaller outfits, the number one asset isn't the clients, per se. It's the RELATIONSHIP between the principals and the clients. Non-competes are nice, but don't always work (you have to be willing and able to take them to court if they violate it). So what are you really buying for your $500k or so for a small firm? Essentially, you're buying the good will of the previous owner to promote you to their clients. If they don't do it wholeheartedly, or you don't provide quite the same service they're used to, they all run for the hills and you're left with a worthless firm you just dropped a ton of cash on.

I am not looking at dropping $10-20M. I did a quick search and found some very small businesses for sale around 100K and the owner is retiring. The owner would stay with the new owner for few months for smooth transition.

There are a few horror stories if you scroll down through this forum. I'd recommend reading through them.

Unfortunately, I did not read them but I already have lots of fear and I would have to have a good lawyer to set the contract and terms if you can please recommend some links to read.

PhD Mechanical/Industrial Engineering
Licensed professional engineer

 

[EngineeringDr]

Thanks again

Well first you have to determine if you have a skill that can be sold to clients.

It's all very vague at the moment so difficult to add anything.

I have many skills and have the flexibility of applying them to two main but different fields:
1) Solid mechanics 2) Industrial engineering
Yes I admit it is vague at this point what I should exactly start with but my preference would be in serving structural market needs. I can definitely also teach.

Essentially what will you bring to the business?
A specific skill set?

I believe my knowledge is unique and can offer solution to sophisticated and complex unconventional problems.

Lots of money? If so what will the money be used for other than to line the pockets of the current owner(s)?

At the moment I would say it doesn't look good - You don't seem to have (much) relevant practical experience (academic counts for zilch in the real world), you don't have any clients or contacts, you can't come in as the management side and let the engineering side do the technical stuff, so why exactly would anyone want to partner with you?

Anyone you approach will be asking the same questions so please don't take it personally.

I am not taking it personal. This is a discussion and your input is valuable.
I don't have lots of money. I just wish to have my own business.

PhD Mechanical/Industrial Engineering
Licensed professional engineer

 

[cvg]

I will look for a marketing business partner someone without engineering background

i seriously doubt that a "non-engineer" partner could effectively market a "PhD level engineering consultant". you will need to learn to do it yourself. and since you have no contacts, this will start with cold calls to potential clients and to other engineers that might be able to refer you or to hire you as a subconsultant. to me, 4 - 6 months seems like a low estimate for the time to develop a client list and a backlog.

 

[phamENG]

EngineeringDr - you're quite welcome. I'm in the start-up phase myself, so I can sympathize - though my path is a bit different than yours.

$100k...not sure what your family budget looks like, but I'd hold on to that and keep a part time job and/or teaching gig going. If that firm is winding down, do your research and find out who their clients are. Cold call and get your name in front of them. If the other engineer is offering the firm to outsiders, that means there probably isn't an insider there with relationships lined up. So the only leg up the new owner will get for his $100k is a recommendation from the previous owner. That may or may not be worth much, and those clients may effectively be "up for grabs" anyway.

A few months may not be enough for a smooth transition. What are the time frames for the contracts? If the projects are short and frequent, you may be fine. But if projects take 3 to 4 months and each client only sends one every 8-15 months, then there may be a large section of the clientele that never experience the transition and, so, feel zero loyalty to you. But then again, a few years for a transition may lead to uncomfortable arguments as the previous owner tries to control "his" firm.

 

[EngineeringDr]

i seriously doubt that a "non-engineer" partner could effectively market a "PhD level engineering consultant". you will need to learn to do it yourself. and since you have no contacts, this will start with cold calls to potential clients and to other engineers that might be able to refer you or to hire you as a subconsultant. to me, 4 - 6 months seems like a low estimate for the time to develop a client list and a backlog.

Thank cvg,
That is the problem even large head hunters can not find suitable jobs! however there is no need for the partner to start with marketing with the full potential. It is a startup.
Cold calls is not only degrading but they are at the end just calls no-one would seriously consider them even if I offer high quality with cheap fees to penetrate the market.


PhD Mechanical/Industrial Engineering
Licensed professional engineer

 

[EngineeringDr]

EngineeringDr - you're quite welcome. I'm in the start-up phase myself, so I can sympathize - though my path is a bit different than yours.

$100k...not sure what your family budget looks like, but I'd hold on to that and keep a part time job and/or teaching gig going. If that firm is winding down, do your research and find out who their clients are. Cold call and get your name in front of them. If the other engineer is offering the firm to outsiders, that means there probably isn't an insider there with relationships lined up. So the only leg up the new owner will get for his $100k is a recommendation from the previous owner. That may or may not be worth much, and those clients may effectively be "up for grabs" anyway.

A few months may not be enough for a smooth transition. What are the time frames for the contracts? If the projects are short and frequent, you may be fine. But if projects take 3 to 4 months and each client only sends one every 8-15 months, then there may be a large section of the clientele that never experience the transition and, so, feel zero loyalty to you. But then again, a few years for a transition may lead to uncomfortable arguments as the previous owner tries to control "his" firm.

The $100k is what I found online. I did not dig deeper instead I posted here to learn from others. All your points will have to be considered.


PhD Mechanical/Industrial Engineering
Licensed professional engineer

 

[CWB1]

JMO but small 1-2 person consultancies aren't worth buying unless they have assets worth owning (office, shop equipment, IP, etc), and even then you're buying the hard assets not really a business bc the owner IS THE business. POs can introduce you to clients and attest to your competency, but clients will still treat it as a new business once the PO leaves so you might as well start fresh. In some cases, taking over a firm is actually a negative if you end up associated with a PO who burned bridges.

JMO but given the circumstances I would find a teaching gig and consult on the side.

 

[EngineeringDr]

JMO but small 1-2 person consultancies aren't worth buying unless they have assets worth owning (office, shop equipment, IP, etc), and even then you're buying the hard assets not really a business bc the owner IS THE business. POs can introduce you to clients and attest to your competency, but clients will still treat it as a new business once the PO leaves so you might as well start fresh. In some cases, taking over a firm is actually a negative if you end up associated with a PO who burned bridges.

JMO but given the circumstances I would find a teaching gig and consult on the side.

Thanks
I believe buying an existing business and extending the transition period so clients will feel comfortable. Also, getting the owner more interested in sharing the revenues. My situation is the opposite to this "

https://www.eng-tips.com/viewthread.cfm?qid=470446"

case. I don't know why I have not seen franchises in actual engineering business.

Another idea, would be to start an engineering training and/or teaching business and offering consultancies.

PhD Mechanical/Industrial Engineering
Licensed professional engineer

 

[BrianPetersen]

Small engineering firms are worthless. They can be cash flow generators, but they have no value. To an accountant. they are nominally worth some multiple of the profits that the existing engineers/owners bring in, but the moment that engineer retires/leaves, that becomes zero.

I work in such a firm. We operate as if we have no value. We have no assets other than a few laptops and printers. We also have no debt. It brings in cash flow. If someone were to hypothetically buy us out, I would take whatever multiple of cash flow they offered and run, and never work again. In other words ... whoever bought us would have spent money for nothing. So your legal adviser wants to write up some contract to force me to work for some period of time to create value to whoever bought the firm? I have a real simple one-word answer to any such proposition, and that word is "No". An attempt to force the issue would result in a two-word reply that can't be repeated here, although it contains the letter F.

Understand that people (clients) generally don't call up an engineeering "company" when they want something done, they call the specific "engineer" that they have experience with. If that person is no longer there, so much for that idea.

 

[EnergyProfessional]

Engineering or other design is a really bad business to buy. They don't have continuing clients, and each job is bid out new. This is different than an accounting company for example. An accounting company has continuing business for payroll, bookkeeping etc. They provide operations service. So you could count on some momentum and hope some clients stay. Engineering is more project based. So once the current projects wind down, you may have 0 business.
And what do you buy? A name? Unless the name of the company has actual value (Siemens et al), it is worth nothing. Especially if the owner used his own name. Again, unless the previous owner's name was Siemens. if you name is Smith, and you now buy "Humperdink Design" you basically pay a lot of money to stroke the old owner's ego.
The office is rented, computers and software are worth nothing when used. The clients you don't own. Even for a business like accounting, the clients can leave because they don't have the same relationship with you. Employees you don't own. The good employees will send out resumes the moment they hear the company gets sold, leaving the bad employees. The old owner staying on for a few months is just to keep the s$$t from hitting the fan until all money is legally transferred.

There was a thread of someone who sold a small firm and was frustrated how the new owner didn't care. It is very seldom the old owner actually cares besides the $.

 

[LittleInch]

I believe my knowledge is unique and can offer solution to sophisticated and complex unconventional problems.

That is the problem even large head hunters can not find suitable jobs!

If nothing else i would urge you to look at these conflicting statements and perhaps realise that the first one says
"Look at me I'M AMAZING"

The second says
"Yes you're AMAZING, but no one wants to hire you"

I fear that either starting your own business or joining up with someone else to market your skill set will simply eat your savings for little benefit.

Unless you can identify a firm which manages to make a living offering the same services/skills you profess to have, then I would think very long and hard about whether this is a real business idea or not.
If you do find such a firm then you might be able to essentially buy yourself a job by "investing" in a small firm or partnership to get access to their client base.

You could get lucky and find a rich vein of work, but luck and engineering never seem to go together very well.

I fully agree with my fellow posters here - do a trawl though some recent posts and you can see that small engineering consultancies have no intrinsic value when a key person leaves / retires / dies. Even a hand over period / no compete period is fraught with difficulties and rarely works out like everyone wants it to. Unless the company is probably 20+ strong, most simply die a natural death once the owner jacks it in.

To be frank this sounds like a much better plan, but is equally hard to get off the ground - "Another idea, would be to start an engineering training and/or teaching business and offering consultancies."

At the moment though not many people are paying for training when they are busy letting people go.

Let us know how you get on.

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

 

[EnergyProfessional]

I'm no lawyer, but I also would urge you to research how liability transfers when buying a firm. What if the company designed something 3 years ago, and now you are the new owner and get sued for something that happened on that project. Also remember, companies get sued just for association, not necessarily actual fault. the suit would be against (now) your company, not the former owner. I don't think transfer of ownership stops all liability (like how bankruptcy would). if you are unlucky you spend a lot of $ to get no tangible assets, and a huge liability.

 

[fel3]

EngineeringDr...

"Cold calls is not only degrading but they are at the end just calls no-one would seriously consider them even if I offer high quality with cheap fees to penetrate the market."

I also find cold calling to be degrading, which is why I am not any good at it. I do fine developing business from people I already know, but I don't do well with cold calling. I am shy, an introvert, and usually overloaded with project work, all of which works against me. Fortunately, my current role includes supporting business development instead of driving it.

HOWEVER, the most successful business developers, in engineering as well as other fields, have mastered the art of cold calling and building personal relationships from scratch. The best business developer I ever worked with was the guy who hired me out of college. He was able to get work out of clients his predecessor had p*ssed off. He wasn't a great technical engineer, but he brought in the work. The moral of this story is that if you have no contacts and won't cold call, you probably won't have any work either. That's the hard reality of it.

My field is consulting civil engineering. My personal experience is about 90% public sector (municipal infrastructure, correctional facilities, etc.) and 10% non-residential private sector (commercial development and industrial). The engineering group I now work with at my current and much larger firm does about 50% public sector and 50% private industrial sector. In our fields, there is no need to reduce fees to get work. All our clients will pay our rates, which are higher than average, but still competitive.

There are several problems with loss-leader rates. One is that you are shooting yourself in the foot financially. Another is that low rates are hard to increase to competitive rates, especially if you are doing sequential projects for the same client. It's best to start off with reasonable and competitive rates and let your expertise justify them. It's also best to bump your rates each year, if inflation makes this appropriate.

============
"Is it the only lesson of history that mankind is unteachable?"
--Winston S. Churchill

 

[EngineeringDr]

Small engineering firms are worthless. They can be cash flow generators, but they have no value. To an accountant. they are nominally worth some multiple of the profits that the existing engineers/owners bring in, but the moment that engineer retires/leaves, that becomes zero.

I work in such a firm. We operate as if we have no value. We have no assets other than a few laptops and printers. We also have no debt. It brings in cash flow. If someone were to hypothetically buy us out, I would take whatever multiple of cash flow they offered and run, and never work again. In other words ... whoever bought us would have spent money for nothing. So your legal adviser wants to write up some contract to force me to work for some period of time to create value to whoever bought the firm? I have a real simple one-word answer to any such proposition, and that word is "No". An attempt to force the issue would result in a two-word reply that can't be repeated here, although it contains the letter F.

Understand that people (clients) generally don't call up an engineeering "company" when they want something done, they call the specific "engineer" that they have experience with. If that person is no longer there, so much for that idea.

Thanks, now I understand better. I believe this might be the reason that I haven't seen actual engineering franchises.

PhD Mechanical/Industrial Engineering
Licensed professional engineer

 

[EngineeringDr]

Thanks

Engineering or other design is a really bad business to buy. They don't have continuing clients, and each job is bid out new. This is different than an accounting company for example. An accounting company has continuing business for payroll, bookkeeping etc. They provide operations service. So you could count on some momentum and hope some clients stay. Engineering is more project based. So once the current projects wind down, you may have 0 business.

I didn't know that. I actually thought return customers/clients are the majority of the business or at least that's what I have seen.

And what do you buy? A name? Unless the name of the company has actual value (Siemens et al), it is worth nothing. Especially if the owner used his own name. Again, unless the previous owner's name was Siemens. if you name is Smith, and you now buy "Humperdink Design" you basically pay a lot of money to stroke the old owner's ego.
The office is rented, computers and software are worth nothing when used. The clients you don't own. Even for a business like accounting, the clients can leave because they don't have the same relationship with you. Employees you don't own. The good employees will send out resumes the moment they hear the company gets sold, leaving the bad employees. The old owner staying on for a few months is just to keep the s$$t from hitting the fan until all money is legally transferred.

The more I read, the more I am beginning to realize this

There was a thread of someone who sold a small firm and was frustrated how the new owner didn't care. It is very seldom the old owner actually cares besides the $.

If you are referring to this

https://www.eng-tips.com/viewthread.cfm?qid=470446

then I am the opposite case. (Meaning, I can definitely do all the calculations very easily and there is no hard or difficult engineering problem for me. I just need to penetrate the market)

PhD Mechanical/Industrial Engineering
Licensed professional engineer

 

[EngineeringDr]

I believe my knowledge is unique and can offer solution to sophisticated and complex unconventional problems.

That is the problem even large head hunters can not find suitable jobs!

If nothing else i would urge you to look at these conflicting statements and perhaps realise that the first one says
"Look at me I'M AMAZING"
The second says
"Yes you're AMAZING, but no one wants to hire you"

There is no conflict in my statements. Have you heard of over-qualified?

You could get lucky and find a rich vein of work, but luck and engineering never seem to go together very well.

It is true "Luck and engineering never seem to go together" and they shouldn't

To be frank this sounds like a much better plan, but is equally hard to get off the ground - "Another idea, would be to start an engineering training and/or teaching business and offering consultancies."

At the moment though not many people are paying for training when they are busy letting people go.

Nothing is going to be easy.

PhD Mechanical/Industrial Engineering
Licensed professional engineer

 

[EngineeringDr]

I'm no lawyer, but I also would urge you to research how liability transfers when buying a firm. What if the company designed something 3 years ago, and now you are the new owner and get sued for something that happened on that project. Also remember, companies get sued just for association, not necessarily actual fault. the suit would be against (now) your company, not the former owner. I don't think transfer of ownership stops all liability (like how bankruptcy would). if you are unlucky you spend a lot of $ to get no tangible assets, and a huge liability.

Not sure

PhD Mechanical/Industrial Engineering
Licensed professional engineer