-
Buying into the firm…
As my career continues I often wonder about ownership or “buying” in as a partner, should the opportunity ever present itself. If that were to ever happen I wonder how I would know if it is a good deal? Are the arrangements fair? How much skin in the game is typically required, 10,ooo cash, 100,000 cash, reduction in salary to offset investment? Those of you in your own practice or partners in a larger firm have any experiences you would care to share, publicly or private?
-
20 Replies
-
My own experience was that a vague offer to buy in was dangled for several years, but it never quite got to the for-real stage. I finally pressed the issue with an ultimatum: I’m either all in or I’m all gone. (The situation was a lot more complicated than that, but that’s what it came down to.) We negotiated the matter for several weeks, but in the end the owners decided not to offer a buy-in, so I quit and set up my own shop. That was a stressful and kind of terrifying time, but it turned out to be the best move, both professionally and personally, that I ever made.
-
I worked for a mid sized firm for several years in the late ’90s -early ’00s. The owner wanted to retire and offered to sell the company to a select group of principals. These people were all asked to put up $40k for a share. And many did. Thing is, the owner had been promising, for years, to pay bonuses when profitability was over 10%. He had been showing power points of the companies quarterly P&Ls to the rabble regularly that showed profitability to consistently hover within a few points of flat line. No bonuses where ever paid. I never could figure out why I should want to put in my life savings into an unprofitable company. Many people did nevertheless.
I moved on to a startup situation where, as in Jim’s case, a vague promise of buy in at some point was dangled. Like Jim, it never happened. But during that time I was asked by a number of fairly major clients whether I was an owner or not. It didn’t really occur to me until later just why they were asking. I now believe that they wanted assurance that I would be there in the long term before committing their business to the company. So…keep in mind that buy-ins are a 2 sided street. If you are important enough to the organization that they are willing to allow you to buy in you are also important enough to the organization that your assured continued presence represents a real value to them. Under those circumstances I can’t see what reason there is to pay more than a token amount for a proportionate share.
Another outfit I worked for sold shares to the employees. The number of shares was “closed”, so at the time I worked there the only way to acquire was through private sale from employees who held them. Company bylaws required you to sell any shares you held to the company at a fixed price if you left. The dividend, as I recall, was consistently around 10% per year. So it was kind of a golden shackle. Good returns as long as you stayed, a kick in the pants as you went out the door.
-
Off topic a litte, but just my 2 cents. Keep your good relationships & just go solo.
For some reason it is common for us in this business to feel better about going out on our own with partners. I did it too. We all think we are the exception. We think that our partnership will work out. Maybe it has for someone that I haven’t met yet?
-
My story:
I started at a survey co. running 4 crews, as the only licensed individual except for the owner. Buying the firm was always on the agenda after assurances I was capable.
After 5 yrs it was time. Owner gave a price. Extremely high, considering the assets and it was the start of the great recession. I hired a CPA to value the company at my expense. Her value came in at 1/3 owners value, and I made my offer based on that. Denied. Within 2 wks was demoted as mgr. and salary cut by 15%. Then fired by email for not stamping a retracement map, (since I was no longer mgr. my opinion was my license was not for rent). A very ugly situation with a boss that was considered a friend (jeez, his wife would pick my daughter up fr. school if I was suck in field!). That all came down on a Friday in 2010. By Monday I had a home office, land line and registered a business domain. Started networking immediately. Pulled my old Topcon out of the closet and got to it.
My point: Unless the Rolodex has valuable, and you doubt your ability to attract new business, go your own way. Being fired turned out to be the best thing in my long career.
PS: Currently involved in lawsuit/ boundary dispute with that firm. The panel ripped them a new hole last month after our evidence presentation and discussion. My client wants their head on a pike and they may be sanctioned or loose their license if he presses it . That company came with ALOT of potential liability.
-
Few survey firms operate with any real profit margin. The equipment is usually old and obsolete and what remains is wore out. The profits margins most “claim” would be gone like a fart in a hurricane if the company were to modernize.
And where I operate there are several long time well established firms who are in their waning days but they still work cheaper than a street walking hooker. The owners cannot afford to retire so they are still plugging along at 12 market rates and it depresses the local survey market. So if the company your referring to is not in the upper margins for pricing then you’re leaving a lot of money on the table.
Just say no.
-
Becoming a principal/owner with others is very much like a marriage. Be sure that you can jointly make important decisions together, just like raising children. The larger value of a surveying/engineering company in my opinion is in assets with just of touch of value in the business itself.
-
Arrangements are fair if you perceive them as fair.
Sorta like buying a house. I’ll give your asking price but you have to pay the closing costs, repair the roof, pay next years taxes. Alternatively, I’ll pay closing cost, you wash the windows, remove the crappy stove… or some other scenario. It’s open to negotiation.
Buying in or not very much depends on what your goal is.
Calculated profit margin on for a solo operator can be quite high.
However the value of a solo company might be considered, simplistically, one year revenue. Putting numbers to this, lets say you bill yourself out at $150/hr. If you work every hour of a 40 hour week for 50 weeks a year, your revenue will be $300,000. (An unlikely scenario, but gives us numbers for discussion.) Your company value would be $300,000.
When you want to retire, could you sell it for $300,000? Who would pay that amount? There’s not much reason anyone would.
On the other hand, instead of buying a truck, equipment, software, etc. for, let’s say $75,000 (I think that’s a low number, but let’s use it for this discussion) you invest that same $75,000 to buy into a firm. Let’s further assume that your $75,000 gets you 10% ownership.
Now, 10 years down the road, the company you’ve bought into has $10 million in revenue. Simple math gives your ownership value $1 million. (VERY simplified calculation. If you consider time value of money, Weighted Average Cost of Capital, Net present value, tax implications, growth rate, etc., that value could be higher. Depending on those variables, considerably higher.)
So, getting back to going solo. You have control of the projects you take, the clients you work with, hours you work, etc. The value of those variables? Only you can say.
-
Very much agree with the marriage analogy.
And somewhat agree the assets opinion.
A company’s assets are more than it’s fixed assets.
The people and know how of employees are assets. The company’s ability to generate revenue is an asset. The latter is pretty easy to put a value to, the former is not so easy, but definitely adds to a company’s value.
-
You are correct that the value of a company is the value of the fixed assets plus the value of the people. But in a solo operation, the “people” are not being sold, so the value is pretty much the fixed assets.
The owner of the company I was working for, an engineer, passed away suddenly last year. There was another PE on staff (with very little experience in the area of service we were working in) and myself as the only other licensed professional. Two non-licensed employees. I did what I could to keep things afloat while a buyer was found. A CPA valued the company at a quarter mil., or roughly the gross annual sales. I valued the fixed assets at between $60k and $70k. That included a near new pair of R8s, a 3 year old robot, 2 Ranger 3s, and a 10 yr old F150 4×4. The remaining PE left the company before a sale was concluded.
I considered buying, and it was offered to me, but there was no way I would pay even full price for the fixed assets – most of which I didn’t want to be burdened with. I would have rather leased the equipment makes and models I wanted. I would not have paid a nickel for the work on the books, which pretty much was mine already if I wanted to take it. Every survey client already knew me and nobody else (still alive) at that company.
I did not buy, because owning a survey company is not my thing at this point in my life. 20 years ago, maybe. Not now.
Another engineer bought the company and although I have never learned the exact terms I believe that a figure near half the CPAs estimate was agreed upon. The greater part of the non-survey equipment fixed assets went in the dumpster. She got the jobs on the books, 3 new staff members, and a survey department. The jobs probably haven’t been all that profitable.
I’m now the Survey Manager at the new company. I manage myself and one survey tech.
-
You’re with a larger established firm similar to the one I came up in. That firm’s owner sold shares to select individuals throughout the 2000’s. Share purchases traditionally came along with a bump to salary so if the purchaser looked at the salary bump as the vehicle to fund the purchase the cost was not that great. The ultimate goal for the majority share holder was for the company to be sold outright at a much higher valuation than anyone had internally paid. That plan was unfolding perfectly with serious interest from 3 different investment outfits looking in the $25M range. It would have been a huge windfall for every level of ownership. Then Lehman Brothers happened in 2008 and everyone disappeared. Such is life and the adage that timing is everything. Offering a perceived discount valuation of $20M probably would have sealed the deal 3 months earlier and everyone would have gotten their payday.
From a tactical standpoint 3% ownership is an important number. Under it and you avoid a great many tax implications. Over it and your health care benefits become taxable income for example. Depending on your ownership level you can also become personally liable for various business decisions the company might make like equipment loans or payroll taxes. My advice would be to stay at or below 2.9% or go as big as you can. There’s plenty of upside to buying into a well managed and structured firm with a good reputation and more repeat Clients than walk-ins.
I’m in a partnership now with 2 other people, all equal 1/3rd owners. We’ve grown it to 15 employees with a goal of getting to about 30 but never more than 49 lol. We’ve started to discuss exit strategies so we’re looking at it from the other side of the mirror from you. My wife is one of my two partners and the other is non-family that we both worked with for about 15 years. He’s 10 years older than us which makes it interesting. He just graduated his last child and neither of them have any interest in what we do so there’s no succession plan to explore there. Our kids are in middle school and while they always enjoy going out to the field with Dad to Survey we have no idea if they’ll truly become involved as they mature. We’ve not managed the finances of the company with corporate profit at the forefront so selling the firm as an investment is unlikely or at least not likely without a severe shift in corporate strategy. There’s always the possibility of an out of town company wanting to enter our market by buying a local firm but that’s not something we’re factoring into our equation. That leaves strategically selling shares to employees we feel could drive the company into its next chapter. Valuing our investments into building it has been the hardest part. No external person outside of the 3 of us will value the blood, sweat and tears we put in like we do but there is still intangible value there. There is also value in the team we have built and the relationships we have helped foster between our employees and our Clients. I assume it’s a similar situation in your firm so there’s more to it than just the P&L report when you’re looking to buy in as an employee owner.
Ultimately you need to decide if it’s a company you want to be permanently associated with and if the answer to that is yes, you should sit down with your personal investment planner and see how best to incorporate that strategy into your long term goals. After that, talk with the owner(s) of the firm and see if your goals align with theirs and if you can figure out a way to make it all come together. Buying in is a logical evolution if you’ve found a place you want to stay and be a larger part of. Good luck!
-
Marriage Analogy??
Here’s mine… It has many of the BAD aspects of a marriage and very few of the good ones.
Worst form of business (IMHO) is 50/50. Took on a partner years ago after landing a very large contract. Let him in with overvalue on his old junk because I thought I knew him.
Took me too long to recognize he was running things by the veto. Remember it takes two to say yes and only one to say no.
Ended up buying him out and forgiving debt. Expensive lesson learned there.
-
I was going to keep quiet on this subject simply because I’ve never entered into a business agreement with either an engineer or another surveyor that didn’t blow up in my face. And a quick count might be 5 times. You’d think I would have learned after the second or third….but there may be others out there that have success stories.
IMHO anyone wanting to sell an interest in a professional business is only doing it for themselves with little or no concern whether you (as the buyer) make good or not. Most sellers are only interested in making something look profitable enough to keep someone around to actually do the work or to have someone with which to split the liabilities. And anyone with half a brain can tell you that buying “business” (as in buying clientele) is nothing but “blue sky”.
I’m a firm believer you will be much better off by standing on your own two feet from the get-go…that’s probably where you will wind up anyway after paying way too much money for a bunch of worn out equipment and hard-to-get-rid-of drafting tables.
-
Payden be right.
If you need to make a survey business profitable, buy a printing press, and print your own money…. Why should the rich have this exclusive ability?
😉 (grin)
-
Payden be right.
If you need to make a survey business profitable, buy a printing press, and print your own money…. Why should the rich have this exclusive ability?
😉 (grin)
Reminds me of the old joke:
Q: “How do you make a million bucks on a survey company?”
A: “Start with two million…” 😉
-
Another perspective. Multi-discipline info starts about halfway down.
I’m one of two owners who started a survey business from scratch.
This experience does not include the ownership problems other surveyors have identified above.
We were both well established in the surveying/engineering community with experience in both the private and public sector.
Fortunately, our goals are aligned and the things we disagree on aren’t significant enough for one or the other to “let it go”. We never cut corners. We never charge a client for anything that does not contribute to the forward progress of the scoped work. In 11 years, the majority of our revenue has been put back into the business – we have no significant debt. We’ve always paid ourselves the same kind of salary that we’d get running a survey section in a larger firm (but we’ve had to delay that pay a couple of times when cash-flow was tight) – and we pay ourselves bonuses when it’s prudent to do so.We are working towards transferring the business to survey staff that have the desire and good judgement required to keep the organization thriving after we move on to other things – the alternatives (big firm buyout or garage sale) haven’t worked well for other small firms that we’ve seen.
It’s not all gravy being an owner – everyone is your boss (clients, employees, landlord, insurance broker(s), mailman, platting authority staff, everyone that you need to operate your business). The buck stops with you. Bills are yours and revenue mostly goes to others). Fraud, theft, and negligence come out of profits – take steps to minimize these risks and watch your books/bookkeeper/accountant closely. Recognize that ANY sub-professional practices can be expected to lead to liability – maybe not today but someday. Do your due diligence.
While my current situation is working well, it’s my multi-discipline firm experience that made it desirable for me to pursue development of a geomatics only organization.
I’ve been exposed to ownership arrangements at a few small/mid (under 150 people) multi-discipline firms.
The multi-discipline arrangements that I’ve been exposed too were difficult for the survey section for a few reasons:
1. It costs a lot more to put a surveyor in a seat (all of the software cost of an engineer/architects PLUS a bunch of field equipment and expensive vehicles);2. Other discipline leads have historically been reluctant to charge what it actually costs for that surveyor (rates should exceed engineers/architects) so you are starting off with a profitability deficit (this is slowly changing);
3. The survey lead/project managers rarely have a seat at the table when contract negotiations occur on a multi-discipline project – an engineer or architect is almost always the project PM and the survey scope/schedule/budget are negotiated by an individual who (nearly always) doesn’t understand what needs to be done, how long it takes, and how much it will cost! The survey component of a contract is frequently under-funded and has compromised schedules at the time that the contract is signed! My experience is that this is often the source of most friction between surveyors and the other disciplines.
4. The utilization rate goals for an staff engineer/architect/surveyor/survey technician are pretty much the same for each discipline, however, the surveyor works with a wider range of software and hardware and they need to know how to operate safely in the field. All of this means that the surveyor has greater on-going training requirements. This leads to the survey section either not meeting the utilization goals or not getting the training or… coming up with a staffing strategy that focuses on specialization (thereby reducing the number of topics an individual is required to know). You have to have a large survey section to specialize (and still have all of the skills required to competently achieve project objectives) – not easily attainable in most markets. Surveyors shouldn’t have the same utilization rates as engineers or architects.
5. It’s been difficult to get new survey hardware and software. Not only do YOU need to figure out if it’s a good idea, unless you have a healthy discretionary budget ($100k or more), you need to convince all others who hold the purse strings that it’s a good idea – early adoption of technology with an unknown period of return is not an easy sell.
6. You may have to go through HR for hiring and firing – while it’s nice to have access to this knowledge, it may impede your ability to build a competent and reliable survey section.
These are all items to discuss when considering becoming an owner.These are all items to discuss when considering becoming an owner.
Here’s a start of other items to discuss – hopefully others can add to this:
1. What type of ownership is being offered?
Does this ownership have a say in business decisions? How are lease, purchase, insurance, etc. decisions made?2. Who owns the building? (I’ve seen “founders” holding companies that own all assets and lease them back to the firm thereby milking most of the profits – lease rates were a function of the profitability of the firm. This is a COMMON practice in some areas.) Profit sharing doesn’t mean much when much/most of the profit has been skimmed by an external company.
3. Who owns the equipment and software? (see building ownership comment above)
4. Does the firm have any long-term financial obligations (long term lease, settlement payoff, loans, etc.)
5. Does the firm owe the IRS money?
6. Does the firm owe state or local back taxes?
7. Has the firm been sued? (what is the status of these suits)?
8. Has the firm paid any claims in the last five years? What were the amounts and what were the claims for?
9. Do any of the partners or staff have (or have had in the past 5 years) BOR complaints filed against them?
10. What happens if the firm becomes insolvent? Are owners liable for debt?
11. What is the process of selling your ownership?
12. What happens when an owner dies or becomes incapable of performing their duties?
13. What do court record searches for the firm and other owners show?
14. Did the firm do business under another name? If so and it was recent, answer the relevant questions above for that firm.
There are a lot of pluses to buying into a firm.
1. It takes a long time (somewhere between 7 and 9 years in our case) to develop brand recognition – you get this on day one when you buy in.
2. It’s tough to get startup capital to buy multi-constellation GPS, vehicles, AutoCAD, processing software, servers, server software, lots and lots of less obvious software and a boatload of other field and office gear – you get much/most of this on day one when you buy in.
3. You may have wise people to consult with.
4. You may have access to staff you can put on your project when things are busy.
5. You may be able to cross train your staff when things are slow.Whatever you do, don’t buy into a firm with:
1. a less than stellar reputation;
2. a lot of debt;
3. dishonest owners;
4. multiple years with losses;
5. pending lawsuits.Always represent the profession with honesty and dignity – it takes more skills to be a competent field to finish surveyor than it does to be an engineer or architect.
-
I heard of a guy that was making big money.
.
.
They caught him because it was 1/8″ too big.
. -
“Always represent the profession with honesty and dignity – it takes more skills to be a competent field to finish surveyor than it does to be an engineer or architect.”
I”ll second that notion and offer drink to your perspective………….. ??¯
-
Been down that road concerning private stock options, partnership agreements, personal loans(?), etc. Got burned every time, maybe $60,000 over 30 years. I finally woke up when my financial guy pointed put if I’m investing in a market segment (surveying), look at competitor’s stock situations, big NASDAQ firms, etc., and unless you are fully in love with your company possibly your investment should be made elsewhere. Is your company so stellar that it’s going to outperform the market and therefore be worth a premium concerning a partial ownership buy in? Pretty unlikely.
I gravitated to a 40 hr. salary with overtime situation with really giant firms, took years but finally was chugging a $120k per year pay schedule with 4 weeks vacation, etc. Socked away money like a squirrel and retired early 4 years ago. I’m a happy camper.
The main thing is plan your life out. A buy in with your firm could bankrupt you years later. Don’t take risks.
-
@jkinak provided a truly outstanding post. His “other items to discuss” list is no joke. A younger, more naive FrozenNorth would have thought his list a bit paranoid, but it actually describes in some detail the issues I encountered when I considered buying a firm.
-
Jkinak provides an excellent insight. As a former survey manager from a large multi-discipline firm and now owner of a survey only firm, I can say his analysis is spot on.
Log in to reply.