The Business Side: The Right Time to Sell Your Shop
Buying or selling a survey or engineering firm for all practical purposes is the same. The truth is that in many cases they offer both survey and engineering services, or at least have an arrangement to offer both.
We will deal with buying or selling in multiple columns. First, we will consider getting a company ready to sell; in the next column, we will deal with selling the company; in the third part of this series, we will deal with buying a company.
So, let’s start by talking about when is the right time to start preparing for an ownership change.
Stages of a Company’s Life
The formation stage is, as the name suggests, the forming of a company and may last five to 10 years. This is the time you are hiring and training employees, and developing clients. Some small companies are sold out to larger companies during this time, when the owners find out how difficult it is to develop a viable company.
The second stage is the mature stage, where for many years the company is well managed with great clients, retaining profits, and being an asset to the community in which it operates.
The slowing phase is when owners are approaching retirement and no longer have the zeal to continue to fight the fight to remain profitable and put in the management time required to run a successful company. This company, past its prime, can be hard to sell.
Items that Affect Value
All companies face a changing business environment. The three key changes that all companies face are developing new technology, the turnover and training of employees, and shifts in market segments. How well you as owners address these issues may well determine the value of the company. Everything in business is evolving and will always be this way.
Keeping up with technology will always be a challenge. Buying new technology too soon can cost you dearly; waiting too long can cost profitability. It’s a great balancing act. Retaining employees is an art, not a science. Good benefits including health insurance may be the best employee retention strategy, along with training.
Your client base is a very important part of the value of your company. The type of company I would like to buy would have a very high retention rate of existing clients. Also, it needs a good mix of market segments; not having all your eggs in one basket. Expect a serious buyer to ask to speak with some of your clients.
How do I Get Ready to Sell?
The number-one thing is to start in time to make changes. Five years is not excessive to begin planning the sale of a company. The hardest company to sell is one that can’t make a profit. A seller has to realize the best return on the sale is when you are able to show five years of profitability.
Another important part of selling a company is being able to understand your client base and the geographic area you serve. A large part of what you have to sell is your client base. Having a database of projects with details on profitability and background on clients is the type of information most buyers will want to review.
This is a very tricky part of working out the final deal. You must have a confidential agreement prepared by an attorney to protect this information. This information should only be released to a very serious buyer.
Other items important to a buyer who is willing to pay top dollar for your company would be computer systems capable of running the most current software with legal copies of the software, up-to-date field equipment with the current updates for software, and training certificates for employees on both field and office software. Having a few registered employees included in the deal is a great plus.
Selling the Different Types
The upstart company has few assets and is many times sold to a larger company by assuming the company debt. The owners are glad to get out from under the burden of running the company and settle for a good paying job with a larger company.
The longer-established company is a little more difficult to sell. The transition to new owners may take some time, maybe a year or two. Before beginning to think about selling, you need to have in place an accounting firm and legal advice. There are a few consultants who will assist in the transition to new ownership, and this is money well spent.
The third type of company, where the owners have held on too long and way past retirement age, is much more difficult to move. The number-one problem is an unreal expectation on the value of the firm. In my book “Surveyors and Engineers Small Business Handbook,” I call this Old Company Syndrome, where the owner or owners have held on for years promising the company to many different employees. This sale never happens — the owners can’t let go of their “baby” — and these companies seldom end up in the hands of the employees. If they are sold, they are sold at a much reduced rate … or they just close their doors.
What is it Worth?
The quick answer: What amount someone will pay you for the privilege of owning your firm? The more in-depth answer is that it depends on many factors. We will conclude this month’s column dealing with this issue.
One of the most important issues today is the difficulty in borrowing money. In past times, banks would loan on what was then called goodwill. The banking crisis changed all that. Goodwill was your client base. What has changed is lack of loyalty to any one company. Whether we want to admit it or not, most clients contract for the lowest price and buy services from different providers. Banks today are required by federal regulations to have security for loans. Most buyers of survey/engineering companies lack this amount of capital.
Another very important issue is you are selling to a very limited market, because of ownership requiring licensure as either a surveyor or engineer regulated by state boards. This limits the number of potential buyers, thus affecting the sale price.
The last item that affects worth is that many potential buyers are young engineers and surveyors who lack the assets to purchase their own firm. The sale may require some owner financing; more about this to come.