Buying or selling a survey or engineering firm, for all practical purposes, is the same. The truth is, in many cases, they offer both services or at least have an arrangement to offer both surveying and engineering.
In this column, we will deal with selling the company. Next time, we will deal with buying a company.
So, let’s start by trying to answer the question, “How do I know what the company is worth?”
Fair Market Value
Not very long ago, I wrote that companies were not being purchased as often by larger companies. Business is an ever-changing scenario. What was true recently can also change rapidly. I am now finding larger companies are back in the business of grabbing up smaller companies. The reason this is developing is threefold:
- They are buying their way into a market segment geographically. This purchasing of smaller firms is a good sign larger companies have returned to a more profitable situation and want further expansion. This can also come in the form of a merger between firms. Many times, larger firms have tried to open new offices with limited success. So, the most logical solution is to purchase a firm in the intended geographical area.
- With rapidly changing technology, the larger firm finds a smaller company immersed in new technology, especially in the mapping or surveying field. This is a logical choice, because the purchase not only includes the equipment but the trained technicians needed to deliver the products.
- Although not as common a reason as the other two, buying small companies can also be based around a larger company wanting growth. A good way to increase gross sales is to add other companies and staff. This is much quicker and more cost effective than opening a branch office.
Value of the Firm
Whatever the reason for the move, a value needs to be developed for one or both firms before the purchase can be completed. This ends up being a very analytical process involving accountants and attorneys.
In many cases, this process ends up being a great disappointment to the company being purchased. The owner or owners who remember the many difficult times experienced building the firm have an unrealistic expectation of the firm’s worth. This is true where some or all of the value of the smaller firm is converted into the stock value of the larger firm. This is the place where many deals fall apart.
If you have read along this far, I know you want a dollar figure on the value of a company. Let me conclude this segment by saying this about value: Companies sell for many different reasons, sometimes for much more than the book or accountant’s value because of special circumstances. The standard before the 2008 crash was one year’s gross or an average of the last five years. This decreased to as low as a half-year’s gross revenue. The word I am getting is the current value of companies has returned to an average of the last five years if the company has been profitable for this timeframe. Keep in mind that some companies sell for less and some for much more.
If possible, separate the real estate from the sale of the company.
A way to sell to potential owners who do not have the money or financing is to have the current owner finance the sale. While this is a very common way for owners to receive the value they want out of the company, it does have pitfalls.
The sale does need to meet certain IRS rules, and the owner is always faced with the possibility of having to take the firm back to save his equity. This type of sale is common when the owner wants to sell to employees who have few assets. The deal needs to be structured in such a way that the company returns to the original owner if the new owners fail to meet the obligations spelled out in the agreement.
I know of one recent case in which the new owners met all payments to the original owner, who lived an upscale lifestyle. After the 2008 crash, the company went out of business, forcing the original elderly owner to adjust his lifestyle because of lack of income.
Boost That Value
Before you sell, increase the value of your company by leveraging as many of these tips as possible:
1. Maintain a succession plan for all employees
2. Maintain your office in an organized manner
3. Keep your physical plant well maintained
4. Ensure that your account’s receivables are current
5. Develop a viable client mix
6. Show steady growth in the company
7. Avoid a name change shortly before selling
8. Have an up-to-date cost accounting system
I know what you are thinking: Tell us how we can find a buyer for the company.
If you are working with a bigger company, put out the word that you may entertain an offer for your firm. I also know of firms that put a blind ad in one of the engineering or surveying magazines. If you do this, make sure you list your geographic location. The Internet has great bulletin boards that can be utilized, too. If the company has a business Facebook page, a few well-placed statements may also do the job. Remember, you only need one buyer!
One very creative owner leased the company to a group of employees to make sure they could run the company before making the final sale. This gave him time to train the employees in business practices.
Lend a Guiding Hand
It is in your best interest to help in the transition of the business to new ownership.
You can stay on as a part-time management consultant, but don’t expect this to continue for a long period of time, maybe two years at best. Set your compensation rate in the buyout.
You could also help with client maintenance, marketing services, public relations or financial consultations. These are all important if the company is going to continue to carry your name.
In the final column, we will address buying a company:
• How can I be sure this is the right deal for me?
• How do I know for sure what I am buying?
• Is it just more cost-effective to start my own firm?
• Pitfalls of starting my own company!
• Milton’s rules for buying or selling a firm!