The Business Side: What To Look For When Buying A Company
As we’ve determined in the previous two columns, buying or selling a survey or engineering firm is, for all practical purposes, 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 the final part of this series, we will deal with buying a company. We are going to explore how you find a company, know what the company is worth, and how not to overpay. Furthermore, how can I make sure the company is what it appears on the surface? And, once it is purchased, how do I transition into being the new owner?
Finding a Firm to Buy
You have a great advantage going in your favor. There are many more owners wanting to sell than willing buyers with capital to invest.
One of the most important items to consider is geographical location. Choosing the location may mean getting licensed in another state in anticipation of a future purchase.
The most ideal location is on the fringe of a large geographical population. This is where the action is when it comes to money being spent. While a very rural location may be a nice place to live, you are limited to land surveying for private owners and small engineering jobs.
For the land surveyor, having an engineering partner may be the best way to purchase and develop a full-service company. It is always nice to have a partner to discuss issues with, and to cover for each other when time away from the business is needed.
As far as finding companies to purchase, a few ads in survey/engineering-related publications or posting online should get you some good leads.
How Much to Spend?
The answer to this can be very simple or very complex.
The simple answer goes something like this: A longtime standard in our market segment was that companies would sell for one year’s gross sales. In some cases, this may still be true, but only if the company shows profitability over the last five years. When I mention profitability, I don’t mean one or even five percent, but rather 20-30 percent per year.
The long answer is as follows: You should never make an offer until you ask what the owner expects. This may be the end of the negotiations. There is a belief by many company owners that the company is worth more than most buyers will or can pay. Just make sure when you start negotiations that all parties with ownership are present. I have seen more than one deal fall apart when other family members who have some ownership interest will not agree to the final deal. A good way to start negotiations is with a written offer, including terms and conditions. You most likely would want a CPA and attorney to help structure the offer.
Transition is Critical
A company that I have knowledge of has just been sold. This is not a survey or engineering company, but the principles are the same. The sale was very upsetting to the employees who had very little knowledge of the process of selling a company.
The buyout went something like this, happening in four very distinct steps:
- A contract, much like a real estate contract, was reached with the seller. While I did not have access to the actual contract, I can guess with certainty that it contained all the standard buyout information including the price. I am sure the negotiations had been going on for a long period of time, including accountants and attorneys, before the employees knew of the sale. After a contract had been signed agreeing to the terms of the sale, the employees were notified of the pending sale to be finalized in a couple of months.
- Part of the agreement was the new owners had requested permission to interview all existing employees before the final purchase. A substantial amount of time was spent with all employees learning very specifically what their roles were in the company. This information was then used by the new owners to structure their management plan for the company.
- The new company made it known it was not going to automatically take over the payroll and employees of the old owners. Rather, each employee had to fill out a job application to the new owners, including submitting their resumes. The new owners would then decide on the employees they wanted to hire as part of the new company. While I had never seen a transition such as this, it is sure a good way to cut all ties from the old company, including liability, and to also understand your future employee pool. This is also a good way to get a clean start on all benefits. The seller would need to settle with all their employees for benefits owed.
- About two days before the sale was final, the new owners contacted the employees they wanted to hire and offered them positions. The original owner contacted the people who were not being offered a job, because they were employees of the old company and their jobs were being eliminated. As the new owners were bringing in their own staff, many of the top management jobs were eliminated. While this may seem a little harsh, it is about as clean a way to take over a company as I have seen. It also highlights the authority of the new owners and managers.
To Buy or Start a Firm?
I always think buying is best if you can find the right company and work out the best deal for yourself.
If you like the market area and the deal can’t be finalized with an existing owner, you can always start a company in that area. It may also force the owner of the company you did not buy to make you a better offer.
Milton’s Super 7 Rules When Buying a Company
- Start with employees as new. This keeps you from paying unpaid vacation and sick leave. Only hire employees you want to employ.
- Run a credit check on a seller. Let the seller retain all accounts receivable.
- Check for liens on real estate.
- Meet with key clients before the final purchase.
- Check with the registration board for pending problems.
- Hire a CPA and attorney to structure the buyout deal.
- Don’t believe everything you are told. Do your own checking.
In our next column, we will start a two-part series on “Marketing in the 21st Century.”