Looking Ahead
Selling an engineering business is a process and not an event. Time and planning are required to achieve success because eventually, everyone leaves their engineering business. Ideally, you will prepare for the next era with a succession plan put in place long before the sale time approaches. This would include developing a strong management team and / or mentoring a successor.
If you plan to sell to a key employee, time and planning are required to overcome the primary challenge that many employees do not have sufficient money. You do not want to be the bank because it puts your retirement plans at risk by potentially giving you a disproportionate amount of exposure to the economic cycles that are beyond your control.
There is no exact path or one-size-fits-all answer to selling your engineering business. Presented here are some possibilities for thought.
Selling Is a Team Sport
No one has all the training and knowledge to handle this extremely complicated matter on his or her own. Vast areas of expertise are necessary to create a smooth sale and protect all parties. We believe that your team should include:
Your spouse: This is a decision that will dramatically affect all aspects of your life. Decisions will need to be made about “life after sale”. Some prominent considerations are cash flow, assets, location of children and grandchildren, and health. This is not a one-afternoon discussion, but a plan for your next phase of life.
Your accountant: While the clear, concise, and true financial figures and value of the company are important baseline items to construct the sale, the main issue here is taxes. The goal would be to have the sale as tax-friendly to all parties as possible, with equity (capital gains) versus income being the key issues. The accountant must be able to verify all the figures, as you can be sure the buyer’s team will thoroughly review the entire financial package. Make sure all the facts and figures are correct. Leave the interpretations of those figures for negotiations.
Your business attorney: I suggest you hire an attorney who is familiar with the sale and purchase of companies. This may not be the attorney who has handled your business for years. An intricate knowledge of business law, labor law, and tax law are necessary for this task.
Financial Planner: In today’s world, what you do with the sale proceeds is also a very complex matter. The options for where you invest the funds to create an income stream through the years are diverse, with different levels of risk. A long discussion with the planner, with the direction of the sale in hand, will help immeasurably in the future. Considering the variety of answers on this topic; opinions from more than one financial planner may be appropriate.
Your estate attorney: With the sale of your business, the allocations and liquidity of your assets will dramatically change your portfolio. It only makes sense to ensure that your wills and trusts accurately reflect your desires.
Business Intermediary(Allen Business Advisors): A business broker can be the difference between a successful sale and not. Even if you have found your own buyer, a highly skilled business intermediary (Allen Business Advisors) will help you far beyond negotiating a price. We understand the small and large elements that will affect success such as, your employment agreement, business acquisition financing and communicating with employees, clients and vendors.
Also, business intermediaries are the only way to ensure confidentiality. You do not want your employees, clients or competitors to know, as this likely will erode the value of your business. It is human nature to fear the unknown and knowing that your employer or vendor is for sale with no definitive answers may cause them to look around.
Selling Options
The method of sale also can vary, and they all have tax and life implications. If you are selling shares to a key employee over time, structure the agreement allowing you to purchase the shares back at fair market value if something changes. You do not want to be held hostage because someone owns a few shares of your company.
- If you are selling to an outside third party with bank financing, expect the bank to require you to provide a loan to the buyer. You are the bank’s insurance policy if something goes wrong. The bank wants you to have an incentive to help.
- Selling to employees using an ESOP (Employee Stock Ownership Plan) is a viable option that provides significant tax advantages for the seller. Given the costs associated this this, the business should be generating over $5,000,000.00 for consideration.
The Buyer’s Company Culture
Before evaluating the financial aspects of the sale with a potential buyer, make sure the culture of that firm will integrate well with yours. As with oil and water, some cultures do not mix. If you have a fairly free-flowing, open culture, sale to a company of form-filling, time-sheet-monitoring, bean counters will not work no matter how much money they offer. A few situations you may encounter with suitors:
- The suitor has the same type of business as yours and is seeking to expand geographically.
- The suitor has the same type of business as yours and is seeking to expand his scope within the same geography. This suitor would have his eyes on your backlog and client list.
- The suitor is adding new services to an existing business, such as an engineering firm that wants to add surveying. As the seller your involvement will be key to explain and assist with understanding your business, scheduling, and cash flow.
- The suitor is a bottom fisher. You will always find that one “charitable” soul who is willing to take your business off your hands for one-third of what others are offering, usually with a long-term buyout. The answer to this offer should be “Goodbye!”
Evaluate the potential buyers as you would a potential employer. Visit their office. Are the people friendly? Do they seem to enjoy their work? Is the workplace organized? Are the principals open and forthright with data and answers to your questions? Are staff members working alone or is there a team feeling? I’m sure you have your own ideas and criteria. If those items don’t feel right, no amount of money will create long-term happiness on either side.
Value Analysis
The next task is to get a feeling for the value of the firm. No matter what rules of thumb you may hear, there is no accurate way to determine the value because so much of it is in the eyes of the buyer. For example, a company with $1 million annual sales whose projects were mostly one-time projects and another company with the same yearly sales but with large projects from repeat clients would not have the same value. I have found by working with many surveyors and engineers who have sold their business, that a) the business is not worth what they think it is, and b) if they receive between 40-60% of the annual billing you have done well.
These items are part of what affects the value of the firm:
The value of the physical plant including vehicles, equipment, furniture, supplies, etc.. Usually, this is a small portion of the final number. The buyer will most likely have an appraiser evaluate everything in the physical plant.
The personnel, particularly managers to assume your role when you leave. Experienced personnel with longevity at the firm and ongoing relationships with the clients are a valuable asset. This will vary with the intent of the buyer.
The signed contracts. This will show not what you have done, but what the buyer can expect as income in the near future.
The client list. Long-time, repeat customers add value.
The “good will.” Pick a number, any number, for this value. (But consult with your team as this value has serious tax implications.) Items that come into play include: the number of years in business,
- the quality of the client list,
- a niche you may have developed, and
- how your company is perceived in the area all come into play.
The “good will” is the ultimate variable in the equation.
Allen Business Advisors https://www.allenbusinessadvisors.com provides Exit and Succession Planning, Business Brokerage Services and Business Advisory. Our clients need high quality professional advice but are overlooked by the Mergers and Acquisition firms that prefer larger businesses.