Buying into or becoming a LLC partner

[dadof3]

I currently work for a small geotech firm with two owners (equal partners) and have been with them for six years. Besides them, I am the only other registered engineer. Working environment is great and I am compensated fairly. My question is how to make an "offer" to become a member and at what price? What is that offer a function of? I have 9 years experience. Should I wait for a "possible" offer some time down the road or just begin making plans to move on and do my own thing? One of the owners is probably about 8 years from partially retiring. Don't mean to ramble on and thanks in advance for your thoughts.

 

[MiketheEngineer]

Simply ask!!!

Explain to the owners that you would be very interested in becoming a partner and owning a part of the company. Explain that you enjoy working there and you believe the future is bright - yadda - yadda - yadda

Do NOT expect an instant answer. This will cause the owners to start thinking about the future. Hopefully, they will come back to you with a proposition.

If however they give you an immediate answer of "NO" or come back later on and say "NO" - then you will have to make a decision to just "lump" it or leave and start your own company.

Good Luck

 

[Ashereng]

I also like the direct approach.

Picking the time to ask, is also important. If you have annual or bi-annual reviews, that would be an ideal time to bring up the subject.

I would simply approach it as a proposal, without bringing up the fact that someone may be retiring (they may be retiring, but may not want to give up ownership of the company).

"Do not worry about your problems with mathematics, I assure you mine are far greater."
Albert Einstein
Have you read FAQ731-376 to make the best use of Eng-Tips Forums?

 

[GregLamberson]

I agree. Ask to see how receptive they are.

Calculating the investment is easy, you'll need to see the cash flow and then depending on the terms you have as a partner, you can discount the future values to see what it is you should pay for them.

Greg Lamberson, BS, MBA
Consultant - Upstream Energy
Website:

http://www.oil-gas-consulting.com

 

[bvanhiel]

Calculating the investment is easy...

No it's not. Your calculation would only work if the partners did nothing but sit back and count the incoming money. Instead they are each contributing unequal amounts of hours and experience.

Besides the cash in the bank and the value of the computers and equipment, the only value such an entity has is the goodwill of it's customers. That goodwill may or may not be transferable.

In my experience it is very difficult to negotiate the value of a small business. Owners tend to overinflate the value of the company because they mentally discount the amount of work they do to keep it running.

-b

 

[GregLamberson]

It's not difficult, not at all.

Valuating a business is fairly straightforward, and the valuation of the business has nothing to do with the "Owners tend to overinflate the value of the company because they mentally discount the amount of work they do to keep it running" - it is what it is and if the owners want an inflated price then walk away. The business is only worth the present value of future profits plus equipment, cash, and inventory. There are some subjective components - costs, revenues, discount factor, but there are common methodologies for assessing these components.

I do allot of work on investment analysis, both for projects and businesses in domestic and emerging markets. Nothing magical or complex about it. Your valuation of the business may not line up with the owners assessment and if it doesn't and you can't reach an equitable agreement on the value, then don't invest.

There is nothing to be transferred in this case, it is simply the existing business potentially bringing on another equity partner.

If you need any advice on making a valuation, I'd be happy to give you some assistance - current workload dependant.

Greg Lamberson, BS, MBA
Consultant - Upstream Energy
Website:

http://www.oil-gas-consulting.com

 

[bvanhiel]

Greg,

This is a consulting business he's buying into, not a manufacturing company. There is no significant cash, inventory or property value. The only value the company has is it's goodwill, which in a small company is more attached to the owners than the company itself. It becomes nearly impossible to separate the owner from the business.

Let's say dadof3 buys in for 100k and his partners decide to immediately retire. Dadof3 is up the creek without a paddle because all of the customer relationships resided with the retired partners. He may have bought into the business, but he didn't get what really mattered.

Your valuation based on future returns will grossly overinflate the value of the business. The missing piece is that the owners are contributing value at a rate that far exceeds their stated salary.

-b

 

[dadof3]

bvanheil,
You bring up a great point and one i failed to mention in my initial posting. Our biggest asset is the employees (and employers), that is what I have struggled with. What about offering to purchase a percent of sales over "x" dollar amount per year? Lots of other legalities come into play also. Such as, we are an LLC and I would want that protection also.

 

[bvanhiel]

dadof3,

I would aim to get an ownership share that was proportional to your contribution to the company as compared with the other two owners. You need to talk to them about how to get there.

It is a mistake to think of the company shares as having any intrinsic value. They are simply the counters that divide up the profits at the end of the year. They need to be proportional to the owner's contribution so that everyone is properly incentivised to work.

If the owners are smart they won't want you as a partner as long as they can keep you as an employee. You probably need to be willing to leave to force them to consider offering you ownership to stay.

-b

 

[riskengr]

Be careful and make sure that your proportion of the LLC will provide enough return to cover the taxes. My employer gave me a few token shares in the company to avoid having an employee in another state and having to pay taxes there.

He grossed me up by $7.5k to cover the portion of SSI and medicare that the company would have had to pay if I were an employee which sounded fine. Well guess what, my fed income tax went up by by $17k and state income taxes went up by $3k. I took a major hosing and have only broke even because my company pays overtime to its engineers for billable work. It took a year and half to figure out that this was occurring and that my wife was not pissing our money away. My accountant said it had something to do with they way they reported income and expenses that was screwing me.

I just got a small adjustment from him to compensate for this, which will help me as I set up the next step, going into business directly for my self.

 

[MikeAnd]

I would approach the two business partners and tell them that you would like to feel more of a sense of ownership and that you're considering leaving to start your own firm, but you would be very interested in becoming a partner in their firm.

See what they suggest or offer, and then start to worry about the specifics and definitely post back here if you have questions about what they propose.

Mike

http://www.partnerup.com