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Looking for opinions on buying out my MEP company

Looking for opinions on buying out my MEP company

Looking for opinions on buying out my MEP company

Hello all,
I’ve been looking through a bunch of old threads and I’m very impressed with the quality of the responses here. I’ve been quite a lurker and am now ready to throw a question in. I appreciate any input.

I’m considering buying my current MEP consultant company. I’ve been out of undergraduate school for six years. California based school, family, work. Mechanical licensed PE. I’ve been in my current company for five years. Over the last three years the sole owner has been looking for me to buy him out when I’m ready. We had an evaluation done. Value came back at $1.1m including accounts receivable and accounts payable. Value was $700k for everything minus the accounts receivable and payable.

Owner and I have agreed upon a $500,000 price that I will pay off over ten years. I pay ~$50,000 per year and each year I get larger salary (up to $150,000 by year five). For the first five years I just the get profit I’m allocated (i.e. in year three I’m 30% owner and will have paid around $150,000, thereby getting 30% profit). At year five I receive total 100% ownership and pay the remaining $250,000 off over five years with minimal interest to the owner. Owner will NOT be taking account receivable with him when he leaves. Although we will likely negotiate making a draw form the company that leaves me enough to run it and give us both profit at 50% level.

I have a great relationship with most of our clients. I’m not at all concerned about losing work when the owner leaves. The owner will stay employed with us for the first five years and retire after five. At year three or four (still need to nail in) he might move down to four days a week, but will take a salary cut to do so.
Lets get to my questions:

1. I’m concerned ownership isn’t for me. I have a small but growing family and I worry about how much extra work I will have to do as owner vs right now as just a project manager. I love my kid and my wife and stress about being away from them more to do owner things besides just work things.
2. I worry about our staff. We have slowly deteriorating in quality staff. We are about 12 people. Electrical is run by a guy who will retire in the next few years. He is our only PE and I will have to find a replacement along with the owner to keep that side of business open. WE have no potential Electrical PE in line at the moment. M&P: our good folk have retired over the years and our current staff is lacking in motivation (near retirement) and skills (newly hired – but have potential). What keeps me up at night is people leaving the company and I’m left holding the bag. The hardest part about being an owner it seems (as I daily imagine what its like and try to get in my bosses head) is dealing with employees and helping them do work. A good chunk I wouldn’t hire myself. But most will be retiring in the next five or six years anyways.
3. I have an alternate opportunity right now that I could go work for my county. Unfortunately, I think I’ll like the work less than my current job. It’s more like a pure project manager and scope/estimator. I’ve loved my current job just because I manage work but also play a good role in staying in design and continuing to learn. I do have a call with the person who retired from that job this afternoon. I’m going to probe him many questions to ask about what his actual day to day is like. I’m attracted to county stability, no overtime, not having to manage a large staff, and getting paid well there (details at end of post).
4. Lastly, and some of the other threads I’ve read allude to this: I wonder I’m even making the right call entertaining buying a company. I could start my own after the owner retires, however I’m under a two year non-compete. The assets of the company are likely around $100,000 currently for physical things but by the time I’m a 50% owner I think that will be deteriorated and items will somewhat need replacing. Because out accounts receivable right now is ~$600,000 and that would NOT be transferred to the owner when he sells, It’s all a bit murky.
I don’t have many folk in my life who have been in a situation like this that I can hear opinions on. I do love my current company. The folks are nice enough, whilst not motivated. I am comfortable here. With the owner needing to leave I’m in a bit of identity crisis. I see myself potentially moving into his role (along with his guidance and help) but I can’t help feeling I might be stepping into something that either a bad bargain or something I just don’t think I’ll want to do in five -ten years. I also see myself working for my county and hating my job because It’s all desk work and kicking myself for not going out and missing the opportunity that was right in front of me.
Lastly, and please be gentile with this: I’m a rockstar at my work. I’m extremely self motivated, I work very hard, and have no doubt that If I wanted to run a company (in any way that comes about) I could likely do it. However, Money isn’t everything to me. My wife has full time work (Makes about $80,000 and will make around $110,000 in next decade with regular pay increases, very stable job). I feel I’ve passed the threshold to where my time is having a lot of value and an extra $40,000 per year, is that life changing or just situation changing?

County benefits are $~135k per year after a few years in, 15 days sick leave per year that becomes years of service, 5 weeks PTO after a few years, basic pension, 11 holidays per year.
If I work for the county and my wife work, we’ll be pulling in $200,000 per year in the next five years. Why work harder and more just to make more money?

Thank you, I’ll try and monitor the thread to help answer questions and provide updates, but during the work day can be a challenge.

RE: Looking for opinions on buying out my MEP company

What is generally the yearly profit the company produces? When you discuss salary, you are saying 150k base paly plus the company profit for ownership percentage? That profit number should be significant. I would anticipate for a 12 man operation that yearly profits would be 600K-1M if you keep everyone busy, but maybe its quite a bit below that? If you lose a business segment that is not insignificant though.

So you would be purchasing 10% per year for 5 years then 50% in the final year all paid within the year of transfer? It could be done where you buy 100% of the company and pay it off over the same amount of time but that is a tougher pill for the seller to swallow as he has to pay tax on the purchase price which he won't see for a while. Have you had discussions with a CPA regarding all the tax implications of the ownership transfer and beyond?

For buyouts there is sometimes a holdback of some percentage of the value that is 'made up' at a later date to cover if not all of the billed money is received. It sounds like you are paying for the backlog of money so it may be something to consider.

RE: Looking for opinions on buying out my MEP company

If you're asking us, you probably shouldn't do it. If you don't have anyone in your network whom you can trust more than a bunch of strangers on the internet, you're just not in a good place to buy a business.

RE: Looking for opinions on buying out my MEP company

Didn’t read in great detail, but it seems like a bad deal. But you should get advice from an accountant and lawyer. Do you have a detailed financial statement for the current company?

I don’t like that part where you are only a part owner until year 5. Seems like it could lead to all sorts of issues.

Can you get a loan separately and buy out the owner 100% now?

Work/life balance is important. Your kids will grow up fast, and you don’t get that time back. And you will need your spouse 110% on board with this.

RE: Looking for opinions on buying out my MEP company

Also, who did the “valuation” and what was it based on? What assumptions?

RE: Looking for opinions on buying out my MEP company

Quote (MemoryME)

The assets of the company are likely around $100,000 currently for physical things

Then I'd say that company is likely worth about $100,000 plus the value of the cash account + a steadily decreasing percentage of accounts receivable based on age based on risk of recovery. Good Will is not something you should pay a penny for. You're not buying out an existing company that will continue to work and operate as is...you're buying a job as the head hauncho. Not a great move. You should never buy a job. If there's $600k in receivables now and you'll get all of that, you probably have a decent deal.

Quote (MemoryME)

Why work harder and more just to make more money?

Good question. The answer is never simple, and it's about finding the right balance. If I can make $600/day and see my kids for 1/3 of it, get weekends, and a few weeks of vacation, would it really be worth it to make $1M/day, not see my kids, miss them growing up, and only come back into their lives when they've moved out and gotten married? No, it wouldn't be. But somewhere in between there's probably a good balance of income vs. time to spend said income. If you're not passionate about it, though, don't do it. Running a small business can be grueling. A well run business doesn't have to be - if anything you should only see a shift in your responsibilities, not so much an increase in labor, because there should be people doing the jobs that so many small business leaders feel compelled to do themselves (at the expense of themselves and the business).

Another thing: make sure you don't conflate the profits with the salary. It doesn't sound like you are, but I always feel the need to say it in threads like this: the salary should be commensurate with your labor (valued based on knowledge, experience, and efficiency) and profit should be commensurate with your financial risk. If you're going to put $500,000 into this, you should be getting an annual return that is much higher than any other investment opportunities you may have for the same amount of money. Would you be getting $50,000/year from that in the stock market? Then your profits had better be much higher than that. You also have to consider liability exposure as a business owner and practicing PE (yes, corporate structures and other legal instruments help shield you, but they are not absolute guarantees...there's always some level of risk for which you should be compensated through profit).

If you go through with it, make sure you have an off ramp. You may take a small loss, but there should be a way for you to get out of the purchase if things go south without losing your shirt. What if the economy tanks completely, you can't find a replacement EE, and your revenues halve each year for the next three years? If there's no provision to revalue the company each year, you could be stuck paying BMW prices and take delivery of a used Geo Metro in a few years. The flip side of that is that the price could go up if the value of the company increases, unless you can get the seller to agree to a price ceiling that it won't go above.

RE: Looking for opinions on buying out my MEP company

Agreed with above, you're valuing the company way too high. I'd be curious to know what the $100k in tangible assets entails and whether/not they're rapidly depreciating disposables like PCs and office furniture or something with real value.

Personally I'd highly recommend option C - relocating to "not California" for the same or better income, drastically cheaper cost of living, and overall better/healthier lifestyle.

RE: Looking for opinions on buying out my MEP company

I don't think non compete clauses are enforceable in CA. And once the owner retires, the non compete is probably no longer valid anyway.

RE: Looking for opinions on buying out my MEP company

That purchase price seems very steep. Hopefully he has shared all of the financials with you so that you know what kind of living he was making and how profitable the company really is. High valuations are great when you are selling to an outside party, but not so great (or even applicable) when someone is retiring along with an internal restructuring. Who is going to replace your high output? Or the owner's output? You need to be realistic on your revenue going forward.

On the plus side, this is an opportunity that not everyone comes upon. It can be way more satisfying (and lucrative if successful) to have your own company than to work for someone else or the government.

RE: Looking for opinions on buying out my MEP company

For general profit, it seems the business owner has only been recently comfortable taking about $30,000 per year since the company transitioned from C corp to S corp. The evaluation that was done showed the book profit as upwards $100k-$200k per year on good years, but not always that. It is about a 12 man operation.

I think its just the life stage i'm in I don't have peers buying companies, which is why I'm looking for more opinions on the internet. There are a few folks (older) who I have run this by, but wanted to open up the pool more to get more varied opinions. Its already been quite helpful, so thank you all.

I cannot convince the owner to let me have 100% ownership and then pay off over 10 years, that would be ideal right?

I honestly don't have my own accountant, but have lined up talking to a family accountant. That is forthcoming.

I personally don't want to go into debt to buy this company, because I feel risk adverse. And honestly as I type all this it really is starting to make me try hard to justify the purchase. It's like I want to defend the offer because to be considered seems like an honor, but I should only do it if it makes financial sense.

My spouse is on board with supporting me (whatever I think is best). However, if it were up to her she would rather no be placed in a risky situation. My wife is my other half, which is why I of course have some inner turmoil as well.

From various posters here, it does look like the profit to purchase ratio is much lower than it "should be." I've done my own private calculations comparing conservative estimates of the company profits plus my owner salary vs just doing the county job and throwing that all in a 401k and it comes up as a wash. There is tons of risk in the unknowns of the company and I really need to ask myself I think if I just want to be in this position. However, working for myself, and not answering to people to have a day off feels like a perk I shouldn't refuse.

The 100,000 in assets is EXACTLY depreciating PCS and work station/plotters, etc.

My biggest concern about the functionality of this change is that there needs to be a total restructure of personal in the company. We need to hire basically 50% new staff. I don't have anyone currently to replace my high output when I step in fully and the owner departs fully. Ideally I find that person or grow him/her over the next few years. Electrically is the same. We need to get a signing PE and then help that person get a competent staff.

RE: Looking for opinions on buying out my MEP company

So is that $70k-170k per year delta in profits the result of reinvestment? If not, where did that money go? To constantly pull in 6 figure profits and only draw a couple tens of thousands each year without a multi-million dollar cash account or other investment assets owned by the company doesn't sound right.

Based on your last three paragraphs, it sounds like not doing it is the answer.

Quote (MemoryME)

not answering to people to have a day off feels like a perk I shouldn't refuse.

This is (these are?) the biggest myth of entrepreneurship. Be your own boss! Do what you want when you want! That may work in some industries, but I've found it to not hold true for engineering consultants. Sure, if I'm caught up on my work I can take my kid to the park for a few hours. But my old job was no different - I had a decent boss who was flexible with time off. If somebody needed/wanted something and they had no outstanding responsibilities, they could go. If it was an emergency, they took care of you. But instead of exchanging one boss for none, I've exchanged him for 20. And they all want their tasks done now and don't want to hear about the other guy. This Christmas was the first time in three years I've taken a vacation where I was able to turn off my email and phone AND not work on any project related stuff (though I still put in a few hours wrapping up some financial matters for the year). So while I have more 'flexibility' after a fashion, I have far less 'freedom'. Again, this can be mitigated with a well run project and client management structure...but it sounds like what little of that you may have had is collapsing and will have to be rebuilt from nearly the ground up.

RE: Looking for opinions on buying out my MEP company

PhamENG, thank you so much for these thoughts. You're summing this up in a way I was not able to totally describe. You're completely right about exchanging one boss for 20.

I've asked my boss the direct question about the discrepancy between his draws and book profit. The recent change to an S-corp has made him not draw last year (first year being an S-corp) which is a year the company actually did not make any profit. Previous years must have been different though.

I'm now really looking forward to this call with the county tomorrow. I'm thinking they are going to push me over the edge to just let this opportunity base me by on my current company. I wish I had a better idea into EXACTLY how every dollar is being moved around, because that would be more helpful. however I also am making this decision based on work life balance. My wife has a solid stable job. I'm now leaning towards not jumping into the unknown even though I hate to call myself risk adverse.

Frankly my boss took two vacations last year, that were each a week long. I probably couldn't do too much more than than in his place unless I had a kickbutt team nailing Everything while I'm going. We don't currently have that team. That team would need to be created essentially from nothing.

Sorry for the rambling and am truly grateful for the thoughts.

RE: Looking for opinions on buying out my MEP company

MemoryME - why is the county job your only alternate option? have you considered starting your own company? have you looked into jobs at other consulting companies?

And what is your current owner's plan if you do not "buy" the current company? is he planning to just retire and shut down the company?

RE: Looking for opinions on buying out my MEP company

No problem - I'm certainly not a certified expert, but I went through a similar process a few years ago. I was going to be brought into ownership (it's a partnership structure), but as I started looking around I realized that 1) I liked the ownership but I really didn't trust them with my family's well being and 2) the team had some stars but more dead weight than I wanted to keep...and a couple either had an ownership stake or were close enough to an owner that they would be off limits. So I left, and now I'm in a prolonged startup phase of my own company...deciding if I want to scale and take on more and bigger, or stay small and just seek a better balance.

Best of luck in whatever path you choose.

RE: Looking for opinions on buying out my MEP company

The County is not the only other job, but I am very attracted right now to the stability. My current salary is $100,000 and I think I could pretty easily jump and get $125,000 elsewhere. I don't really want to jump of course and I bet if I stayed as a non owner I could request up to $115,000-120 and possible get it. But I really won't know what my future hold to stay on at a company where the owner is leaving in a few years. I'd much rather jump ship in that case on my own terms and boost my salary that way.

I honestly don't have the drive to start my own company right now. Being the family man with a new kid, I don't really want that level off effort:finacial pay off. That's why the established buyout was so enticing. I could potentially jump to some other firm and eventually buy in there. But if I want to buy in and own, I'd hate to miss this current opportunity.

I asked the owner yesterday what his plan was if I turn him down. I suspect he will sell to outside or wind down. At that point I guess I could start something and pick up these clients somehow. Just a lot of What if's I think.

I'll be sure to follow up more tomorrow as my story expands. I've been considering this for the better part of a year and I'm at the cusp of making the call.

RE: Looking for opinions on buying out my MEP company


I cannot convince the owner to let me have 100% ownership and then pay off over 10 years, that would be ideal right?

No, but purchase agreements wherein you gain 100% control now, payoff over X years, and gain ownership upon final payment are common.

Buying a small service business for its real estate or other significant, long-term tangible assets can be worthwhile. In this instance tho it sounds like you could pretty easily replicate your employer for less than you could buy it.

RE: Looking for opinions on buying out my MEP company

I should qualify a few points:
1. The owner is essentially giving me control from year one onwards. He and I are very much like minded. We rarely disagree when it comes to how things should be done. He is taking my input on who how we hire very seriously. If I’m saying I think we need to move away from x program to use Y program instead, I easily see it happening.

2. One of the main values my boss has continued to impress on me is that he will continue to train and help transition me to ownership. Of course I can go rouge and learn on my own and the hard way. He is providing a (albeit paid) pathway to move into that role.

3. We have a high accounts receivable now. I think before I was swayed by the idea that owner isn’t taking that with him in the sale. But if I am only getting the amount of profits that I currently own for the first five years, that large accounts receivable I guess won’t be coming to me in any major way. I might end up with 10 percent of it if it all came in next year and I was 10% owner If that makes sense.

4. Lastly, I’m wondering if I’m misunderstanding the valuation breakdown with how my boss colored the last year taking Minsk draws. The four year average SDE was $270,000. I believe that does include owner salary, which he currently pulls $150,000 per year. He’s told me in the ~20 years of running the company, he has only once taking a pay cut one year (2008). 2019 and 2017 seemed especially good on paper which helped to offset last years loss.

RE: Looking for opinions on buying out my MEP company

Quote (MemoryME)

offset last years loss

This is concerning to me. I'm not sure what the market was like in California last year, but it was hopping here on the East Coast. I was turning prospective clients away because we didn't have enough time to get it done. What realm of mechanical consulting are you in? Industrial process? Commercial building design? If you work in the non-residential construction world, pay close attention to upstream and downstream trends (architectural billings as reported by AIA and construction starts as reported by a number of industry reporting outfits). If you're already operating at a loss, you could be in trouble in the coming years. That sector is expected to shrink over the next two years, which would likely pinch you even more.

RE: Looking for opinions on buying out my MEP company

I completely agree pharm. It has been concerning. I think it’s more of an operations issue as you say. This last year we’ve basically been turning away clients as well to maintain our long standing clients just because of the pace of work.

This year would have been a great win for us, but we pretty much broke even with about $600k in receivables. I’m sure some of that is bad debt, and I really should have the owner open up the accounts receivable list so I can see the details.

And I’m sorry, I’ve haven’t yet figured out how to respond in quotes here like others, I’ll dig into it.

RE: Looking for opinions on buying out my MEP company

And sorry, my realm is building MEP design. Non residential construction. Education, high rise, higher Ed, civic, Commercial, some labs, clinics

RE: Looking for opinions on buying out my MEP company

Quote (MemoryME)

I’ve haven’t yet figured out how to respond in quotes here like others, I’ll dig into it.

If you were running full tilt, turning clients away, and still losing money, I'd be hesitant. And if $600k was the receivables for the entire year...yikes. A 12 person operation should be bringing in closer to $2.5-3M/year. We have a structural engineer on the forum with a 2 man operation who regularly breaks $500k/year revenue...and he lives in a city that probably has a cost of living 1/3 of the average California city. Add that to what is projected to be a downturn in the next few years, and the County job looks mighty enticing to me...

RE: Looking for opinions on buying out my MEP company

No the $600,000 is just what is outstanding. I haven't seen the totals for the year but we did make enough to break more than even. Think it would be around $1.7m in revenue which is close to our expenses. We actually expected a lot more money to come in at the end of the year than it did. People usually send us tons of checks by years end to get the balance of their books. We expected to get at least $200,000 extra, which would have essentially all been profit. We've already received some check totally $70,000 since the start of the year. Kind of odd to me actually.

It's tough to gauge the market right now like that because you never really know where things are going to go. for example, CA still has massive housing issue. We're getting tons of jobs right now in multifamily and I personally don't see that slowing down. I'm sure it could, and we might let a designer go because of that, but I imagine they would be the low picking fruit of the employees here so not a big loss.

Good point about single man operation. It's tough because I look at myself and see that I could likely stomach running an established company that I slowly shift to how I like more than wanting to jump in no holds back to working on my own like you and that structural you mention. That second option to me seems even more risky.

I think If I buy this company, there is a pretty good safety net of clients to at least keep the $150,000 salary. I was planning on using the salary increase (currently make $100,000) to offset the buy in. By year four or five of the buy I'm expecting the company profits and the work to handle the $50,000 expense at that point of debt. I would essentially just be cash poor in the first years. But the business owner won't wont the company to fail as I slowly by him out because he's going to be getting profit and some of that will be his.

I don't feed jaded yet, and maybe I'm naïve, but the owner really seems like he would do everything in his power to help me succeed. I know all his clients, which is scary thing for him. The transition of clients I would expect to be keeping almost all of them. I know them all and the relationships we've built have been growing these past five years.

Working for the county is more project management, which has always turned me away from it. That just doesn't' seem as engaging as design. I do like being in design. I admit I don't know enough and will be talking to the county retiree today. He's been quite friendly to me and I expect a lot of candid thoughts.

RE: Looking for opinions on buying out my MEP company

Okay - I guess I misunderstood the $600k number. Be sure to look at it in terms of both cash and accrual accounting - if there's a large delta, there's a decent chance that the receivables are carrying some bad debt (as you suggested already). I only brought up the smaller operation as a comparison in terms of revenue, a moot point now.

Sounds like a difficult spot - too bad he can't wait another 5 years to start the process. You'd probably be in a better place (financially, family, etc.) to do it and likely on the other side of the business cycle. Cest la vie.

Whatever you do, keep your eyes wide open and take nothing for granted. Make sure you have your own lawyer and your own CPA go through everything. Good luck!

RE: Looking for opinions on buying out my MEP company

May want to hire a banker to provide a buy side opinion or sign up to be the financier of the deal. From that you should get a third party assessment of buyer's valuation. The financier will price it for risk, so that should give you an indication of what you're taking on. Of course, if the financier won't do the deal...

RE: Looking for opinions on buying out my MEP company


Quote (phamENG)

too bad he can't wait another 5 years to start the process.
Actually he most certainly can wait to 3-4 years before I buy in. He doesn't plan to retire right away. I could easily keep working for him, help him with the transition to employees and direction and then pay a lump sum for half the company and finance the rest over five years. Owner would probably want to renegotiation price later on which is both good or bad depending on how the company shapes up. I still have the risk of staying on for that time with not a clear direction of where its going.

Quote (AZPete)

May want to hire a banker to provide a buy side opinion or sign up to be the financier of the deal.
Yes that's in the plan. I mention above I planned on getting accounting advise as I pursue from someone who would be in my court. The evaluation was actually done by a third party evaluator. I didn't find their interpretation that much helpful honestly, and don't really see getting ANOTHER evaluation to be of great value...

RE: Looking for opinions on buying out my MEP company

I can understand the owner wanting to sell up and get $500,000 for this company.

But you buying it seems like a poisoned chalice.

From what you say above in your posts, in the next 5 years or so, you're going to have to replace 80% of the staff. That's hard. ON top of now being responsible for getting new work in.

My guess / worry is that as soon as you sign the deal, the owner will mentally retire and within 6 months won't be putting in the hard yards to renew or get contracts, hire new people or replace anything. Hell he might just bring forward his 3 day a week operation. But you'll still be under the S&P agreement.

To be in that position at what sounds like just under 30 is very good, but the balance needs to be right and with only 6 years experience you may not really understand what business is and how hard it is. Being your own boss / running a company may not be what you're really set up to do right now. 5-10 years time maybe.

Is there a third option? Just keep working there?

I'll be frank here that at present this doesn't sound like a company going places and in 5 years or less could have eaten you up and spat you out.

Maybe wait 12 to 18 months and then look again. By that time the owner may have more of a realistic attitude about the "value" of the company.

I don't understand what C corp and S corp are?? Maybe not relevant.

Also why this examination of accounts payable?? That's just part of the value of the company and relvant to the profits no?

I would approach this differently is possible. Say yes you're interested in taking this on, but need to understand much more about the accounts, the profitability and how this company will look in 5 years time, what with needing to recruit all the staff you're going to need. You're going to need min 6 months to do this before you're ready to actually pay anything or change control. Maybe just accept the ownership, but agree a falling percent of the profits to the owner. Say falling 20% a year. He converts to a paid employee / winds down.

Whatever you do, don't borrow any money to do this. Be able to wind the company up if it all gets too hard on you or your family without loosing capital money.

If you've read anything here you'll find the value of consultancies is vastly overblown by the owner(s). Offer 10% of their valuation. Who else is going to buy it??

I was typing this whilst you were so some of this has been addressed....

Remember - More details = better answers
Also: If you get a response it's polite to respond to it.

RE: Looking for opinions on buying out my MEP company

Another possibility:

Inform him that you're very much interested, but you're not quite ready to take on the mantle of ownership. You'd like to push that out 3 to 4 years. You do, however, want to take a more active roll in management. That "owner salary" has nothing to do with being the owner, it has everything to do with management. So take your salary increase incrementally as you take on more leadership and management responsibilities. He'll have an opportunity to slow down a little.

He may not love the idea - most entrepreneurs don't. The idea that owner = manager is the Albatross around many a small business owner's neck. And while he'd still be involved and provide guidance and overall direction, you'd be the one making sure the gears are greased and the machine keeps humming along.

This will boost your pay and get you closer to seeing if owning/managing a consulting firm is right for you. And in 3 years time if the company is on a better footing and you like what your doing...buy him out. If not...go elsewhere with a wealth of experience that will make you a hot commodity at any other firm.

RE: Looking for opinions on buying out my MEP company

Thanks LittleInch. I do agree with a lot of what you're saying to the point its not even worth it to respond to each item. I've got my work cut out for me to analyze this appreciate all (and others) input. Getting that gut reaction from so so many has been immensely helpful. I have more options than I initially considered too. My boss doesn't want me to leave. He's going to keep the company going. I can certainly put this in a holding pattern, he just may decide to do something else and that might be for the best.

I will say I was in no way going to need to take a loan out do any of the buyout. I calc'd that I needed to put in a monthly stipend of $1,500 out of my own budget plus the salary increases to meet his number. However that would make me essentially take my $100,000 salary, subtract out eh $1,500 per month and then not see a "raise" for the next ten years because all the extra goes to buyout of the company.

RE: Looking for opinions on buying out my MEP company


Quote (phamENG)

And in 3 years time if the company is on a better footing and you like what your doing
I think this going to be the most likely scenario right now if I want to stay and not jump to another firm or go to the county. The owner doesn't' have anything else lined up so his options are limited.

RE: Looking for opinions on buying out my MEP company

Quote (MemoryME)

I honestly don't have my own accountant, but have lined up talking to a family accountant.

Family may be too close. Recommend true 3rd party for cold analysis.

Buy side evaluation would be a reviewer who is preparing to consummate the deal; i.e., eat their own cooking. If you have a lender who will agree to lend on the deal, they will be on the lookout for risk--including your fitness to own up to it. They'll be able to highlight the weaknesses (from their standpoint). If they won't do the deal, then maybe you should consider what you're signing up for. Whether you finance or sign a promissory note, you're acquiring debt. May as well get a very thorough scrubbing by a sophisticated party. Your questions indicate that valuation, risk, tolerance, inclination, and ability are not ironed out anywhere clearly enough to proceed confidently.

The deal is worth $X00,000+ to your pocket book, gain and loss apparently, so why not spend a $X,000 to get solid accounting and risk advice.

RE: Looking for opinions on buying out my MEP company

From the above the revenue numbers are quite small considering you are saying you are totally booked. I would think along the lines of Pham, at least 2.5-3M revenue. How many jobs is fully booked? how many of the 12 are engineers? We have about 15 people - 12 engineers - and do 300-350 jobs a year. Granted there are many half day jobs in that number but also quite a few multi year large projects.

Are all your jobs a fixed fee and you get killed by more time spent than budgeted?

RE: Looking for opinions on buying out my MEP company


Earlier today you said, "Working for the county is more project management, which has always turned me away from it. That just doesn't' seem as engaging as design. I do like being in design. I admit I don't know enough and will be talking to the county retiree today. He's been quite friendly to me and I expect a lot of candid thoughts."

If you become the owner, you will almost certainly spend a lot more time doing business and project management and a lot less time doing design. Are you willing to make that transition?

"Is it the only lesson of history that mankind is unteachable?"
--Winston S. Churchill

RE: Looking for opinions on buying out my MEP company

Quote (MemoryME)

I haven't seen the totals for the year
If you haven't (and the above statement implies it) you need to see the entire company financial info for the past 3 years at a minimum. Every $ in and out. And see the complete tax returns for those years. Also, all of the info provided to the person/company that did the valuation.

RE: Looking for opinions on buying out my MEP company

I think the best course of action here is to get additional information on the financial state of the company. I have the evaluation report that shows the tax return data for the last four years. I don’t have all the supplemental s that created the report. The owner has offered me to talk to the company account to get more up to speed and then I can hire my own accountant to more fully get a risk analysis and help me find questions I haven’t realized I should ask yet.

My talk with the county reitree was really insightful. The job is mainly project management like I expected. It entails creating RFPs, cost estimating work, assisting county management staff to solve sight issues, manages consultants the county hires who do actual work, and review those plans, provide general guidance to inspectors and sometimes review installations. There is about as much county travel as I have travel at my current work and would expect as a company owner. The biggest differences are that the county position is a one-off. I will not have a staff to manage. They currently give all the mechanical jobs to county architects who are struggling with that. I would be a bit of a solo as far as work loads, but still have options to deflect work if I get too much. The retiree did have periods where he did design. Maybe about 10% of his time, but super common.

Comparing to the ownership position , a lot of the work types elements are similar. As an owner I would be guiding marketing, writing proposals (like I already do) but also managing staff. Our current staff is three PEs and about 7 designers, and two admin. That’s probably why our “metrics” are lower compared to others. We pay staff less because we don’t have many PEs. We usually do about 100-120 jobs per years. Average job price is $20-$40k. All really fixed fee.

Reviewing work like I would do as an owner has would be analogous to reviewing work of consultants as the county employee. However I wouldn’t have the responsibility for the PE stamp needed unless I did the design. The county job does seem safer, but obviously comes with cons of no profit benefit. I don’t really have all the details on the pension, but I would need to contribute around 10% or paychecks.

I feel myself leaning towards the county position just because it sounds quite a bit more simple. But I’ve also read account of many employees of county groups feeling trapped by the pension and wishing they could do something else.

RE: Looking for opinions on buying out my MEP company

Engineering companies are never worth what people think they should be because they are not at all like passive wealth generating assets. In my opinion, yu should really consider the value of a company to be profits from its backlog. I have seen and heard of numerous cases of firms getting bought out and then they basically just dissolve as the employees don't like the knew owner, they follow the old owner, or they lose clients. I would say that often it seems worst than cutthroat industries like the restaurant industry because there are very few assets that can't just pick up their shit and leave. With a restuarant, you at least got the land, building, and equipment that has physical value. Let me put it this way, I think when your boss retires, if he doesn't find someone to buy the business in a timely manner, he will just run out the backlog and shutter it.

RE: Looking for opinions on buying out my MEP company

A friend of mine was looking at buying an engineering company. He looked at several. Stock was mostly dusty stuff on shelves that had been ordered and then cancelled. Most of the value was in the owner's contact list. Typically they were hoping for a price of the order of 1 year's cashflow.


Greg Locock

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RE: Looking for opinions on buying out my MEP company

I recently bought a business. We do consulting and fabrication. My recommendation is if you like the work you are doing, buy the business but hire an accountant to make sure the deal is equitable. It is a long process between signing a letter of intent and closing on the business. However, don't have any illusions that the business will run itself anytime soon. That should be your goal but it might take a while to get your team to that level.

RE: Looking for opinions on buying out my MEP company

let me get the numbers straight from all this text:

revenue: 1.7M/year
owners salary: 150K/year
employees: 12
profit after all salarys (incl. owners salary): 150K-200K
sale price: 500K (3X profit)

doesnt seem like a very profitable company. profit margins way too thin.

I was offered to buy out my old boss (50% share). the stats on his company
revenue: 1.4M
owners salary: 200K
employees: 4
profit after all salarys: 700K
sale price: 1.4M

& i turned it down. mostly cause i didnt like the partner remaining. started my own gig. kinda regretted it for a bit, but 3 years in, no regrets.

RE: Looking for opinions on buying out my MEP company

@NorthCivil - 1.7M/year with 12 employees sadly isn't that far off normal. Typical operating profits are 5% to 13% and actually dropped about 6% across the industry this past year per the most recent Deltek survey. Civil and Environmental based on what I have seen are usually on the higher end of profits with better fees for the work being done, structural is probably on the lowest end with mechanical somewhere in the middle, at least on the west coast of the US. As most engineers will say, we (engineers) are stupid when it comes to running businesses and are in a race to the bottom undercutting each other constantly to get the project. Architects, contractors and owners know this an often shop around, because few care about quality or if it's designed correctly, they will just sue you if it fails and with such few design events, failures are rare.

As to the original posting, I personally wouldn't consider buying an engineering business because the business is only worth accounts receivable as there is no guarantee of continuing relationships with clients once the person their relationship is with is gone. This is typically the time the clients see the opportunity to easily start shopping other options. Starting a business is IMO better as you are building those relationships and right now there is more work than can be done so it's a great time to do so.

RE: Looking for opinions on buying out my MEP company

Thank you so much all who have posted. I told my boss today I would not be buying his company. He asked me if there was anything else he could show me financially that would encourage me to change my mind. I told him, the company doesn’t seem as profitable to me as it does to him. He has already paid for it. If I had $500,000 today I would not be investing into this company, I would feel safer just investing in the stock market.

The other reasons I told him I wouldn’t be buying is because I have very strong concerns about the future of our company regarding staffing and it just felt like too big a risk to take on for the value it was worth.

I ended saying I would be happy to keep working there for the time being.

Frankly, I feel sick to my stomach about it all. I can’t shake the feeling that even when I look at it all on paper, I’m passing on an opportunity. It’s hard not to get wrapped up in the emotions too. I genuinely like my boss and want him to succeed, but I won’t put him over myself or my family in this area.

I don’t have to have my whole life figured out in this moment, but I’m just trying to be ok with the decision I made, knowing I considered it for as long as I did and couldn’t bring my self to jump in. I’m going with my gut and my gut said no.

RE: Looking for opinions on buying out my MEP company

I think you made the right decision. I know it was difficult given your relationship with your boss, but you still have some agency over your life now. You can do something else or start your own gig. If you were committed to purchasing the business, you would not have that freedom. Best of luck!

RE: Looking for opinions on buying out my MEP company

This is a really great forum. It’s definitely encouraged me to play a more active role in it when I can weigh in.

RE: Looking for opinions on buying out my MEP company

I agree, right decision to pass. Not really a good opportunity.

if you want to chase money, look at potentially shifting/bridging into more lucrative industries. sounds like there is no money in MEP.

I would hesitate to take on that company for free. (but you might find your boss tries to give it to you for free)

RE: Looking for opinions on buying out my MEP company

Memory ME,

First, thanks for coming back to us to let us all know what you decided to do. I do think it is the right overall choice and sometimes not being able to come to a decision tells you it isn't the right choice for you.

You know your industry and company far far better than anyone here so you can see if this would actually be a useful avenue for your money and more importantly time.

Some of us are not really cut out to be business type people and your posts make me think you fall on the engineer / technical side.

Don't know what your contacts are like, but this sounds to me a bit like you need to join forces with someone in the same line of business but who wants to expand their business or is better at running businesses than engineers tend to be. Then it might make sense.

I've no doubt you could make it work and struggle on, but at what price? Both monetary and personal cost it looks too high for you to do on your own or at the moment.

But live your life and NO REGRETS!

Remember - More details = better answers
Also: If you get a response it's polite to respond to it.

RE: Looking for opinions on buying out my MEP company

I agree and thank you the encouragement. What I feel the best about it as I’m going to pursue some other sides of MEP work for now and the opportunity to ownership could always present itself in the future.

What really sealed the deal was realizing all the man hours and sweet it would take beyond the typical 40 hour work week to start attaining a higher financial threshold in my life. With my wife working right now and my daughter in day care, it’s so hard to put a dollar value on the time I have outside of work. For now, if I can get a pretty decent wage and benefits all for maxing out a 40 hour week, on top of not having the personal stress of maintaining staff, it just seems like the right call. Even better is I’m not dropping $500k and exposing financial risk to have that.

Hopefully I return to this thread in some months time with an update that I was hired at the county. They already have my resume. Haha

RE: Looking for opinions on buying out my MEP company

Honestly, the only way engineering companies really feel like they have a lot of intrinsic value is if they're large enough to self sustain. If they have a management structure below the owner and groups of people in charge of things so that when you lose one or two people new ones get brought in and the structure supports them.

On a smaller scale, they're a collection of skilled people and the value comes from those individuals. There's some inertia to having a client base, but that's only 3 months to 18 months of grace depending on the type of work. You need to be constantly replenishing that.

You're basically buying a starting point and some inertia at the lower end. The company itself is a money making process that you operate, rather than a machine that you buy that automates the process.

I think the type of succession planning that works better for these types of companies is probably bringing in partners a lot earlier. If you're going to retire in ten years, start promoting people to partner and getting a buy in from them, or pull it from their profits. Then by the time you're leaving, it's not one person selling off, it's just another day in the office because there's already structure.

RE: Looking for opinions on buying out my MEP company

Very interesting thread. I worked 12 years for Jacobs. The Corporation had a slogan: "People are our greatest asset". Incorrect. People are its only asset. Dedicated competent engineers and designers is what our clients pay us for and in turn our companies provide an environment where we can deliver safe and accurate designs on cost and on schedule.

Owning such a company is a multi-faceted undertaking requiring vision and dedication and never a day off, whether it's big like Bechtel or just a dozen folks.

24/7 365 is what you get when you own the company. There is no free lunch. If you can take pleasure in blocks of time with your wife and kids mixed in with sequential blocks of time for your company then do it! You're young and kicking ass and you'll never be another day younger! Meh, working for the county: nope! Don't do it! The first thing to go will be that rock star feeling! Now is the time to spin that energy up!

You can set the terms with this guy. You could start your own gig with just one project from his clients - which actually belong to all of you. But if you're constrained by a non-compete, you could go work for one of your clients. Have you not had any discussions with any of your clients about such a path? No offers or at least some indication from them that they'd be interested in having you join their team?

As the owner, you would have the opportunity to employee the talent yourself and to really succeed, in my opinion, you'd have to be not just willing, but enthusiastic, about hiring other rock stars and compensating them and selling their compensation as value added to your clients' projects. Sadly, clients don't get all that excited when their projects go according to plan, regardless of the miracles performed along the way to get them there in spite of the often times self-made obstacles provided by less than competent project teams from the client organization. So you'd have to champion the success of your projects and do everything within your power to make sure every project will be a success. Sometimes you'd need to turn away work for purely ethical reasons like Jacobs should have done with their Limetree Bay contracts.

Especially do it if you have any big visions, like making it an even bigger business. Design build I bet is an opportunity for you. Merge in an HVAC, Electrical or Plumbing team and differentiate your engineering services with this. It is a huge gap that almost no one is even beginning to close. Engineering designs I've seen come out of the commercial side of Jacobs have pretty substantial details left to the construction guys. Similarly for the super detailed deliverables in Petrochem, packaging them for construction is a huge gap that has only begun to be closed in the past decade or so. Sure this will be easier said than done when working with existing clients that are used to getting the engineering and design done separately and then moving on to work with their preferred construction partners. Develop the concept for new clients where it would be a better fit and then sell it to larger clients from the success of smaller new clients might be one way to make it work.

Ah, just some thoughts is all. I have no idea really, but I do recommend seriously against the government job. Then again I've got a good friend that does PM work for USACE and he likes it quite well!

RE: Looking for opinions on buying out my MEP company

If you could swing it, a good option would be to take the job at the county, and do a bit of moonlighting. if they would allow it. start with one client, and go from there.

have your cake and eat it too.

steady salary, good health benefits for you and the family (i imagine), low stress environment, and a bit of moonlighting to keep your hunting skills & killer instinct alive.

whatever is best for you and your family, is the best choice.

a divorce will rob you of any monetary gains sacrificing your family might have made you

RE: Looking for opinions on buying out my MEP company

Late to this thread but agree with the conclusion that the margins at this business are thin - if you have a 12 person company there are going to be times where you are faced with laying someone off and losing a lot of investment vs keeping them on partially paid. Also litigation risk, etc. I would want to make >$300k for that kind of risk and investment. The question is whether it is possible to sharpen things up a bit so you do create that kind of profit, because it should be. You are also getting almost your whole investment back as accounts receivable, which does justify the purchase price pretty well.

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