Business Angle: Selling Your Surveying Business
Professional Surveyor Magazine - January 2012
Bill Beardslee, PLS, PE, PP
Many of the great surveyors in our country are moving towards an age where their future does not include the day-to-day operation of a surveying business. These surveyors own companies of varying sizes, formats, and specialties covering every possible area of our profession.
A significant percentage are sole proprietors whose firms are like children to them—they gave birth to the firm, nurtured it, fed its growth, and have incredible pride in its status as a mature firm. The thought of this child “leaving the nest” is sad, even painful, to them, but they know it must happen. Others have operated firms of a corporate nature, possibly with equity partners. Many of the partners may have drastically different ideas of how the business should be brought to the next era. In either event, the process of selling the business is a complex, time-consuming task that may need to be handled years before the event—and there are no prudent shortcuts.
No matter what your business form, the day for you to leave the firm will arrive. The method of preparing for the next era might include a succession plan put in place long before the sale time approaches. For sole proprietors, this means mentoring a successor. It may be the right-hand man of the firm or a family member. If you want the firm to remain with this person, consider creating a buyout agreement with him or her to protect the owner’s financial future and to give him an ever-increasing stake in the company. Even if the buyout agreement isn’t the road you want to travel, having a valid successor to head the firm increases the value to eventual suitors.
There is no exact path or one-size-fits-all answer to selling your business. Presented here are some possibilities for thought.
Selling Is a Team Sport
No one has the 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. In my opinion, your team should include:
This is a decision that will dramatically affect all aspects of your life. Decisions will need to be made about “life after sale” to help form the sales contract necessary to accomplish your goals. In this article, space doesn’t permit discussion on all the possibilities to be addressed, but some prominent considerations are cash flow, assets, location of children and grandchildren, location and time for retirement, and health. This is not a one-afternoon discussion, but the development of a “business plan for life.”
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.
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. Find people who have sold their businesses and seek referrals. I spent months talking to other surveyors in our state who had sold businesses before I let it be known that mine was for sale.
Having the “business plan for life” in hand when you talk to an attorney is very important. Do not ask, and do not expect, your attorney to make your life decisions for you; that is not his job. It is your job to know your destination. It is his job to help find the right mode of transportation to get you there.
When all the details of the sale are set, this is a good time to update your wills.
In today’s world, what you do with the sale proceeds is also a very complex matter. The options for where you set aside these 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.
The method of sale also can vary, and they all have tax and life implications.
- If you intend to “sell out and get out,” then you will probably receive less but will be out immediately.
- If you’re going to sell and stay on for a few years to verify the equity for the buyers, make sure your yearly equity is separate from any income from employment.
- You may sell with the intent of staying on to run the firm for the new owners.
- Whichever option you choose, ensure one critical thing: that your employees are taken care of. All their benefits and eligibilities should remain intact or even improve.
I will stop here to give you one hint. Virtually every one of the people I spoke with who used the sell-and-stay-a–while strategy said the same thing: They stayed too long. It seems that two to three years after the sale is the comfort zone.
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. Beware of this situation as the suitor has no one on staff who understands your business, scheduling, or cash flow. Coordination and hierarchy will be difficult.
- 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.
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 surveys and another company with the same yearly sales but with large projects from repeat clients would not have the same value. I can say, from talking to many surveyors who have sold, that a) the business is not worth what you think it is, and b) if you 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 if there is someone in line 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.
This article is an outline of possible approaches to a complex issue. I spent two years selling my business, interviewing numerous firms until I found some with the right culture, and then I worked out the finances and the care of my employees. But I was very, very fortunate and had a wonderful experience. The firm that acquired us was more than fair, very honorable to their agreements, and offered tremendous benefits to my staff.
The right situation for you is out there. Be determined, thorough, and patient.
This is a synopsis of the value discussion. You can find more detail in the article “What’s Your Business Really Worth?” by John McIntosh, Jr., LS and Susan Zeloznicki in the Jan/Feb 1999 issue of this magazine (available in the website archives). Several updated articles are in the works, as well.
About the Author
Bill Beardslee, PLS, PE, PPBill Beardslee is the past president of the New Jersey Society of Professional Land Surveyors and their 2006 Surveyor of the Year.
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