So I know there is a lot of discussion on the subject and I've read through as many posts as I could find but I wanted to get opinions on my situation.
I've been with the same firm for about 6 years now. Over the years my boss has "jokingly" mentioned that I should buy out the firm eventually. I recently got my license and this topic has been coming up more and more. A little background on the business, my boss just turned 60, has been in business for 25-30 years and has built a solid reputation in the area, we have about 6 employees and gross around 2 million, give or take. There are two other licensed architects in the office but they are also getting up there in age and it really leaves me as the next young buck (I'm 29) in line to potentially keep this thing running. I definitely have a lot of versatile skills along with a solid sense of business. I have brought some small work to the office, (nothing substantial) and nobody in the office has the client relationships besides the boss.
At any rate, he asked if I had received my license certificate, which I have, and he said he wants to take me out to discuss "what I want to do with the rest of my life" So needless to say I am excited for that conversation. Maybe a possible buy out option in a certain number of years, maybe some type of profit sharing to keep my invested in the business. I really don't know but wanted to get some feedback from all you experienced folks out there. What would be the best option? whats worth it? Thanks for the input!
Unless they are fairly large, most firms tend to die when the founders are gone from the scene. Don't pay a lot because you are likely not buying much more than some old drawing files, office equipment, and a rolodex. With luck, depending on your unique situation, there may be some franchise value in taking over the firm, but it isn't like buying a McDonald's.
Are there a lot of repeat clients? Are they aware you even exist, realistically? Is your market niche fairly stable, or is it up and down with the economy, requiring constant recruitment of new clients? Are there ticking time bombs liability-wise that you need to worry about inheriting.
Do lots of thinking and homework. Good luck.
Apr 6, 17 11:21 am ·
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MDH-ARCH
Thanks. We do have a lot of repeat clients for sure. Our niche market is fairly stable but I think most markets will have their ups and downs with the economy. In all honesty, most of our clients probably do not know I exist and this is one of my main concerns but I see this as a potential 5 year buy out in which I will have opportunities to build those relationships.
You buying out the firm entails taking on a bunch of debt and your boss banking on it. (unless you have cash then you lose a lot of it and your boss banks on it.) What happens when the economy crashes? Can your company still service that debt? You'll know where your bosses interests lie if he gives you a price. Do you know how to value a $2,000,000 architecture business?
What happens to the rest of the staff when you buy the business? Do they currently enjoy their jobs?
How will you incentivize him to help you establish your relationship with existing clients?
Apr 6, 17 11:23 am ·
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MDH-ARCH
He most likely does want to set himself up to bank in on all of the work has put into building this business. I do not know how to value the business, perhaps looking at profit / loss data, our back log of work, any debt ect.. sound about right? The current staff all gets along great and enjoys their job but it is a concern of mine considering some are 20 years older then me and it might be a hard pill to swallow having someone much younger in that position.
Don't bite on the idea that you're being sold a client list. You've already said some don't know you exist. Clients are under no obligation to continue working with you when your boss is gone. Some will, out of convenience. Clients should have little to no value in this transaction.
Are your older, more experienced, coworkers going to be keen on working for you?
Take an inventory of what the company actually owns. How much of it is technology/equipment that will be out of date or die in the next few years? Do they own the building? If so, can you lease the building instead of buying it?
Apr 6, 17 1:23 pm ·
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MDH-ARCH
He does own the building but were actually working on a development project where our current building along with a bunch of others would be torn down. So if I'm not buying clients or the building then what would would I be getting? haha I thought the clients, reputation would essentially be what I would want.
Do don't put up your house equity or lifetime savings as collateral for a loan to buy this or any business. Assume it will go bankrupt and evaluate what you will be personally responsible for. $00.00 is a nice figure to shoot at.
At 60 your boss is relatively young. If you do decide to "buy in" it would be a good idea to partner up with your boss for at least 5 years. So that there would be a smooth transition with the clients.
Apr 6, 17 2:14 pm ·
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MDH-ARCH
Yes I agree and here is where I am torn, do I wait around for 5-6-7 -10 years in hopes he retires or try to expand myself on the side and put my energy into pursuing my own work. I feel like climbing up from the trenches may not be worth it if I can adapt to what someone else has already established.
Have you been compensated in a way that they should expect you to be in a position to buy the firm? How do they excpect you to buy-in?
Transition a must.
Don't mortgage the farm to buy in. It needs to be equitable for you. You need to see everything. Once you've seen everything, you may not be able to work their any longer- if you decide not to buy.
I’ve got experience in this area. Prepare to talk about transition plans; You’ll want a financial planner eventually to help with this. The money part is the easiest. Obviously, a price needs agreed to that can withstand an audit. What we did since we’re a corporation is the firm, as an entity, starts buying his stock over a set period of time. (we also set him up with a consulting salary to keep him on the books as an employee, helping with marketing and QAQC type things part time… various benefits for him that way such as salary, bonus’s and the all so critical passing of the baton on the network).
For you, you get a salary increase in the form of stock options over a set period of time. Basically a raise to match your elevated position, but instead of cash, you get stock. I like this method since there is no real cash outlay or fast turnover; doesn’t work well in our industry. If he wants out faster, it’s possible depending on revenue. The firm can own the majority of stock and buy it from him directly.
The hard part is marketing. A sole proprietor firm is often very closely interwoven with the person itself. So… it’s a hard change to get it associated with you. The network is really hard to transition. Sort of like “Jim” thinks to call “Bob (your boss)” when he hears or has work… then remembers he retired and calls his next guy he knows and trusts.
Next year our firm will be 20 years old. My wife (also licenced Architect) started it from scratch at age 29. There are a lot of times we look back and think if it were better to buy into a retiring rainmaker and have a mentoring experience. With out one, it took about three to five years to establish our sea legs as owners, as bosses, and as rainmakers. If you you want the burden and responsibility of owning a firm, then I agree with MTDEW:
At 60 your boss is relatively young. If you do decide to "buy in" it would be a good idea to partner up with your boss for at least 5 years. So that there would be a smooth transition with the clients.
Over a five year transition, it is a win-win for him to introduce you to the entire community - not just the clients.
Most of being a rainmaker comes from relationships. That might be the local Mayor, Congressman, the local chamber, the local college and associated business roundtables.
If he is open to introducing you to the community then there is value. Without warm introductions, it might take you 10 years to be respected as a fixture in the community and have the firm able to scale.
Here's something to consider. Whatever the firm might be worth, don't borrow money to buy him out -- the future cash flow of the firm should be the source of whatever funds may be used to pay off the founder. These payments can be structured as deferred compensation for the founder (talk to a CPA about how this can be done) which allows the payments to become tax deductible, unlike buying his shares outright.
As you noted, firm's prospects ebb and flow over time. Whatever payout schedule you adopt should have some built-in flexibility to reflect the inevitable "down" years that will occur before he's fully paid off.
Don't pay too much -- frankly, design firms are worth a lot less than many firm owners think. They're only worth a high number when the existing revenue stream can be guaranteed to continue. Will that necessarily be the case if the founder does not remain with the firm? Seems doubtful.
And, remember this -- based on how you describe the situation, if you don't buy him out what are his other options? It sounds as though you're the only viable internal buy-out possibility. If you decline the opportunity, the firm's going to be worth a whole lot less to some outsider who doesn't know either the firm's clients or the firm's processes.
Finally, think about what price he might ask you to pay, then compare that price to the cost of starting your own firm, independent of your current employer. Sure, you'd be starting from scratch, without any real existing book of business. But that alternative will give you some frame of reference about how much extra you might be willing to pay to step into an existing operation as owner.
don't buy in - if he wants to hand it over, take it, but make sure the companies finances are in order before you do. A buy-out so he can get an extra bump to finance his retirement is lame and self serving.
As others have warned - he is the only person with client relationships which is the backbone of the entire business, if you don't get some hand off here, you are doomed, even with some ushering in you might be doomed just based on the fact you are a 29 year old kid. Architecture is an old mans game and most with the money to execute projects won't trust some 20 year old to pull it off.
Apr 6, 17 5:00 pm ·
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MDH-ARCH
Yes I agree, he's a business man though and I don't see him giving away his life work for nothing and that's respectable. I guess the most important part to the equation is the assurance that I will meet and build relationships with his clients / connections.
Thank you everybody for the advice. Such great information here. It sounds like a 5 year buy out with a transition plan and raise that's used to buy stock is a solid plan that benefits both parties. He is a rainmaker for sure and has tons of connections and political involvement that I hope to be submersed in. We do not have a date yet for our "talk" but I will be sure to follow up and ask for more advice when that time comes. Thanks again!
Apr 6, 17 5:02 pm ·
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MDH-ARCH
No offense taken, in fact I do agree with some of what you said. I am currently networking, seeking outside work, making connections with builders and contractors. I started my own LLC for that reason exactly. I do not end my day at 5pm. My thought, being in this position, is deciding whether its worth starting from the absolute bottom and working my up by taking on small crappy jobs in hopes they lead to better ones or.... potentially being mentored and building connections with higher ups and putting my energy in taking over the larger scale, higher paying and more prestigious work. Second option seems more appealing but at what cost and time frame is the question.
Offer a finders fee of 5% on all projects from his prior clients & 10% on new clients he brings in. 5 year overlap & he teaches you the ropes & introduces you to clients.
Apr 8, 17 3:52 pm ·
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bowling_ball
Why in the world would the boss give you a finders fee for work with an existing client? And as for new clients, from what I've seen, it's typically more of a percentage of the profits, if any, from the project. You bring in a shit client, it's a tough argument to make that you should profit regardless.
So I was taken out for lunch for our "talk". It seemed my boss was concerned that I was going to leave after getting my license. I assured him that was not my intentions. We talked about the future of the business and where he sees the firm moving. He pretty much said I am the next guy in line to take this thing over "one day" We did not get into specifics as far as a plan to buy out. Maybe I jumped the gun a little. I did however receive a 25k bonus! and mentions of making me an associate. So I am still very happy with the outcome regardless. Thanks for everyone's input, hopefully a buy out transition is still on the horizon.
25k.. nice. Mine was a 5k raise, included as part of the typical merit based annual raise. The annual is publicly supposed to be between 2-3.5% So that takes a chunk out of the 5k amount.
Congrats! If an associateship is being considered and a healthy bonus has been awarded, they clearly see you as a valuable part of the future for the firm. If you like it there, that's even better.
Oct 31, 17 11:33 pm ·
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Boss Retiring
So I know there is a lot of discussion on the subject and I've read through as many posts as I could find but I wanted to get opinions on my situation.
I've been with the same firm for about 6 years now. Over the years my boss has "jokingly" mentioned that I should buy out the firm eventually. I recently got my license and this topic has been coming up more and more. A little background on the business, my boss just turned 60, has been in business for 25-30 years and has built a solid reputation in the area, we have about 6 employees and gross around 2 million, give or take. There are two other licensed architects in the office but they are also getting up there in age and it really leaves me as the next young buck (I'm 29) in line to potentially keep this thing running. I definitely have a lot of versatile skills along with a solid sense of business. I have brought some small work to the office, (nothing substantial) and nobody in the office has the client relationships besides the boss.
At any rate, he asked if I had received my license certificate, which I have, and he said he wants to take me out to discuss "what I want to do with the rest of my life" So needless to say I am excited for that conversation. Maybe a possible buy out option in a certain number of years, maybe some type of profit sharing to keep my invested in the business. I really don't know but wanted to get some feedback from all you experienced folks out there. What would be the best option? whats worth it? Thanks for the input!
If you like the work you do and want an increased stake in it, go for it. No risk, no reward and all those other cliche statements.
Unless they are fairly large, most firms tend to die when the founders are gone from the scene. Don't pay a lot because you are likely not buying much more than some old drawing files, office equipment, and a rolodex. With luck, depending on your unique situation, there may be some franchise value in taking over the firm, but it isn't like buying a McDonald's.
Are there a lot of repeat clients? Are they aware you even exist, realistically? Is your market niche fairly stable, or is it up and down with the economy, requiring constant recruitment of new clients? Are there ticking time bombs liability-wise that you need to worry about inheriting.
Do lots of thinking and homework. Good luck.
Thanks. We do have a lot of repeat clients for sure. Our niche market is fairly stable but I think most markets will have their ups and downs with the economy. In all honesty, most of our clients probably do not know I exist and this is one of my main concerns but I see this as a potential 5 year buy out in which I will have opportunities to build those relationships.
You buying out the firm entails taking on a bunch of debt and your boss banking on it. (unless you have cash then you lose a lot of it and your boss banks on it.) What happens when the economy crashes? Can your company still service that debt? You'll know where your bosses interests lie if he gives you a price. Do you know how to value a $2,000,000 architecture business?
What happens to the rest of the staff when you buy the business? Do they currently enjoy their jobs?
How will you incentivize him to help you establish your relationship with existing clients?
He most likely does want to set himself up to bank in on all of the work has put into building this business. I do not know how to value the business, perhaps looking at profit / loss data, our back log of work, any debt ect.. sound about right? The current staff all gets along great and enjoys their job but it is a concern of mine considering some are 20 years older then me and it might be a hard pill to swallow having someone much younger in that position.
http://www.theaiatrust.com/practice-resources-and-benefits/ownership-transition-resources/
Great resource, thanks!
Architects retire?
Don't bite on the idea that you're being sold a client list. You've already said some don't know you exist. Clients are under no obligation to continue working with you when your boss is gone. Some will, out of convenience. Clients should have little to no value in this transaction.
Are your older, more experienced, coworkers going to be keen on working for you?
Take an inventory of what the company actually owns. How much of it is technology/equipment that will be out of date or die in the next few years? Do they own the building? If so, can you lease the building instead of buying it?
He does own the building but were actually working on a development project where our current building along with a bunch of others would be torn down. So if I'm not buying clients or the building then what would would I be getting? haha I thought the clients, reputation would essentially be what I would want.
Besides assets like computers, etc, you are buying "goodwill". http://smallbusiness.chron.com/goodwill-calculation-business-68189.html
Do don't put up your house equity or lifetime savings as collateral for a loan to buy this or any business. Assume it will go bankrupt and evaluate what you will be personally responsible for. $00.00 is a nice figure to shoot at.
At 60 your boss is relatively young. If you do decide to "buy in" it would be a good idea to partner up with your boss for at least 5 years. So that there would be a smooth transition with the clients.
Yes I agree and here is where I am torn, do I wait around for 5-6-7 -10 years in hopes he retires or try to expand myself on the side and put my energy into pursuing my own work. I feel like climbing up from the trenches may not be worth it if I can adapt to what someone else has already established.
Have you been compensated in a way that they should expect you to be in a position to buy the firm? How do they excpect you to buy-in?
Transition a must.
Don't mortgage the farm to buy in. It needs to be equitable for you. You need to see everything. Once you've seen everything, you may not be able to work their any longer- if you decide not to buy.
I’ve got experience in this area. Prepare to talk about transition plans; You’ll want a financial planner eventually to help with this. The money part is the easiest. Obviously, a price needs agreed to that can withstand an audit. What we did since we’re a corporation is the firm, as an entity, starts buying his stock over a set period of time. (we also set him up with a consulting salary to keep him on the books as an employee, helping with marketing and QAQC type things part time… various benefits for him that way such as salary, bonus’s and the all so critical passing of the baton on the network).
For you, you get a salary increase in the form of stock options over a set period of time. Basically a raise to match your elevated position, but instead of cash, you get stock. I like this method since there is no real cash outlay or fast turnover; doesn’t work well in our industry. If he wants out faster, it’s possible depending on revenue. The firm can own the majority of stock and buy it from him directly.
The hard part is marketing. A sole proprietor firm is often very closely interwoven with the person itself. So… it’s a hard change to get it associated with you. The network is really hard to transition. Sort of like “Jim” thinks to call “Bob (your boss)” when he hears or has work… then remembers he retired and calls his next guy he knows and trusts.
Next year our firm will be 20 years old. My wife (also licenced Architect) started it from scratch at age 29. There are a lot of times we look back and think if it were better to buy into a retiring rainmaker and have a mentoring experience. With out one, it took about three to five years to establish our sea legs as owners, as bosses, and as rainmakers. If you you want the burden and responsibility of owning a firm, then I agree with MTDEW:
At 60 your boss is relatively young. If you do decide to "buy in" it would be a good idea to partner up with your boss for at least 5 years. So that there would be a smooth transition with the clients.
Over a five year transition, it is a win-win for him to introduce you to the entire community - not just the clients.
Most of being a rainmaker comes from relationships. That might be the local Mayor, Congressman, the local chamber, the local college and associated business roundtables.
If he is open to introducing you to the community then there is value. Without warm introductions, it might take you 10 years to be respected as a fixture in the community and have the firm able to scale.
Here's something to consider. Whatever the firm might be worth, don't borrow money to buy him out -- the future cash flow of the firm should be the source of whatever funds may be used to pay off the founder. These payments can be structured as deferred compensation for the founder (talk to a CPA about how this can be done) which allows the payments to become tax deductible, unlike buying his shares outright.
As you noted, firm's prospects ebb and flow over time. Whatever payout schedule you adopt should have some built-in flexibility to reflect the inevitable "down" years that will occur before he's fully paid off.
Don't pay too much -- frankly, design firms are worth a lot less than many firm owners think. They're only worth a high number when the existing revenue stream can be guaranteed to continue. Will that necessarily be the case if the founder does not remain with the firm? Seems doubtful.
And, remember this -- based on how you describe the situation, if you don't buy him out what are his other options? It sounds as though you're the only viable internal buy-out possibility. If you decline the opportunity, the firm's going to be worth a whole lot less to some outsider who doesn't know either the firm's clients or the firm's processes.
Finally, think about what price he might ask you to pay, then compare that price to the cost of starting your own firm, independent of your current employer. Sure, you'd be starting from scratch, without any real existing book of business. But that alternative will give you some frame of reference about how much extra you might be willing to pay to step into an existing operation as owner.
Good luck. And, let us know how it unfolds.
don't buy in - if he wants to hand it over, take it, but make sure the companies finances are in order before you do. A buy-out so he can get an extra bump to finance his retirement is lame and self serving.
As others have warned - he is the only person with client relationships which is the backbone of the entire business, if you don't get some hand off here, you are doomed, even with some ushering in you might be doomed just based on the fact you are a 29 year old kid. Architecture is an old mans game and most with the money to execute projects won't trust some 20 year old to pull it off.
Yes I agree, he's a business man though and I don't see him giving away his life work for nothing and that's respectable. I guess the most important part to the equation is the assurance that I will meet and build relationships with his clients / connections.
Thank you everybody for the advice. Such great information here. It sounds like a 5 year buy out with a transition plan and raise that's used to buy stock is a solid plan that benefits both parties. He is a rainmaker for sure and has tons of connections and political involvement that I hope to be submersed in. We do not have a date yet for our "talk" but I will be sure to follow up and ask for more advice when that time comes. Thanks again!
No offense taken, in fact I do agree with some of what you said. I am currently networking, seeking outside work, making connections with builders and contractors. I started my own LLC for that reason exactly. I do not end my day at 5pm. My thought, being in this position, is deciding whether its worth starting from the absolute bottom and working my up by taking on small crappy jobs in hopes they lead to better ones or.... potentially being mentored and building connections with higher ups and putting my energy in taking over the larger scale, higher paying and more prestigious work. Second option seems more appealing but at what cost and time frame is the question.
Why in the world would the boss give you a finders fee for work with an existing client? And as for new clients, from what I've seen, it's typically more of a percentage of the profits, if any, from the project. You bring in a shit client, it's a tough argument to make that you should profit regardless.
A little update:
So I was taken out for lunch for our "talk". It seemed my boss was concerned that I was going to leave after getting my license. I assured him that was not my intentions. We talked about the future of the business and where he sees the firm moving. He pretty much said I am the next guy in line to take this thing over "one day" We did not get into specifics as far as a plan to buy out. Maybe I jumped the gun a little. I did however receive a 25k bonus! and mentions of making me an associate. So I am still very happy with the outcome regardless. Thanks for everyone's input, hopefully a buy out transition is still on the horizon.
Congrats on becoming the chosen one! ;)
Nice bonus - Its nice to be appreciated
25k.. nice. Mine was a 5k raise, included as part of the typical merit based annual raise. The annual is publicly supposed to be between 2-3.5% So that takes a chunk out of the 5k amount.
Congrats! If an associateship is being considered and a healthy bonus has been awarded, they clearly see you as a valuable part of the future for the firm. If you like it there, that's even better.
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