Taking over a business - advice & thoughts please

How much profit does it see? 

And who'd be the majority shareholder?

You seen previous years accounts?

Very much depends.. Would toping up be a grand or two or would you have to remortgage your house for tens of thousands?

If it’s anything like my field, these consultancies get bought by bigger ones. If that’s the same, you want to be an owner for future proofing what might happen. The other point is you take a dividend for tax purposes I believe, not a salary. 

i.e having to prop up finances if we have short months, I don’t have the capital to do that.

Your good months should be covering your short months. Business and personal finances should be kept separated, and if the bad months are outweighing the good then you’d really need to think about it being worth taking on.

If it's a limited company then if it won't make enough money to pay the bills you collectively throw in the towel and your private assets are protected.

I fail to see that you have anything to lose from trying. Your job is no safer staying on as an employee and if you collectively make profits you'll get a cut.

You can take either dividend or salery, Tired. The best option is usually a mix of both to get the best balance of pension and low tax.

How do you get on with the other employees/future shareholders?

Is there to be sufficient working capital in the business, either overdraft facility or loan from the current owner?

Is he selling because he wants the business to thrive, or just to wriggle out of his obligations?

Somehow I've managed to stumble through 9 years since I quit employment. I've now got a team of me+3 (doing IT stuff).

I know employee ownership is fashionable at the moment, I'm not convinced that management by committee works too well though, you need to appoint (keep your current) manager for the foreseeable.

Also make sure you have an exit strategy before you do anything else. What happens when one person (you, or another) wants out.

Thanks all - appreciated.

Working capital we need to see the books, but believe we have enough.

We all get on well and work well together - as said it's a very small team.

He's selling as he wants to retire - he's 70 next year I think and getting grief lol

He doesn't want to close the business as it's always done well and we also have a couple of high profile clients, one of which we've had for 25 years and we do ALL of their M&E design work for new build, full refurb and little piddley toilet refurbs etc.

Hoping the good months outweigh the bad, which is why we were looking at ploughing everything back in for the first couple of years.

We all get on well and work well together – as said it’s a very small team.

I'm gloomy by temperament. Will this continue when the Boss leaves and suddenly everyone thinks their opinion is equally valid to everyone else?

What happens in a year if you aren't making x profit? Can you agree to sell out to a bigger shop?

£500k turnover and 7 staff doesn’t sound overly successful.

I’d take a careful look at the overheads.

£500k turnover and 7 staff doesn’t sound overly successful.

I’d take a careful look at the overheads.

My initial thought but as a consultancy it may not buy much so maybe not so bad?

Yeah £500k doesn't sound a lot, but we don't make anything or have to buy anything in other than stationery, IT and tea/coffee....

As a consultancy it's our time an experience that's being paid for by the client.

What are you looking for? Maintenance of personal income and status quo? For how long? Nothing is forever. The long standing major client? What about them? Can a major founder there also be looking for an out? After 25yrs, someone will be. Will the new regime have the same loyalties? Are you personally ambitious? Because out of your small team at least half won't be and are just looking for an easy ride. If you are truly ready to properly go for it; why not do it on your own without saddling yourself with the old company's liabilities? Take the best of the team with you, with you retaining overall control but giving one or two of them some junior partnership incentives? Is the current set up scale-able where you can build it and exit profitably in a few years? Lots to think about. I'd be cautious.

I’m struggling to see what the owner is getting out of this ? He is not selling it, so no monies there, other than not having to pay you redundancy etc

Is he staying on as a non working director to receive future dividends etc  ?

'Profit is sanity, turnover is vanity'

Ancient Leith proverb

He's looking to stay on for 12 months on a negotiated salary as a consultant.

Need to do more digging and find out exactly how it would work.

Thanks for all of the input - thrown up a few more questions for discussion in the new year.

I reckon profits are around £175-200k - based on quick maths & guestimates of outgoings/other overheads, salaries and corporation tax, vat etc.

Again we need to see the books to get an accurate picture.

£500k turnover and £175k profit with 7 employees. So the average salary package is £46k each? So about £38k plus pension?

For a consultancy that would be a day rate of about £230 per day.

Seems oddly low, but I don't know your industry.

Out of interest, why did the sale fall through?

Maybe the current owner just wants to do 'the decent thing' - there's 3 options

- sell (that fell through and maybe doesn't want or need the shiite thst goes with trying to sell again)

- close it down (not a decent thing for those getting made redundant)

- hand it over to the people who's work built it up in the 1st place.  The most decent of the 2 remaining options.  Not every boss is a megalomaniac evil capitalist ruthless selfish barsteward !

Back to the OP.

To me, it's relatively simple:-

What financial exposure/ risk do you carry if you become one of the shareholders / directors?  If its a limited Co, the answer should be 'none' (other than losing your job if it goes tits up - which will be the same outcome whether a director/share holder or not).

If on the other hand you carry personal liability (eg you house as collateral for any bank loan) then I'd be a 'no' myself. 

As the the question of the turnover.  I have worked in an engineering consultancy for 30+ years.  In broad terms, we'd probably expect in the region of £150k income per 'delivering' person per year at my level of experience. But less for the younger staff.  If say 5 of the 7 are 'delivery' 2 are support (admin / accounts / pay roll etc) then £500k isn't mahoosively off the mark.  Depends on the level of pay, any pensions, and what fee rates your industry will tolerate.  With a small workforce, maternity periods for even 1 staff member  can make a difference too.

What will the management structure look like? How will the share holdings be split? How does the board make decisions, and what is the process, how do problems get resolved? What are the different roles and responsibilities of the shareholders and does that differ in contribution compared to shareholding
You might all get on well now, but when something challenging crops up (and it will) how does that get sorted?
These may seem trivial at the moment, but you need to know how to address before you commit

Initial thoughts is that a turnover of £500k seems very low. (I work in investment banking and own a number of small companies)

But without having sight of the books and knowledge of the business and working practices it’s really hard to say. If you can afford to take the risk of a year with limited salary then go for it. All depends on what you have to lose. Along with the ……what is the ultimate aim of the new company? Are the partners ambitious, intelligent and entrepreneurial enough to make the new business a success?

How is the handover to you guys being structured? Management buyout or a Transition to Emoloyees? I work on mergers and acquisitions and currently working on a MBO for a large multinational organisation.

Is there a future business with x amount of secured clients rather than just projected? Just remember that you absolutely cannot rely on a single (or small number of) contracts, you have to factor in growth and this means multiple secured contracts.

When reviewing the financials it’s incredibly important to look at them forensically. You have to look at drivers of performance and to understand if this is from one off deals or whether there is genuine longevity within the business model.

In terms of “the books”. It’s not just about the profit and loss. Understand the balance sheets and ensure your account looks at this in detail.

Sounds a great opportunity, but I would also be thinking about what Brian2 mentions above regarding you taking a team with you to capture the market under your own team.

There’s a specific mechanism for this these days. An Employee Ownership Trust. Should remove the feelings of risk/pressure around being an owner instead of staff, but also lets the existing owner retire. They just don’t usually get a big payout like they would if they sold to a buyer. https://www.pwc.co.uk/services/tax/employee-ownership-trusts.html<br /><br />

Sounds like you need to do some personal thinking about how this would work for you.

Then some discussion with the other potential shareholders on their thoughts, concerns, and interests.

Then a big think on what you want and how that fits with what the consensus is.

And then legal and financial advice. Maybe the firm’s current providers would be OK for you and the other potential shareholders?

I’m not convinced that management by committee works too well

🤷🏻‍♂️ seems to work for many companies including successful plcs.

Turnover? As has been said, understand the accounts. Check the growth. Figure out how it can grow and improve.

Thanks for all the replies - really appreciated.

Staff breakdown is

2 x Admin/Accounts

2 x CAD Manager & Technician

2 x Engineers (Me & Associate director - well 3 if including the MD)

So we're a very small team.

We'd need to take on another Engineer at some point as the the current AD would would cover more of the management/client stuff.

I think he wants to gift you a percentage of the business each , say 12% . And he keeps an interest in the business which earns him a dividend yearly . Then it's in everyone's interest to keep working towards a common goal of good profitability.
Then there is an annual share dividend with each employee getting 12% of that year's profit , less retained cash in bank. The original owner also gets a divvy but no salary as he isn't actively working.
I could be wrong of course, and he just wants to give you all shares , or sell you a share .
Structure is critical, 7 employees with equal interest in the business will eventually disagree on critical issues and lead to arguements and infighting.

Interesting scenario.  Based on the current staffing structure I don't think you  should be contemplating an equal share basis if you chose to take the plunge. The ratio of support staff to qualified engineers seems out of kilter and would explain the relatively low turnover for a firm of 7 staff.  Could you bring in another work-winning engineer to increase turnover?

I work in a very similar market and after 18yrs working in consultancy roles I jacked it in 2 yrs ago and set up my own business with no other ambition than to avoid being an employee ever again.

I would strongly recommend taking the owner up on the offer, but as you'd be a joint shareholder it's got to be crystal clear where the company's heading and how you're taking it there.

Doesn’t sound to me like you’ve got anything to lose, worst case it goes tits up for any number of reasons and you have to go and find a new career path for yourself but that’s where you’ll be anyway if you don’t take up the offer. Of course you’ll want to limit your liability but that’s obvious.

Thanks again all 👍