“I’ve found a company in Miami, they are a perfect fit for what we do and they are ready to sell, can you help us put the deal together?” So began my the phone call with Susan (not her real name). Just a few years after finishing graduate school, Susan started a market research firm, and over the past ten years has grown it into a national leader for her specialty, biomedical research. Her decision in 2005 to launch her business in Nashville had proven smart. Susan is not one to tout her own success, though it’s obvious to everyone who knows her that smarts and hard work are a hallmark of everything she does.
The company Susan wanted to buy was a research business much like hers; although just three years old, the Miami company already had two blue-chip clients. The guy who owned the company was a brilliant academic type. He had two employees and the three of them made a great team. However, he didn’t like being a business owner, especially the administrative and sales functions. Joining together to be part of Susan’s company made perfect sense for him.
“Do you know what his company is worth,” I asked Susan, to which she replied, “He has given me his financial history, but I have no idea what I should pay, that’s where I need your help.” I asked Susan to send me the financial records. A few days later, I called her and said, “Susan, this company has no value. The owner is making about $250,000 per year after all expenses, but he’s taking that as his salary. I’m not sure what the transferable value is, especially since 85% of his business comes from just two clients.”
So here’s the dilemma: Susan wanted to buy, the other guy wanted to sell… but what is she buying and what is he selling? I suggested an alternative. “Susan, instead of buying his business, why don’t you hire him and his two employees? Give him a two-year employment contract for what he’s making now with some upside, and give employment contracts to his two employees. You take over all the admin and sales work which will free him up to serve those two big clients.”
After about two weeks of sorting through the details, we had a structure in place that made sense for Susan and the business owner in Miami. Her risk was giving him a two-year employment contract, but he was bringing over two contracts worth about $1 million and he had two great employees. Susan could immediately add two brand-name clients to her client list. In fact, about two weeks after having the deal put together, Susan was meeting with each of those clients to pitch an expanded scope of service.
Acquisitions structured as employment deals work when the parties are comfortable having a long-distance relationship, not to mention a high trust factor and compatibility in work styles. When those circumstances exist, an employment deal can be a great alternative to a normal acquisition, especially for professional service firms with little transferable value.
{This story was first published in mid 2016}
JIM CUMBEE is President of Tennessee Valley Group, Inc. a retainer-based business brokerage and transition mediation firm in Franklin, TN. Cumbee is an attorney and has an MBA from Harvard Business School. Jim is the author of Home Run, A Pro’s Guide to Selling a Business. He has a wide range of corporate and entrepreneurial experiences that make him one of the most sought-after business transition advisors in the state of Tennessee. The names and fact patterns above have been changed to preserve the parties’ identities.
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