By Hank Bulmash, MBA, C.A.
For 10 years my client Bill Kress has been one of four partners in a firm of consulting engineers. I've been aware for some time that he has been unhappy with his business life, but he seemed unusuall...
For 10 years my client Bill Kress has been one of four partners in a firm of consulting engineers. I’ve been aware for some time that he has been unhappy with his business life, but he seemed unusually agitated as he walked into my office.
“What’s up?” I asked.
“Mel Atkins, our oldest partner, has told us he wants to retire. He expects us to pay about $500,000 to buy out his share of the business.”
“How do you feel about that?” I asked.
“I feel pretty frustrated. As you know, I’ve been working very hard the last several years, and I just don’t feel that I’ve made much financial progress. I have more work that I can deal with, but it’s not high margin stuff. Now Mel, who I thought would want to work forever, wants out and he expects us to pay for his pension. The last thing I want to do is to go deeper in debt to buy more of our company. In fact, before this happened, I had been thinking about leaving the business. I thought Mel was perfectly happy. He seems to make most of the decisions in the firm. And now that he’s given us notice that he wants to leave, I’m sure that the others won’t be able to afford to buy me out.”
“So you feel he’s sort of pulled off an end-run on you.”
“Yes, I do,” Bill said.
“One of the problems that I’ve noticed with your company,” I said, “is that you run it like a group of proprietorships. You really don’t have a sense of the goals that all four of you want to achieve and you’ve never spent much time trying to decide what the goal of your business is.”
“It’s true, we don’t really work together. But I think we’re clear on our goals. The objective of our business is to make money. That’s why we’re all in it.”
“That’s a major purpose, absolutely. But I don’t think it’s the only one. When you started off years ago all of you had good jobs. You didn’t have pressing money worries. You must have started the company because you wanted something else.”
“We wanted freedom of action and interesting work … and we hoped we could do well financially.”
“And what happened?”
“We had some lean years as we grew the business. Those were our best years I think in terms of enjoyment. Then we became so busy that we really didn’t want more work.”
“You didn’t want more work?”
“That’s right. We made some decisions based on the fact that we were all working hard enough, actually too hard. I guess we fell into a rut. The work became less fun. It seemed that we were working harder and harder but the business really couldn’t grow very much.”
“We didn’t want to add overhead. We were all frightened by the downturn in the early 90s.”
“Instead of selling your share of the business,” I said, “I’m going to suggest you take an alternate step. Why don’t the four of you do some real planning? Determine where you want your business to go and how you can get there. Try to establish some real objectives for the next two, three and five years.”
“We’ve been together for 10 years. What are we going to do that we haven’t already done?”
“I think there is a lot you can do. Mel may be considering selling because he’s suffering from the same frustrations as you. I think if you did some planning in a very focused way you might find that your business would be worth substantially more than it otherwise would, and you might not be ready to sell it yet.
“My firm can help the partners come together for a structured planning session,” I continued. “We could develop an action plan and establish real goals — including retirement goals. You are all working very hard but none of you is thinking about the direction of your efforts as a whole, and I believe you’re not reaching your potential. After all, the point of every business is to sell it. You should be developing it as a product that has value on its own. One reason you may not want to buy out Mel is that you’ve developed a practice where you each have jobs rather than a business. A business is a group of systems that lets you leverage your activities for greater profit. But no-one would want to pay something just to be able to do someone else’s job in addition to his own.”
“It’s something to think about,” Bill said. “Let me talk to the guys.”CCE
Hank T. Bulmash, C.A. is a partner with Bullmash Cullemore, Chartered Accountants of Toronto.
“One of the problems with your company is that you run it like a group of proprietorships.”