Continuing down my December 2004 list of challenges facing the geoinformation industry, here are some observations about business structure. At first glance, it appears difficult to identify why business structure might be a challenge facing us.
Although there are many aspects of this challenge, I will focus on small surveying businesses, which are often sole proprietorships but may be partnerships or corporations, usually with only a few principals.
One aspect of this challenge is that many newly registered surveying professionals see licensure as the door to owning their own surveying business. Certainly licensing gives them the opportunity to do so, but they usually step through this doorway without thorough preparation. In many cases, they seek to emulate the small businesses from which they have come. Often, they do not have any training in owning and operating a business, and do not see "managing" or "management" as part of the responsibilities of owning a business. Issues of business ownership—such as personnel, taxes, finance, cash flow management, training, quality assurance, policies, and procedures—are treated in an ad hoc way when they arise. These issues often are not addressed as part of a business plan, and potential problems might not be foreseen and hypothetical solutions developed before trouble hits.
Rarely do these young professionals see acquisition of an ongoing business as a means of setting themselves up in the owner’s seat. This happens partly because, should they identify a business they would like to acquire, they don’t know how to negotiate a sale, value the business, or develop options for financing the sale. Even more frequently, the reason for not considering the takeover of an ongoing business is that the young professional has no cash or other means of financing the acquisition. I also have heard young professionals talk about ongoing businesses with some bitterness because of some relationship problem with the current owner. Negotiating with the business owner is considered a personal failure.
Current business owners are the other side of this coin. In many cases, they have a successful small business (successful, at least, in their minds).
They believe that what they have is of significant value, and factor that value into their plans for retirement. In other words, they see proceeds from the sale of the business funding all or part of their retirement activity.
Unfortunately, in many cases, they don’t look carefully at their balance sheets, or perhaps don’t even try to construct one. If one of these owners nearing retirement does have a balance sheet, they often are disappointed at the apparent value it shows. Sooner or later, someone advises them that the goodwill value is appreciable, and the dream of funding retirement seems attainable again.
Unfortunately, should they get into negotiations with a possible buyer, they find that the goodwill portion of the valuation is extremely variable and possibly fragile. Young, inexperienced buyers often do not wish to pay for goodwill, which after all, is an abstraction. Not having run a business, the importance and value of goodwill is much lower to them than to the seller. The value of the records being provided by the seller is usually much lower to the buyer than to the seller. Unrealistic expectations on both sides often doom the discussions. If the discussions fall apart, and other opportunities (for both parties) have been exhausted, it is not uncommon for the potential seller to simply close and liquidate the business for the value of its furnishings and equipment. The meager crop of licensed surveyors, compared with the number of those retiring annually, adds to this problem. For the potential buyer, this means self-funding the business through assignments, the first of which may be taken on with borrowed or rented equipment and staff who are temporary at best.
In my view, properly considering business structure can prevent disappointment for parties on both sides of this troublesome coin.
Without getting too much into next month’s challenge for discussion—business planning—the following structures can help develop more tenable businesses: Partnerships and alliances—This is where the business owner creates a strong area of expertise that is desirable to another organization, such as an engineering, architectural, or other type of consulting firm. A business relationship can be created through acquisition, merger, joint venture, or even a long-term exclusive services agreement. Or, it may be a long-term services agreement with a developer, home builder, construction company, or public agency. When such relationships are considered long term, the revenue flow adds concretely to the business’s worth.
Co-principals or owners—By taking in co-owners, a structure for vesting the ownership can be created that is based on performance of both the individual and the company. Ownership can pass to new coowners through an agreed upon amount of sweat or capital, or a combination of both. The transfer may occur when the company passes a certain threshold for business volume, or when the co-owner-to-be brings in a certain level of annual business volume. Co-owners can be from the founding owner’s area of expertise, or they can be in areas that harmonize with plans for development of the company’s business. Either way, the pool of co-owners provides a source of buyers when an individual is ready to retire. For this strategy to be sustainable, it must include a policy of identifying and bringing in new co-owners. Many existing owners do not identify bringing in co-owners in a planned way as an opportunity.
These are only a couple of strategies to consider. Regardless of the strategy followed, it is important to create a business structure that is not ad hoc but is purposeful. You should follow the plan assiduously, while having flexibility to change it when opportunities present themselves.
Joseph V.R. Paiva, Ph.D., P.S., P.E., is a geomatics consultant. He can be reached at email@example.com.