Value of a pension consulting firm

[Guest Steve Caudle]

I have worked for a small pension consulting firm for about three years now (I have been in the industry longer though) and the owner of the firm is planning to retire in 2-3 years. He has indicated that he would like me to buy the company from him at that time. How much is a company of this size worth (annual revenue = $350 - 400k) and what options are available for a deal like this? He feels that if he stayed around after the sale, he could sell the company for more as well as continue to receive some salary during the transition period. I have an excellent relationship with all of my clients, and feel that the only "transition" would have to do with the clients he still works with. Finally, his timing is such (on purpose) that the sale would take place after our plans are restated to comply with the GUST amendments. I feel that the value of the company would be lower at this time, right after that income "spike". Any thoughts on this matter would be appreciated.

[Guest marki]

i am partners in a pension firm in the northeast. we are lookin gto sell the company. please email susanb@netreach.net if interested

[Guest Robin Davis]

Let me preface my opinion with the fact that I am not an attorney or an accountant and I think that you need both when considering this issue. However, I will render my opinion anyway like any good consultant!

My first question is of a psycological nature - what type of relationship to you have with the gentleman and what type of person is he? This will impact negotiations considerably.

My next questions are in regards to your comment that he feels that he can sell the company for more if he stays around.

Q - Is he referring to staying on as an employee or consultant? I'm not sire this would necessarily increase the value of the company if he is going to be receiving compensation in this capacity. In fact, I would think that the additional expense would decrease the value but that is something that a business valuation specialist or even an accountant would be better qualified to determine.

Q - Is he referring to staying on to transition his client base? If so, this should have nothing to do with the value of the company, this should be his responsibility upon the sale company at whatever value is agreed upon.

Next, I have no idea what GUST is (I do nonqualified plan myself)but from your message it sounds as if there is going to be a onetime increase in profit and then it will go back to normal. If so, I would think that it wouldn't affect the value at all. A company should be valued based on reasonably anticipated revenue and growth, not a one time profit or cost.

Anyway, you asked for thoughts and those are mine. I would strongly suggest retaining professional advice if you are serious about this though. The company should be professionally valued and analyzed for profitably and growth potential.

Then, if you decide to buy, you can contact me and we can discuss a partnership to combine qualified and nonqualified consulting!

Well, I hope this helps and good luck in your decision!

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Robin Davis

D&D Benefits, L.L.C.

972-755-3327

[This message has been edited by Robin Davis (edited 01-04-2000).]

[Guest Mike Kimball]

Most deals of this type are based on the value of the recurring income stream. i.e. the administration fees only, not document fees, not plan termination and consulting income etc. Based on the actual book of continuing business, it might be 70% to 120% of this income stream. Might depend on types of plans administered, amount of technology/time saving applied, etc. Remember: fair market value is whatever buyer and seller agree it is! The existing P/L and expense position will impact it also because you may be saddled with expenses that continue on after the sale (e.g. his salary and benefits package). A non-compete agreement should also be part of the buy out to prevent him from selling to you, then taking back all his clients in another venture. You could also set up deferred payments for business retention. i.e. pay him less if business leaves as a result of the sale, more if the business satys on the books. This could be part of a salary/benefits package. If it were me, I would want complete control of company with a non-compete and deferred payments. Depends on your relative bargaining position and capital availability.

[Cathy from Chicago]

About two years ago, myself and the key person of a 17 yr old admin firm resigned as the owner was making a major change in his affiliation (insurance) and insisting his pension people go with. We did not want to do this, so resigned. Since we were the key people, etc., he ultimately sold us the business and closed the company. Originally he had some ridiculously high price he wanted us to pay and we refused...the files were not worth that much plus the clients could provide us copies if we asked. The bottom line was that we bought 'the files' for only 5% of his original asking price. Granted we were in a great situation, but I think you need to stand tall and not let the old coot wear you down on his stories on how valuable he is, etc. I totally agree with Robin on retaining professionals to determine a value and the last poster (sorry can't remember name) on the avenue to go...non-compete and deferred income. Clients are buying you, the person...anyone can run an annual valuation, prepare 5500's etc. - it's the intangibles such as top notch service, etc. that separate the men from the boys.

[stephen]

Have you considered using an ESOP transaction to help with the purchase?

I'm not sure of the specifics involved but if the owner sold at least 30% of the stock in the company to the ESOP he could put the proceeds into a tax deferred account until he started withdrawing the funds (1042 transaction)

[Guest mshenry]

Princeton, NJ area TPA seeks to acquire small to mid-size pension administration firms in the Northeast U.S. Interested parties should contact us at 215-493-7073 or email sales@princetonplan.com.

Richard J. Walls, President