So You Want To Start Your Own Engineering Firm [Part 2]
Editor’s Note: Last issue, we presented Part 1 of this article, which focused on the importance of creating a business and marketing plan that is accurate and truthful, as well the tough “Why, What, and Where” questions you’ll need to address to complete that plan.
In Part 2, the author talks about the tough “Who, How and When” questions you must answer. And why successful engineering firm owners always remember - and stick to - their Mission Statement.
The engineering business is a service industry that is people doing business with people. You are only as good as your last project, and having good working relationships with your clients’ project managers and the principles of the firm is an absolute must! If they don’t know you or the quality of your work, the chances of your success are very slim.
You must have the attention of the principles of the firms you are currently working for because those are the people you will be calling on when you sever your ties with your current employer and become your own. Keep in mind that the quality and accuracy of your designs are very important - but also that you are establishing a service industry business. You want your clients to know that when they have a problem and contact you, you will be right there to help them in any manner they need.
Be attentive, responsive and alert to your clients needs, and success can be yours. Establish yourself as being thorough and accurate, but also human, knowing that some day, some time, something will get overlooked.
The owner’s credentials, education, experience and client relations are going to be important information to include in your business plan. The business plan should indicate a tentative listing of the Board of Directors and corporate officers. Develop this list based upon the strengths of each individual and not necessarily by amount of ownership. The majority owners will typically be the board of directors who dictate how the business is operated.
Keep in mind that some states’ incorporation laws for professional engineering firms may require all or even a simple majority of the corporation’s board of directors to be professionally licensed engineers registered within the state of incorporation.
Also keep in mind that professional registration requirements deviate from state to state, even though efforts are being made to make them uniform within the United States. There are several challenges currently going on in various states regarding professional registrations for professional plumbing engineers.
Therefore, it is very important to do your homework. Typically professionally licensed engineers must compromise the majority ownership (51%) of a professional engineering firm.
The board of directors elects the corporate officers who may or may not hold ownership in the corporation. The majority of start-up engineering firms will have a board of directors who also serve as corporate officers.
One very important corporate position is the chief financial officer (CFO). This person is typically from a business background and prepared to be a certified public accountant or already is a CPA. Most good engineers that I know are not qualified CPAs, so some firms will employee a bookkeeper/office manager who works with a CPA who is hired on a consultant/part-time basis.
It is important to have a person of this caliber reviewing and auditing your business statements. Also it’s good to have a qualified CPA associated with your firm, even if you do not need to secure start-up capital, because some day you may need a loan to expand your business or possibly buy your own building - and a professionally prepared business plan and financial statements are a must.
This is the part of creating the business plan where each person(s) who wants to start a firm needs to dig deep within themselves and answer the How questions honestly and truthfully.
Money, money, money - it all takes money. You think you have enough money to start a new firm without getting private financing. When we started Metro Design, we had good client support, most of the partners had name recognition with some major architectural firms and school districts, and our design team worked countless hours of overtime to deliver projects on time and under budget.
The partners put in $100,000 (collectively) to get going, with the thought that this would carry us over until we could establish a cash flow. We underestimated cash flow. Remember, if you are working for architects, they work for a month, bill their client, collect in 30-60 days (if they are lucky) and they pay you 15-30 days later (if you are lucky).
Guess what? If your client misses their client’s billing cycle, you’re another 30 days out. This is what I call the food chain, so whenever you can move yourself up on the food chain to work directly for the company paying the bills, do it!! Needless to say, we went through 100K in a heartbeat. We didn’t buy any thing we absolutely didn’t need and tried to buy wholesale or as cheap as possible - and still maintain a professional image.
Fortunately, we obtained private financing, and after the first year we had a very small profit and paid off all of our debts. In year two we started with no cash, but we had accounts receivable and a backlog of projects.
If you are successful, you will get the reputation that will bring in business and, consequently, engineers will hear of it and want to join your team. Success breeds more success, but you need to control it and your firm’s growth. Uncontrolled growth leads to chaos, more mistakes and lower profitability. Grow, but do not grow too fast.
Additionally, before you take the next leap in growth, make sure your corporate standards are in place, such as the standard MasterSpec, design solutions, details and future marketing plans.
It is always good to have executive planning sessions every two to three years with key staff to keep your focus on where you’re going and how you’re going to get there.
Any professional engineering firm will need errors and omission insurance in conjunction with general liability insurance. Smaller firms will pay a larger pro-rated share than bigger firms, regardless of claim history. When soliciting this insurance, it is recommended to seek advice from the firms that offer a group insurance plan. Find out what your direct competitors are offering for benefits from the insurance groups you talk to and find out what your prospective new engineering candidates that you interview are seeking.
Stay lean but stay competitive. The typical employee is looking for job security, quality health care insurance, disability insurance and some type of retirement plan (401K) over and above what they may or may not get from the federal government’s Social Security plan.
There are several organizations that offer insurance benefits on a somewhat co-op level. For example, ACEC works with architecture and engineering firms to group them as an association and collectively market them for group insurance plans.
Okay, we’re almost done. What follows are the last questions to complete your business plan. These questions are last, but they’re absolutely not the least important.
We’re on the edge of entrepreneurship - looking outward (and seeing that the grass always looks greener on the other side, of course), positioning our bodies physically and mentally for the big jump. It’s huge the first time you make it.
When we formed Metro Design I was a newlywed of just over a year. I also was floored when my father-in-law (who is an accountant/comptroller) started asking all of these financial questions regarding our new company.
I had given my wife a copy of my personal ownership agreement, and she slipped it to her dear old dad, so it only took seconds to figure out where these questions were coming from. I do not regret sharing that information with my life partner, and my (still) now retired father-in-law who interjected some thought-provoking questions.
Needless to say, the partners made adjustments and agreements, came together as a family, held hands, and Metro Design Associates, Inc., jumped. It was November 1988.
Once you jump, the news will be out. You should tell your employer sooner than later, because later may result in “clean out your desk…now!!!” Some firms have key personnel sign non-compete agreements. Therefore, you need to verify if you are not party to one. It can be a difficulty, but not being an attorney, it is my understanding that it is very hard for someone to prevent you from making a living to support your family.
Find the right attorney, and he or she can subvert these agreements. My recommendation is to be upfront and honest with your current employer and clean up as much of your projects as possible. Even if it means providing some overtime contribution.
Never burn bridges and always leave on a good note. Of course, that still doesn’t mean you won’t hear “clean out your desk and get out of here,” anyway. Leaving on a good note will help you with any severance pay plan, depending on your status.
Additionally, some firms allow you to carry over vacation, paid sick leave or paid personnel leave. Collection on this time may help you keep financially afloat until you can get established and start drawing a normal paycheck from the new business. In some very rare conditions, you may be able to continue working for your previous employer as a consultant while you grow and expand your own business. The bottom line is you should pursue quality and ethics in everything you do to establish your own business.
In order to maintain your quality and ethics with new business ventures, you need to sever your relationships with current clients. Do not try to steal clients. Instead, politely let them know that your intention is not to take work away from your current employer, but you would be glad to send them a corporate brochure as soon as they are printed.
When you start marketing your new company’s services is up to you. But in your marketing plan, you will want to include a mission statement and/or business philosophy.
Remember the Mission StatementYour mission statement needs to summarize what your business is, where you want to go and how you intend to satisfy your clients. You can look to your business plan for the core of these statements and/or philosophies, because isn’t that what your business is about?
You want to have words like “quality and innovation,” “empowerment of team,” “efficient, on time and under budget” and “strategic planning” included in the business statements.
At this point, it’s time for licensed accountants and attorneys to review and comment on your business plan because they both carry equal value and weight. Make sure they have engineering and construction experience, and are familiar with lien rights, arbitration and cash accrual accounting systems (just to name a few). Furthermore, separate legal and financial advisors are recommended because each will have personal life experiences and lessons on issues that will arise during the life of your business.
It may work out that your financial advisor becomes the company’s CFO, even if it is on a part-time/consulting arrangement. Underestimation for the need of professionally trained and experienced attorneys and accountants will lead to the demise of any engineering firm that thinks it is an unnecessary expense, because we live in a very litigious society where no matter how successful you are, people/companies will come hunting for you.
None of this is easy to assemble, but neither is running a business. If you have the ability and desire to assemble a quality business plan, then you have what it takes to succeed.
Being a principal, partner or associate of any firm has its financial benefits, but it also can be a very stressful, up and down business. Follow your business plan - always thinking out of the box, and establishing a well-educated/experienced design team that is creative and able to respond to the client’s fluctuating schedules and requests. Doing so will give your business the advantage in making money that others do not have.
And remember, keeping your marketing ears open and being in the right place at the right time has launched some firms to the next level, so never stop marketing regardless of current workloads.
Dedicated to ExcellenceThis article is dedicated to my mentor, Mr. William H. Peterson, P.E. (Bill), who had the vision to start Metro Design Associates, Inc., and invited this kid to come along. Bill hired me in September 1979 at a firm where he was vice president of engineering, and we worked together for more than 17 consecutive years.
Bill was a tough guy to work for because he always pushed for production and excellence. Many people worked for him at different firms over different periods of time, but not as long as I did consecutively. Bill had previous experience with the formation and executive operation of engineering firms, including H.E.V.A.C. Engineering during the 1960s and 1970s.
Bill successfully sold that business to serve his public duty for a second time. Unfortunately, he lost his battle with cancer only a few short years after his retirement, and this kid wants to take this opportunity to thank him for inviting me to take the jump with him.
Keith O’Higgins, P.E. (president), Larry Arnold, P.E. (vice president) and myself have continued to keep the Metro Design Associates mission focused on providing excellence to our clients.