Cost of Closing an Engineering Firm 1

[phamENG]

So this is probably better placed in the 'Engineering Business Practices and Issues" forum...but it's fairly specific to structural engineers and a few of the members that I think may have the best insights don't seem to pop up over there very often. So here goes:

Lot's of posts come up about branching out on your own, starting an engineering side business, etc. They all want to know about what it will take, what it wall cost, what they need to do. But I never see the question asked or the issue brought up: how much will it cost to shut it down? Failure is always a possibility, but even a successful career must come to an end eventually.

It's a hotly debated fact that a structural engineering consulting firm is essentially worthless. If you've built up a nice client list, have a staff of high quality, loyal employees, and a decent accounts receivable with reliable payments, you may be be able to get something. But, at best, you'd be looking at minimal equity tied up in personal property (computers, furniture if you didn't rent it, etc.) and a percentage of the accounts receivable and contracted work. Anything above that is really just goodwill, and no sensible business person is going to pay for that in this industry (unless you're the Sears of the 1950s in the AEC industry). So maybe you can name one of your loyal employees as president and transfer ownership. That could be good.

But a lot of us are solo or have very small teams where such a sale or transition isn't feasible. What then? The liability from projects doesn't just evaporate. That's why tailing insurance exists, to cover you in case of a claim after the business stops operating. So those risks exist, and since our profits are largely based on risk exposure from liability (minimal capital is tied up), I think more attention should be paid to this. For example: if I get in a car wreck this afternoon or have a stroke tomorrow and I'm unable to do my job anymore, I have to close up shop. My income goes away but there is some non-zero dollar amount that I have to keep paying for some period of time, and some amount of liability risk that continues with me as well. So, let's say the statute of limitations is 7 years for civil or criminal claims. That's seven years of continuing to pay E&O insurance, without getting paid. It seems to me that the cost of that could be quite burdensome. So I should be accounting for it now. Whether it's in a long term disability insurance policy for accidents now, long term financial planning and adjusting my overhead numbers to account for it now and save/invest the money so it's there later when I retire, or some other means, it seems a prudent thing to think about.

What does everyone else think? For those who are retired and have gone through this, what did you do/wish you had done? For those not there yet, have you thought about this? Anyone think I'm crazy? (Don't answer the last one...)

 

[XR250]

As someone who went without insurance for a significant amount of time, I might go commando on this one and not call in any lawsuits to the Universe. Honestly, the main reason I have insurance is because many projects require it.
When I retire, I will weight the risk versus the cost of the insurance and decide then. I assume a tail policy is cheaper then a regular one?

 

[phamENG]

I assume a tail policy is cheaper then a regular one?

Not sure. One of the things I hope somebody who already has the t-shirt can shed some light on. I remember talking with somebody a while back and they mentioned that it decreases with time. First year is going to be nearly the same as your liability hasn't decreased, you're just not adding to it any more. Then with each passing year it slowly drops as older projects fall beyond the statue of limitations and risk of suits reduces.

Regarding projects requiring it...one that I had early this year not only required insurance, but required it be maintained for a certain period of time. Something to think about. If you get one of those right before you sign off, then you run the risk of breach of contract. Hasn't happened to me, but I remember my old firm being audited and they had to provide proof of coverage for a job that had been done years prior but the contract required something like 10 years of insurance coverage.

 

[XR250]

I have had a few of those jobs and told them "no". Either take that out of the contract or find another engineer. I have no way of assuring my future insurability or ability to pay for insurance. Just as bad as the ones who want to be "named insureds" on your policy.

 

[Brad805]

We asked our insurer about this. There is wind down insurance you can get. It is not overly costly (well when we asked anyway), and each year after retirement the fee reduces. I suppose you could include an allowance for those added costs now, or you could absorb them when they come. You know, cause you be a billionaire when you retire from this gig.

 

[dik]

In my early years, I've done 20 storey buildings, Structural and Architectural without insurance. In Manitoba, until about 10 or 15 years back, an engineer could do architectural work, too.

So strange to see the singularity approaching while the entire planet is rapidly turning into a hellscape. -John Coates

-Dik

 

[skeletron]

I've definitely thought about this. I don't expect my practice to grow beyond my own capabilities which effectively limit the scale/scope of my projects. So, I think this is a bit of a "governor" on what I can do in the present and future. If your practice is growing or chewing at more significant pieces of work, I think it's an important operational step to have some sort of growth, succession, or maintenance plan. I also think that you would probably have other staff and maybe another partner to rely on.

The regulator in my area is also buckling down on this to prevent loss of continuity on projects. This is more so about retention of documents (10 years min. after project close-out), but it starts to envelope "death of professional during/post construction" so that the structure still has a point of contact.

From a conversation with an older SE, I recall that he hung his own shingle in the 90s, partnered up with 2 other guys who incorporated as ABC, then they started to retire in 2010+. He now runs a solo show, but had to "buy back" the company so that the last guy could retire. Apparently legal/insurance gave him 2 game plans after that: (A) wind down his work and then buy tail insurance once he can retire, based on the projects still within the 5-10 year range; (B) ramp up his work, move into an actual office and have staff, and then attempt to "sell" or have someone envelope his practice and liability.

From a conversation with an older arch. it sounds like the biggest pains for him were having to keep a storage locker with drawings, paying a nominal fee for tail insurance, and having his wife bark at him about still owning a full-size printer sitting in the rec room downstairs.

 

[TLHS]

This is actually a questions I've been thinking about. Should I be trying to account some percentage of fees to future liability costs. Basically, am I underestimating my operating costs by not having something set aside for this?

 

[rather_be_riding]

It's wise to consider this - it's a significant hidden cost to going back into the workforce should you fail or just get sick of lying awake at night second guessing yourself.

I checked a couple of years back and I could get a buyout of my policy. It was several times more expensive than a year but wasn't so bad that it's entirely unreasonable to purchase. I think it's a good idea to set aside say maybe 30%???? of your insurance premium each year for tailing insurance at the end.

I wonder what will happen in this respect as insurance continues to go crazy though.

Another similar curiousity of the industry is that clients often ask me to prove my insured status. Because I work on long-lived fatigue sensitive structures, it's essentially worthless in some respects that because what they REALLY need to know is whether they can sue me in 2 years not this year.

 

[TLHS]

Two years post-project is actually the timeline in the Canadian ACEC standard contract:

 

[MTNClimber]

Wow, 250k/500k? That’s low. Is that standard for Canadian contracts? We’ve been slowly creeping up to $1M/$2M as the new standard in the Northeast US.

 

[TLHS]

It's low. It's the number insurance companies want you to try to hold to if you can. The ACEC contract is, obviously, engineer favourable.

 

[wrantler]

@TLHS Do you use that contract with your clients?

 

[SteelPE]

So, let's say the statute of limitations is 7 years for civil or criminal claims. That's seven years of continuing to pay E&O insurance, without getting paid.

I remember taking a business class as part of a Masters program I completed years ago. One of the things I took away was... "never go into business without knowing how your are going to go out of business.". I also seem to remember JAE mentioning that you need to be aware what happens with your insurance when you are signing drawings for the company you work for.... as now you need to know what happens when they go out of business.

That being said, the last time I looked into this, the EO company allowed me to buy a "tail policy" to cover me for a certain amount of time once I decided to go out of business. Last I checked, my EO company offered 5 years at 250% of a year premium.... but that was many EO companies ago. I don't recall such favorable terms with my newest EO company.

I know this because an old company I used to work for, where I was the only registered engineer, went out of business. They were going to stick me with buying the tail policy (they actually told me it was now my problem). This isn't want they had agreed to during contract negotiation..... but I never got that in writing (but they acknowledged the conversation and still didn't care). Luckily I had quite a bit of leverage and used every ounce of it and was made whole in the end. I was lucky though (and JAE helped out a bit too).

So, you might want to check with your EO company on the cost and length of available "tail" policies.

 

[phamENG]

Thanks, everyone. I considered this briefly when I started up, but I didn't give it enough attention. I thought I had a handle on the basics, and I would figure it out later. But it's occurred to me that I need an exit strategy - even if just a contingency plan.

I'll reach out to my insurance company and find out what they do for tail policies.

MTNClimber - I'm seeing the same thing here in VA. I'm still holding onto a $1M/$1M policy...but it does exclude me from any State jobs and many of the larger development projects. I've been staying busy enough, though, so it's not worth the added expense yet. When my 3 year rate lock expires next year I'll get a quote to add the extra to the agg.

 

[SteelPE]

I'm still holding onto a $1M/$1M policy

I have always carried $2M/$2M and I can't say that I do large projects.

I actually lost a client who began requesting $3M/$3M a few years ago. My insurance company said I don't bill enough to justify the $3M limits. The client wasn't happy, but they only accounted for 2% of my invoicing.... so while they were a good client (paid in 7 days) I was just unable to keep them around.

Recently had another owner request $5M/$5M.... they were rejected as well. That job is still moving forward.

 

[Craig_H]

I am also interested to hear what sort of routine wind-down policies the insurance world is offering. Based on recent experience with my premiums, I'll get a barrel ready to be bent over.

In my own mind, my hypothetical wind-down strategy is to gradually pass my small firm onto an employee. The gradual transition option is what I picture as ideal because:
1. Clients don't perceive a seismic shift in the company and already have gotten to know the new owner over a period of years.
2. New owner gets to gradually learn the skills that they don't yet have and can gradually begin to make the changes that they want to over a period of years, helping enforce #1.
3. I get to walk away at the end knowing my clients are well cared for and without these sorts of worries.

Secondary hypothetical exit strategy is to sell in 20 years to whomever is doing what WSP is doing now. My clients might not like it, but maybe I'll get some spare change out of the deal.

 

[KootK]

In my own mind, my hypothetical wind-down strategy is to gradually pass my small firm onto an employee.

That's slick if you can make it happen. However, many a business savvy employee will recognize that they can probably just open their own shop when you retire, take your client list, and leave your firm's liability in the review mirror, allowing them to be more competitive / profitable. I've seen this done on several occasions.

 

[KootK]

My own wind down plan is to retire late, as a solo practitioner, and go out with a whimper. I figure I'll ramp it down to just small, delegated engineering stuff for the last five years or so such that:

1) I can travel.

2) I can forgo large contracts requiring me to maintain insurance into the future.

3) I can get clear of any past requirements to remain insured.

Once I retire completely, I'll likely just throw caution to the wind and forgo the tail insurance.

 

[ALK2415]

@ KootK
There will be always something that could came back and hit you in ....
life always harsh to the KIND people "Engineers"
My experience with work, is BAD people will always succeed
Best thing to I think is to Stash some reserve to cover this kind of problems