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...)

 

[KootK]

There will be always something that could came back and hit you in ....

Yes, but like all forms of risk, management of it is a personal choice. I feel that structural engineers are, on average, unduly risk adverse owing to the nature of our work.

Best thing to I think is to Stash some reserve to cover this kind of problems

One should stash some in reserve for all kinds of reasons. However, because most structural engineering is a commodity, my pricing is almost entirely based on "what the market will bear" rather than my anticipated costs, real or imagined. I don't have the luxury of jacking my fees up 10% to cover my eventual wind down costs. If I did, I'd just as soon jack them up 10% tomorrow for no reason fancier than personal greed.

 

[XR250]

My plan is similar to Koots.
I have plenty of other things I would rather spend my brain-power on than worrying about someone suing me in my retirement.
I'm a firm believer in The Law of Attraction. If you worry about something enough, you will attract it.

 

[canwesteng]

How do they leave the liability if you start by bringing them in as a partner bit by bit? Then it's their liability too - you retire and they take sole ownership.

 

[phamENG]

canwesteng - if they stick around and do it, that works. Or they can do what I did - just before the offer to become a "junior partner" was officially extended, I left and hung my own shingle. I had clients that followed me (I made a point to not chase anyone - they knew where I was and if they chose to call me, I took on the work - all my marketing was directed at new clients) but none of my former employer's liability did.

 

[Craig_H]

Pham, do you perceive that whatever savings came with starting without former liability made up for the inevitable expenses of starting your own firm? I personally found that the rigour of creating tools, drafting details, legal expenses, searching out office space, etc. all consumed quite a bit of effort and time. I didn't draw a salary until about six months in, and even then it was below market. Maybe I'm mistaken, but had I suspect that some people would be willing to buy out an owner to avoid all that headache, especially if they felt comfortable with the business and its risk management history.

 

[phamENG]

Yes. I think so. I was fortunate to start at a time and in an area where structural engineers were (and still are) in short supply, so I found work pretty quickly. I paid my overhead, beat my old salary, and gave myself a nice Christmas bonus my first year. It wasn't easy, but it felt good.

I liked my old firm. There were good people there. But the QA/QC was non-existent and the employee culture was...apathetic. I had been trying to fix it for a few years, but nobody seemed to care that didn't care. So in my case the liabilities weren't limited to the typical legal ones, though the lack of QC meant those were probably a bit higher than usual. It felt like the entire business was going to be more of a liability than an asset. Most of the clients that followed me were looking for a good excuse to find another firm anyway.

My QC still isn't what I want it to be - hard to look at it with fresh eyes as a one man show, which is why anything bigger than a fairly typical house I try to hire a peer review - but at least the mistakes that are there are my own.

 

[KootK]

I personally found that the rigour of creating tools, drafting details, legal expenses, searching out office space, etc. all consumed quite a bit of effort and time.

It would depend on the individual of course but, for me, even those things would actually be liabilities. If I'm going to assume the risks associated with entrepreneurship, I want to:

1) Come up with my on name, logo, website etc.

2) Create standards and tools that reflect my preferences.

3) Create my own relationships with lawyers, landlords, accountants, and other business support professionals.

For me, this is a bit like how I enjoy riding my bicycles at least twice as much when I've built them myself. downtube shifting, 9 speed, dry lube, best hubs and bottom bracket money can buy... no dork disk.

Many of the things that I would inherit in an acquisition would, to me, feel a bit like ugly yellow dork disks. Ew.

 

[milkshakelake]

I have a long way to go before reaching my goals, so I haven't given a second of thought to the cost of closing. As for the case where I get bonked by a Ferrari and can't finish the work, maybe I'm optimistic but I have enough goodwill that the clients won't sue me over that. And either way, I'd find a way to do it by hiring outside consultants. That would be less onerous, and nicer to my clients, than insurance and lawsuits.

If I had to close up shop, I'd try something nontraditional and sell the firm to a trusted developer or contractor rather than pass it onto an employee or sell to another engineer. They get a staff of well-trained employees and all the standards and resources that come with it. I'd stay on for a fixed amount of time to clean up old projects, because when you hit the stop button, the old stuff keeps going. I know someone who did that and then retired. For a one man show, I don't see a feasible way to sell the business because you ARE the business.

@phamEng I'm wondering why it's a concern for you? Are you thinking of closing up shop, retiring, getting low on projects, or are just counting a risk most don't think about? Unless it's an active and ongoing concern, I wouldn't really think about it. Rather than insurance, just have some money (liquid or non-liquid) set aside, and have a network of reliable people you can pay to help you. I have investments, so the first part is covered by default and doesn't need additional overhead. The second part is also covered by networking and hiring outside consultants over the years. I generally don't trust insurance for numerous reasons, so my response is colored by that.

 

[phamENG]

I'm wondering why it's a concern for you?

Mostly the counting a risk that most don't think about. I have a long way to go to a "traditional" retirement - probably 30 or 40 years - but I always like to keep my options open. A possible business opportunity has recently come up for me that I'm entertaining, and I realized that exiting my engineering business (if it came to that) could have potential real costs in the short term. Whether I pursue this other path or not, I realized that this was a potential hole in my planning.

 

[JoelTXCive]

Pham- Another thing you can do is set up a Trust for yourself. My father was self employed, and shortly after he retired; my parents met with an estate attorney and set up several trusts. There are a host of tax reasons for doing so, but liability protection is another good reason to set up trusts.

You can be sued individually, but assets can be protected in a trust. Just ask O.J. Simpson....that's why he still has money after all his legal problems and courtroom losses for the past 30 years. The courts have not been able to breach the trusts he set up for himself many years ago.

 

[wrantler]

In BC (Canada) we have mandatory secondary liability insurance. It is run by our governing body and the fee for this is included in our yearly license cost.

It was meant to cover a few scenarios but one is for this specific case...retirement. I believe there is a P.Eng (retirement) fee you pay when you are retired that I assume is less than a non-retired registrant.

anyways this covers up to $250k (PER CLAIM LIMIT) has no deductible and the legal costs are also covered.

I want to say this is standard across Canada but am not entirely sure...

Personally I do not mind paying a few extra dollars a year for things like this.

 

[phamENG]

Joel - good call there. I already have one set up, though it's more of an estate planning measure than a liability shield. I'll have to discuss that with my attorney at some point. Though the idealist in me would still want some sort of justice for someone who was wronged - even if and perhaps especially if I'm the one who caused it. So while I want to protect my personal and family assets, I also want to make sure there's a means of making somebody as whole as possible if I cause harm.

wrantler - that is a nice feature. We don't have that down here in the US - at least not that I'm aware of.

 

[TLHS]

wrantler,

I'm actually confused about how that insurance works in some situations at the moment. It specifically isn't for firms and says that really clearly. Every sole proprieter that does consulting work, though, now needs to be a registered firm with the recent regulatory changes.

So who does the incidental consulting coverage up to 15,000 in fees cover? Does the retirement coverage cover you if you've retired from your own firm?

 

[skeletron]

@wrantler and @TLHS:

I think it's whistleblowing insurance. Like, if you have to make a call at your job that puts you in the line of fire, you get some protection. And then I think it's also there for incidental moonlighting design/stamp your neighbour's deck, your own renovation, or similar one-off projects. But I agree, it's really not there for general protection in practice. Maybe it does cover the tail end of retired eng's.

 

[Aesur]

I'm surprised no one has mentioned faking your own death/changing your identity, I hear a guy who runs a vacuum repair shop charges about 250k for this..

In all seriousness, I believe others have touched on the main points, tail insurance, sale to another company that agrees to cover your tail policy with their policy or transition to new ownership or ESOP to continue the company.

 

[Ingenuity]

I'm surprised no one has mentioned faking your own death/changing your identity, I hear a guy who runs a vacuum repair shop charges about 250k for this..

And your attorney is Saul Goodman, too?

 

[LittleInch]

I'm fascinated about this discussion as it seems that in the structural / civil world, people have a much higher chance of getting sued / claims made which, at the very least, your insurance covers the legal cost of defending them right?

But in reality how often does it really happen? Insurance companies aren't in the business of insuring you for things they think are going to happen so either your insurance premium is huge or it happens rarely?

How much is the premium for a sole trader per year?

My industry they very rarely seem to bother as the cost of fixing it is way higher than the cover you can get and the fees for £1M are not too bad, so indicates they rarely get claims.

Remember - More details = better answers
Also: If you get a response it's polite to respond to it.

 

[Aesur]

@Ingenuity - glad at least one person got the reference!

@LittleInch - based on what I have seen over the years at other firms insurance tends to settle for a lower amount rather than fighting it and then they increase your premium for 3 years to make up for their losses. Most of the claims I have heard about the claim was for something little, ie a portion of masonry wall fell during construction and because the contractor didn't brace it and the engineer didn't specifically note on their drawings to brace it until the diaphragm is attached (however the plans did indicate the design is for final structure and means and methods is by contractor) therefore there was a claim and the claim was for such amount that the insurance wanted to pay rather than spend more to fight it. Additionally it is my understanding that if they fight it and win, they cannot recover their costs (maybe they can sue for it - which costs even more?) whereas if they pay the small amount they can raise your premiums to recover your costs, in the end insurance always wins and you always lose..

 

[MTNClimber]

LittleInch - It's three of us with only two responsible in charge. For $2M per claim and $2M per aggregate, we're paying close to $13k/year for just professional liability. Add another $3k for commercial general liability, workers' compensation, automobile liability, and umbrella liability. We're a newer firm and small chum for insurance companies, so our options are limited to two insurance companies. Hopefully, as time goes on, we can find more competitive pricing as more companies are willing to insure us.

 

[TLHS]

LittleInch,

Engineers screw up. Good engineers screw up. Depending on how you handle it, you might not get sued, but you can do your job with reasonable care, and still not know things, stretch too far, or just make a mistake.

There are mistakes where you're going to get sued even if you handle it well because financially the owner/contractor/whatever needs to do it. They can't justify eating something that wasn't their fault.
Engineering is a profession where the scale of damages is significantly higher than the scale of the fees earned, so a small company or individual can't build that risk in.

I have worked at two larger places that effectively self insure for anything under several million dollars in damages, but to do that you need a lot of money and a lot of legal resources.

I agree that in petrochemical and industrial stuff, large clients tend to just not hire you again rather than chasing for money, but even there that's not always the case, and the liabilities in that industry are even bigger. You have less risk of a claim, but if there is one it's more likely to be big.