So, You Want to Start Your Own Firm

To view the figures and tables associated with this article, please refer to the flipbook above.

At some point in your career, conditions may dictate that you want to or perhaps need to start your own firm. But like many decisions you may make on an emotional rather than rational basis, you may later regret, to one degree or another, that you had not first asked a trusted advisor for their wisdom or “read the fine print.” As you will learn, there are probably more things that you don’t know about running a business than you do know, at least at the start.
After 40 plus years in the industry, from newbie engineer to senior principal, I have seen a lot and interacted with every position in a company from the Board of Directors, to the C-Suite, to Finance and Accounting, to Marketing, to Profit Sharing and 401(k) trustees and to last, but not least, the rank and file engineers and drafters. I personally held several of these positions, but in terms of day-to-day responsibilities, I mostly concentrated on structural engineering, project management, and trying to keep our clients happy enough so that they would hire us again without asking competing firms for alternative proposals. Having repeat clients is the secret sauce to success if you don’t know! The rest of running the business was by others. I trusted that they would do their jobs, and I assume they trusted that I would do mine.

I wrote this article series to provide helpful information that I learned before and since I started my own firm. Like those disclaimers you may hear on radio shows, the information I provide herein is for general information only and is not intended to be specific to any individual or situation. I am only a licensed structural engineer, who happens to have an MBA degree. If you need proper advice, please consult an attorney or tax professional.

Your mindset ought to be that you are starting a company that just happens to provide engineering services. You are not just doing what you did before, engineering design mostly, and getting paid for it. If you can “flip the script” so to speak, congratulations, you are going to be a small business owner!

The key to small business success is earning revenue to pay the bills while doing something you enjoy. And the key to revenue generation is marketing. The four Ps of marketing—Product, Price, Place, and Promotion—run throughout this article series and ought to always be top of mind.

One of the first questions to ask yourself is, “Does a market exist for my “product” i.e. services?”
This is the most important question that needs to be answered when deciding whether to start your own company. It is safe to say that most engineers, with several years of experience, are likely to have the basic technical knowledge to do their own projects. But fundamental to business success, which is the goal here, is the ability to generate sufficient and consistent revenue relative to costs on a long-term basis.

Despite stories to the contrary, there is no shortage of engineers willing to take on more work. Multiple engineering firms will chase every advertised project even when they are busy. That is just the survival mechanism in human nature. If you decide to go out on your own and enter the marketplace, you will be facing competition from established firms who are not going to willingly or happily cede business to you. So, before you take the plunge, ask yourself if your offering will:

If you can answer yes to one of these questions, you have a fighting chance. However, as many in the restaurant industry unfortunately find out after a year or two in business, new offerings of an equal nature in an already crowded market face difficult and often insurmountable challenges.

In 1993, during Hilary Clinton’s efforts to promote her healthcare reform plan (commonly referred to as “Hilary Care”), when confronted with concerns that the mandated employer-provided health insurance would force small businesses into bankruptcy, she replied: “I can’t go out and save every undercapitalized entrepreneur in America.”

That quote always comes to mind when I think about new ventures. Capitalism can be cruel, particularly to an undercapitalized business, which is basically every new business. Unless you don’t need to be responsible for others, or you have a safety net to catch you should you fall, you will need a sufficient capital base at start-up to weather the known and unknown storms that lie ahead.

There is also a lot of uncertainty. A statement by Donald Rumsfeld, Secretary of Defense, during a 2002 Pentagon press briefing helps me put business risk into a useful analytical framework. Rumsfeld said “because as we know, there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns—the ones we don’t know we don’t know. And if one looks throughout the history of our country and other free countries, it is the latter category that tend to be the difficult ones.”

The “known knowns” and “known unknown” storms will determine the amount of capital that you will need at the outset. We will get to the “unknown unknowns” later.

You need to come up with a company name (for the company legal filing) and a logo for your letterhead, calculation pads, title block, and business card. If you aren’t the creative type, get some professional help with these.

One of my first clients said to me “John, make sure your invoicing looks professional.” I took that to heart. You really need to set up a separate email account, with a corporate domain name, for the company. If I see abc@gmail.com, I think amateur or working from home.

Also consider using a post office box as your mailing address. Using your home address for mailing seems less than professional and also tells the world where you live!

Do you need a website? Do you want one? Can you afford one? Can you afford not to have one? The costs can vary wildly depending on who you hire, the complexity of the site, and the upkeep. What do you intend to show your clients? You probably can’t use photos of work you did at your old firm even if you give them credit.

Most clients, or at least the ones you probably want to work for, will require that you have professional liability (errors and omissions) insurance and general liability insurance. The cost will likely be in the $5,000 to $10,000 range per year for even the smallest firms. Some companies will let you pay on a monthly basis after an initial down-payment which will help out.

You will need to establish your operation legally in the state or states where you will operate. Each state has different laws. Some states allow engineers to operate as limited liability companies (LLC), while others, such as California, require engineers to be sole-proprietors, partnerships, or some type of corporation, typically either an S or C.

You will want to select the corporate structure that shields your personal (non-corporate assets) as much as possible and limits your personal financial liability beyond what insurance will cover. Therefore, it is crucial that you do some homework and select the one that works best for you. A good business lawyer will be of immense help by describing the various pros and cons to help you make the best decision.

A new business will require many forms to file, articles of incorporation to draft and file, etc. I was lucky to live across the street from a friendly lawyer who helped me. Otherwise expect to incur some costs.

Your former employer provided you with all of the software and equipment you needed. Now you have to purchase them. You will probably need structural analysis software or licenses (RISA 2-D or 3-D, ETABS, SAP, Ram, etc.), CAD/Revit software or licenses, and word processing software (Bluebeam, Microsoft Office). Don’t forget computers and printers. It all adds up. You may have to make do with less than the optimum amount for a while. It all depends on your available start-up capital and cash flow and what you are working on.

All of the other employee costs that used to pass-through to your employer are now yours to pay for. You will spend money on marketing lunches, advertising, attendance at webinars and conferences, professional licensing in several states, professional society membership (AISC, ACEC/SEI, NCSEA, etc.), codes and standards, books, reference material, etc. You might need to delay some of these costs for a while until you have revenue flowing in.

Part 3 of this series will cover billing for the work. But the major issue with starting up a new firm is that you don’t have any billings!

The first incoming revenue will likely be several months after you start up. You first need to win projects (hopefully you have some work opportunities lined up before you start on your own), start doing the work, bill for the work and get paid, promptly if possible. This could easily take three to six months or more to reach a significant volume. Even once you are established, keeping track of billings and collecting monies promptly will be critical, no more so than when you are starting.

Can you survive the inevitable slow periods of several months, when your clients may be away or distracted by other more pressing demands than providing input to you?

Hopefully you get paid for all of your work, but sometimes you don’t. You need to account for this possibility.

These are impossible to anticipate because, by definition, they are unknown events that you have never considered. I suppose you could sit down and dream up every possible doomsday scenario that has ever occurred throughout history and try to plan for them. That would probably put you in the 1% crowd.

The most recent example is COVID-19. You might have thought about a public health emergency, but who thought it possible that we would be ordered to stay home for a few weeks (long shot #1) and that work from home order would extend for a year or longer, depending on where you live (long shot #2)? If you were just starting out in early 2020, you would have more likely than not suffered mightily. Well-established firms, with more resources, did. Many firms went out of business due to delayed projects, lack of customers and uncertainty about the future. But the questions to ponder are “can I survive as a start-up,” “how resilient is my firm,” and “what should I be doing to prepare?”

The running of the business should be top of mind every day, with the engineering part second. If you have always been “just an engineer,” this is not natural; but it is what you are signing up for. Plan on many late nights taking care of everything that didn’t get done during the day. You must also honestly evaluate whether you have the wherewithal to run a business and whether you can offer a service that will be able to generate sufficient revenue for the long haul. You will be facing many risks that could end your endeavor in its infancy if you don’t understand and address them. There is no guarantee that you will be successful. But if you are up for the challenge, congratulations! Stay tuned for Part 2 in the June issue of STRUCTURE.■

About the Author

John Dal Pino, SE, is a Principal with Claremont Engineers Inc., Oakland, California and the Chair of the STRUCTURE Editorial Board.