Starting a new firm? 15

First get some professional legal advice.
Second get some professional accounting and tax advice.
Third get some professional insurance advise.
Finally get any other professional advice that you can think of.

I’m not kidding. There arm many pitfalls in these areas that can come back several years later and cause problems. You are an engineer. Do your profession and let the others do theirs.

What sort of consulting are you considering? If its something that a few clients can support then go for it. That would be the type of work where you spend a lot of time on one project. I’m a construction type and I spend sometimes over a year working for one client.

If you are a specialist type who does a little bit on a lot of separate projects than you need either many clients or clients with many projects on the go at one time. Then you might want to line up a few more clients before you start out.

How dependant is your area of practice on the economic cycle? As a construction type my work load is governed by the economy in general but not by the swings of a separate industry. If one sector, say pulp and paper is in a downswing, my skills are transferable to the commercial or instructional sectors. Again if you are looking at a narrow specialty in a single industry watch out for that industry’s cycles. You should get started on an upswing and then be established and able to ride out the downswing because sure as a sine wave its coming.

What is your current employment status? Will you be competing with your current employer? If so watch out for charges of client stealing if the ones you start out with leave your current firm and come to you. Even if nothing sticks the time and energy spent defending yourself will detract from the work of starting a business. The impact on your reputation may become insurmountable. It might also hinder your return to salaried employment.

If you will be complimentary to your current employer then consider getting them as a client. My last employer is now one of my biggest and best clients.

What is your personal background and temperament? I am not referring to your professional background but for example did you have a paper route as a kid? Its one of the biggest indicators of business success, having early exposure to entrepreneurship. Did your parents operate a business or were they salaried employees? Are you independent and self assured? If you need someone to hold your hand and reaffirm every decision then your own business may not be for you.

Can you live with a lot of uncertainty in your life. Uncertainty of how much work you will be getting, uncertainty of how much money you will be getting, uncertainty of where the next job will be etc??? As a construction type I have spent the majority of my self employed time living away from home in temporary work apartments or construction camps. When I am between jobs, the next assignment may be anywhere and come up very quickly. I’ve been called on Thursday and been working several hours drive away form home on Monday.

How financially secure are you. The costs of starting a business will be significant. Simply stocking a home office with the bare necessities of pens, paper, stationary, a computer, printers, any specialty engineering equipment that you need will run several thousand dollars. The reality is that even if you work today, you cannot bill until the end of the month and every client will take 30 days or more to pay. You need 3-4 months working capital just to survive the lag between work and expenses and cashing the cheque.

You also need to be able to personally survive. That means perhaps no income for 6 months or so with a lot of expenses. My first year I spent $40,000 to earn $10,000 in gross income plus had my own living expenses on top of that. A good percentage of the start up costs were capital costs but I still had to come up with either the money or the credit rating to make the essential purchases.

How supportive of all this is your family? This can have a big effect on them and they have to be on board with this.

In summary starting a business is not easy or for everyone. I believe that the days of starting a successful business with $50 and an idea (like my grandfather did with a bakery) are gone in most areas. If you have the personality and resources then the rewards are well worth it.
Rick Kitson MBA P.Eng

Construction Project Management
From conception to completion

RDK brings out many good points. I just celebrated my 10th year in business and it has been some ride, as in roller coaster.

Try to get a handle on how you see you/your firm progressing. Being a one man show is fine and may be preferable: low overhead, no employee hassles and minimal worries about feeding the 'monster' you are creating. At times, your technical training will take second place to the business school of hard knocks. Just rememeber, there will be only one 'you' and, as you are not an attorney, will probably not bill more than 40 to 50 hours a week. (Doing this week in and week out will be your greatest, ongoing challenge). Keep in mind the reason most consulting firms bill based on a 'multiplier', typically in the range of 2x's the employees hourly rate. There are (many) times when employees need to be carried between jobs, hence the need for the multiplier. Don't sell your services short. Legitimate clients do not mind spending the money if the work is justified.

When a client tells you "I can get it done for x dollars less by ABC engineering", fight the urge to drop your price, and wish him and his engineer luck. Also, contracts are as important as your work product (along with insurance, taxes, overhead, professional fees, subscriptions, vehicle expenses, legal fees, accountants, continuing education seminars, office expenses, utilities, phones, faxes, computers, printers, scanners, plotters, etc., etc., and oh yeah, your occasional payroll check) Do not work without a contract!!! Gone are the days of hand shake deals (although I am guilty of those occasioanlly). Not that a contract will guarantee payment as you may unfortunately find out, but they are typically required by your professional liability carrier. Yes, this is not inexpensive and yes, you need this insurance. A client's lawyer will not blink an eye before shaking your personal asset tree. When I started out, and no carrier would consider me, I turned to a group program through ASCE. Granted, it was not an ideal policy, but it was something. Once you are practicing for a few years, other carriers will seek you out and try to write your policy.

Uncertainty, as RDK pointed out, can be a real gut wrencher for those not accustomed to business. Monthly bills are guaranteed, your monthly cash flow is not. Get (or keep) your personal finances in order and under control. Don't assume you will make enough out of the box to carry that mortgage, car payment, household bills, etc.

I could go on and on but in a nut shell: PREPARE. The enjoyment you get out of your business will not be purely financial. Do your homework, be realistic, underestimate income/overestimate expenses, check out the competition, talk to your peers (although not your current employer until you are ready to jump ship. When he/she finds out, you may end up walking the plank on their terms, at their schedule).

Then finally, after all the numbers and statistics say you should stay put, get a pension and not go on your own, say
Screw It and go for it. At the VERY least, you can say you tried.

Good Luck!!

Running your own business is God's way of punishing a man for having been a lousy employee.

I agree with RDK. I set up my own consultancy 2 years ago and got into a terrible mess with tax. Accountants dont design their own offices do they?

I have a different take on Watermelons, it is in fact God's way of telling you that your too good to work for anyone else ;-)

Hi AJUK:

There was a fair bit of laughter in my comment, a lot of truth in yours.

I've been on my own for 12 years. There are moments when I yearn to be an employee in a large company. But mostly I am quite happy and proud to be independent.

I understand those feelings. I dont think I could ever go back now, despite the hassles.

I really have to agree with Watermelon and AJUK. I have been in my own for almost ten years and there is nothing like the freedom that comes with being your own boss.

While sometimes I would like the security of having someone else being responsible for finding clients and doing the administrative tasks, all it takes is getting one month’s cheque for what used to take me 3 or 4 months to earn as a salaried employee and all the risk and hassles are suddenly worth it.

A lot of my work is my plugging into an established organization to do some role that they either don’t have the expertise or need additional capacity. I spent last summer working for a large firm in an embedded capacity. They had strict and ridiculous controls on their ability to purchase and configure computer systems and software. It took between two days and two weeks for the company geeks to respond and tell you that you could not do something that was necessary. To actually get them to do anything other than the basic essential support work was almost impossible. For this “service” the internal charges were twice the outside commercial rates. What we ended up doing was using my laptop and eventually a desktop computer, outside the established network just so we could get the job done. At least I knew that this assignment would end and I could get out of this area. The others, who were salaried employees, were stuck in this environment for their working lives.

When support organizations get so far away from the bottom line that they cannot see how they are affecting the company performance, it becomes fodder for a Dilbert cartoon.

It just takes a couple of months in that sort of environment to be thankful for the freedom being on my own. All the risks and hassles are worth it.

One real consideration in starting out on your own is your age. In engineering a few gray hairs are required for credibility. A new graduate may have the technical skills but lack the experience needed to temper the application of these skills. I started out after 16 years experience. I felt that this was about right to have enough time to establish a firm and if not successful have enough time to return to the salaried workforce and re-establish myself if the firm failed. It was also enough time to have my personal finances in order so that I could afford the risk. It was also the third time I was “downsized”

If you are in say your late forties, you might not have enough time to establish yourself and earn back the startup costs. If the firm fails you might not be able to recover financially to have an enjoyable retirement. Remember those years are typically high earning and high expense years. (kids in university etc.)

This timetable is highly dependant on your field (computer might be an earlier start up timeframe), your education, (a PhD might be enough of a specialty to start out immediately post grad.) your personal finances and lifestyle.

Bottom line is if you are thinking about it then go for it. If you have a window of opportunity to start out on your own and don’t take the risk then you will look back and think why didn’t I do it. In the end all you are risking is time and money. (might be all your time and all your money but there are no guarantees in life .)

Good luck
Rick Kitson MBA P.Eng

Construction Project Management
From conception to completion

Watermelon, just curious, when is it during your work that you wish that you worked for a large comapny?

Dear DanDel:

When my next-door neighbor goes for 5 weeks of UNINTERRUPTED holidays.

When he barbecues steak in his back yard and tells me all about the lousy retirement package his company will be offering him at age 55.

When he stays at home because he's sick and still gets paid.

When he pretends to be sick and stays at home.

When I think about the enormous risks I take just to make a buck.

When I get a call first thing in the morning from a difficult contractor, and it's SUNDAY.

When I give a client top-notch, immediate service because he has a real panic, and then don't get paid for FOUR MONTHS.

When I head home from the office at one o'clock IN THE MORNING.

When a client complains bitterly about my charges which are too low in the first place.

When I have to phone and beg to be paid.

When he finally pays, but doesn't pay the interest.

When I have to pay taxes BEFORE I have been paid.

When I have to borrow money just to keep the ship afloat.

When I pay the rent for the office space I occupy.

When I pay my dentist out of my pocket 100%.

But this is all negative stuff and I don't want to leave on a negative note.

Here are the times when I'm happy to be independent:

When my next-door neighbor tells me about the some of the things his boss wants him to do.

When he starts talking about office politics.

When he expresses concerns about the pending corporate re-structuring and down-sizing.

When I know he doesn't get any real satisfaction from his job.

When I know all he is doing is gold-bricking.

When he talks about his plans if he should happen to be terminated.

When a client thanks me for the work I did. (It doesn't happen often, but it does happen.)

When I walk into my office and know that it is all mine and it is bigger than most senior executives in many large corporations.

When I leave the office in mid-afternoon and have a snooze on my boat.

When I jump on the internet highway and don't have to worry about my boss walking through the door.

When I know I do not have an employee number.

When you phone my company and often it will be me who answers.

When I know the next level of management in this company is God Almighty.

Yep! (except I dont have a boat)

Thanks, watermelon for the reminder of why I work for myself, I think I'll ask the boss for the day off and go and pickup my speed boat from the repairman and go for a quick spin up the river.


SC

Thanks for satisfying my curiosity, Watermelon!

Here is a web site you might want to check out


Its the US government's Small Business Administration's site. Legal and tax info is US based but the other information looks like it would be valid in other countries as well. Rick Kitson MBA P.Eng

Construction Project Management
From conception to completion

Thanks for all the info. I haven't responded before becuase I have been a little busy. I just passed the PE and am now licensed.

A little info....I currently have a stable job and can continue to work there while I start a small, home based firm. There would not be a conflict of interest. I do one thing for my pay check and want to do another for the home business.

Any new thoughts?

Hi andycivil,

I too am gainfully employed but thinking of crossing over to the dark side! I am not normally a fan of 'how to' books but I recently bought a book that you might find useful.

"Be a successful consultant: the insider guide to setting up and running a consultancy practice" by Susan Nash ISBN 185703807X

The book asks all the questions that you should have an answer to BEFORE you decide to talk to accountants/tax people etc. Structured questions and examples help you to decide what it is you actually want to do and what kind of strengths/weaknesses/doubts you have that you need to address in order to make this feasible.

Good luck, HM.



No more things should be presumed to exist than are absolutely necessary - William of Occam

Thanks HamishMcTavish. I will check it out. Have you seen anything specific for Engineering firms?

Nothing specific so far I'm afraid, having said that a lot of business start up issues will be generic and you could get the rest of the info from fora (forums?)like this one.

Regards, HM

No more things should be presumed to exist than are absolutely necessary - William of Occam

Not looking to change the subject, but after reading this thread I have a question.

I noticed that no one who posted here is a mechanical. Is everyone who is currently doing their own thing a civil/enviro.

I'm a mechanical and have longed for the day when I can go out on my own. I am just working on some references issues to be able to sit for the PE, but once that happens the sky is the limit.

Is it unusual for a mechanical to run his own shop?

Hi JamesBarlow,

I am in the process of application to be Chartered by the IMechE but am working in the nuclear industry. There are plenty of Chartered mechanicals working in consultancy roles in the UK and I would presume that would apply in the U.S. aswell... maybe some of the others could shed some light!

Regards, HM.

No more things should be presumed to exist than are absolutely necessary - William of Occam