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
www.kitsonengineering.com

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
www.kitsonengineering.com

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

www.sba.gov

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
www.kitsonengineering.com

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

Mr. Barlow.  I too am in process of submitting my application package and will hopefully be sitting in the April PE exam. I can't wait until I get that piece of paper and can start out on my own.

I think you don't see a lot of Mech Eng's out on their own because of a tight market and the fact that many mechinical designers (non-degreed, non-PE) enjoy the industry exempt status.  A free-lance mechanical PE can't compete with cheap labor of a non-degreed designer.

--Scott

For some pleasure reading, the Round Table recommends FAQ731-376

Swertel,
That is a good point about the industry exemption.

I am a Mechanical Engineer and have toyed with the idea of going it alone, or at least trying to do some work on the side.  However, I am not in mechanical design.  I work in the Oil & Gas industry.  I don't know if that would make it easier or harder to start my own business.

In the sixties Mr. Robinson gave Benjamin one word of advice - "Plastics". In the oughts, I believe the best advice is "specialize". Find a niche that companies prefer to contract out rather than hire to fill.

HAZOP at www.curryhydrocarbons.ca

NEVER over-extend yourself financially based on "promises" of future work.

Well, I'm on my own as a mechanical engineer (though not PE), after I got laid off last year. I figured it would be easier to get a few small contracts than a regular job that wouldn't require relocating. That's been true, but the salary hit has been considerable, too. Luckily I'm not the sole supporter of the family. Also I'm enjoying the extra flexibility before my kids learn to drive. On the plus side, I know at least one other person that has been doing pretty much the same thing for ten years, and supports the family on it.

Like owg says, mine is a "niche" that most companies don't need full time, all year. I help them out when they need it and don't bother them when they don't. The tricky part is when they don't know they need me -- then I'm trying to sell something invisible. (Check out the book by that name: Selling the Invisible, by Harry Beckwith.) On the other hand, once the client has identified the need that I can fill, the rest is easy. It's a matter of finding the fit, I guess.

The down side of running your own shop? You have to be your own IT department, your own bookkeeper, your own marketing department... the list goes on, at least until you can afford to pay someone to do that stuff. Maybe someday, after I pay myself a paycheck!

Regards and good luck,
Cathy

Biber Thermal Design
www.biberthermal.com

Interesting reading re: starting your own engineering business.

I've been in business 5 years now and one key to my success has been teaming with other independents.  By combining my mechanical/medical device skills with an electrical engineer, a Pro/E wiz, and a couple others, all of us can go into jobs and win them more easily.  Our skill set is bigger and more comprehensive than just me.

Do others do the same?  Do others have work right now that they can't handle due to limits on their time/skill set?  How do you handle that?


Regards,
Mike S.
www.virtecenterprises.com

Watermelon,

That was by far the best description of being in business I've ever heard!  I've just celebrated 5 years.  Don't have a boat, but I ski 50 days a year!

Frank Lucca
www.terradinamica.com

I am new to this website, but have found it to be very fascinating.  I discovered this website when I was searching the web for information regarding the startup of my own company.  That is how I arrived at this website.  I look forward to many wonderful conversations with fellow engineers.

Now, back to the subject on starting your own engineering consulting firm.  I too, am planning to start my own firm.  I am a Mechanical Engineer with a P.E. license in NY.  I have always wanted to start my own company.   I have already established a D.B.A. and am currently working on my business plan.

One draw back that I have is determining on how to bid on project for state work and any other public project.  I am worry that the state will think I am too small.  I plan on growing my business in the future, but at the present date, I am a one man show.

If You have any ideas, I would love to hear them.

Thanks

I found this years ago.  It really does have some good points.

http://www.sdotson.com/docs/10 tips for consultants.pdf

Sean Dotson, PE
Inventor Tutorials & More
www.sdotson.com

There is a fairly good book on the subject, although it was published in 1985 so it will not cover the computer/internet aspects properly.  It is Standard Handbook of Consulting Engineering Practice, by Hicks & Mueller, published by McGraw Hill.  

I noticed another book recently which I believe is a new publication, The Engineer Entrepenuer, on the ASME Website (www.asme.org) under ASME Press.  The write up appears to be on the mark for what you want, but I have not personally read this book.

RDK mentioned a US Small Business development site, so I though I'd point out that there's a canadian counterpart

http://strategis.ic.gc.ca/engdoc/main.html

for those of use north of the 49th.

STF

Well as an old hand at this consulting stuff (I started September 1, 2003, almost a month ago) I have to chime in.  In Oil & Gas (and probably many other industries) you can't work without a Master Service Agreement with each company.  They take a LONG time to work out and the admin folks who administer them seem to love making big engineers jump through little-bitty hoops.

One thing I had to share here, while you're working on the Master Service Agreement, any work you do for the company is NOT "Goodwill" it is "Free Services that reduce the company's urgency to get you on board".  Both companies I now have Master Service Agreements with were really hot to have me working for them, so I "helped out" with some of their most urgent work while the admin folks were not returning my calls.  

Now that the Master Service Agreements are signed I'm waiting for actual paying assignments and get calls from both companies every day that start out "my manager is out this week, but when he gets back we'll formalize that retainer issue, but could you tell me ... ".  Since I'm such a pushover on this stuff (and I'm really not doing anything else right now) I go ahead and answer their questions.  I've considered relying on Caller ID to screen the offenders, but then I'll probably miss the call for the $100k project that remains on the horizon.

Now I'm wondering about the wisdom of limiting my marketing to 3-4 companies so that I don't make committments that I just can't keep.  It's probably a sound strategy once paying work starts comming in, but how do you tell which 3-4 companies will actually write checks?

David Simpson, PE
MuleShoe Engineering
www.muleshoe-eng.com

I’d politely point out that the only thing that you have to sell is your time and expertise. If they are asking you to provide your time and expertise then tell them that you are considering that they have a contract with you.

If the master services agreement requires that the contract be in writing then tell them that you will start working on the problem and will send the answer as soon as you get the written authorization to proceed. Ask for a written statement of the problem with an acknowledgement that you will be receiving formal approval (and will be paid) before you will be required to submit the responses.

That way you are been seen as being helpful while guarding yourself from being exploited.

I once started working on a project 1,200 kms from home based on verbal assurances that a formal contract would be forthcoming. When the arrears got to over $150,000 I was told by an administrator no contract no pay. I then phoned my project contact and informed him no contract, no pay, no work, court case. I left the message on his answering machine. I got a call back by a panic stricken individual and told him that I was going home (remember 1,200 kms away) and would return when the arrears were paid and I had a formal contract in my hands.

This project had a requirement in my client’s contract with the end user that there be full time on site supervision. I also told them that I would be issuing a letter to the end client stating that I was no longer engaged in the project and from this day on would not be responsible. I knew that the end user would then shut down the project.

I got paid by electronic funds transfer the next day. I never did get the formal contract. Other than the administrative types causing a lot of problems, this was a good client to work with.

I will not work for this client again without a formal agreement in place.

The problem may be that the administrative types have put so many roadblocks in the way of the technical types that the work cannot get done. Just do not let this be your problem. Make it an internal company problem and force them to sort it out before you give any significant free services.

If they are taking advantage of you its because you are letting them take advantage of you.

Rick Kitson MBA P.Eng

Construction Project Management
From conception to completion
www.kitsonengineering.com

Watermelon,
You don't HAVE to pay taxes on your income before you receive it.  You are talking about the accrual method.  The IRS allows you to use the cash method for paying taxes and you can use the accrual method for business planning.  Yes, its okay to keep two sets of books as long as it isn't fraudulent.

I learned this from the March 2003 ASCE seminar "Financial Management for Civil Engineers."

D. Bruce Nothdurft, MSCE, PE, PG, M.ASCE, etc, etc,...
Principal Engineer/Geologist
Atlantic Geoscience & Engineering
Charlotte, NC

When you pay taxes and when you receive the money can differ depending on the tax involved.

Here in Canada we have a tax called the Goods and Services tax or GST. It acts something like a value added tax that some European countries use. Its 7% on all services provided.

You have a reporting period, monthly, quarterly or annually. You have to report all tax money received or invoiced in the previous period, without regard if you have received it or not. As long as you have invoiced for it you have to remit it to the government.

You may also have to pay for disbursements and other out of pocket expenses before you are paid for them. Often this is just some travel or other low expenses, but in the case of the slow paying client that I refereed to above the arrears of $150k included out of pocket of $30k for relocation and setup,plus salary(an assistant's, not mine) plus the 7% GST. (I also had over $15k in capital purchases that I had to make just for that job.)

Bottom line is make sure that you have enough working capital to span the time between money going out and money coming in. Then double that amount just to be sure.

Rick Kitson MBA P.Eng

Construction Project Management
From conception to completion
www.kitsonengineering.com

November 15 will be our two year anniversary.  We've made just about every mistake you can make, but we learned something from every one of them.  We're booked out the ying yang, and cash is flowing (finally).  Two years ago it was me in the office and three guys in the field.  We just hired our twenty fifth employee two weeks ago, and now we're working on booking next year.  We found a great niche.  

But my wife would shoot me in the back of the head in my sleep before she'd ever let me do this again.  More than once I came home without a paycheck.  More than once the mortgage was late.  More than once I worked seven days a week.  More than once I went five straight days without seeing my kids awake.  More than once I maxed out a personal credit card.

But it's finally paying off.  I'd still do it again, but I know more now.  We could reach profitability quicker with what we learned the hard way.

Just like to emphasise the fact that it doesnt matter how good your mousetrap - you still have to sell it.

When I first set up I did it on the basis of a rare and in-demand skill set that got me into a long term arrangement with a big european bank.

Since then my major issue, and indeed the big issue I see with other consultants I know, is getting through the door to pitch my services in the first place, and finding/identifying projects.   

Waiting for clients to come to you is not good enough.  You may not like all the unctuous salesmen, but there is a reason they exist.  

Dont treat sales and marketing as an optional extra - it is essential to your business.