Obstinate partner

August 2008 » Columns
What can a firm do if not all of the partners are willing to sign for a line of credit? David Wahby offers some options.
David M. Wahby

Dear Dave,

We have maintained a $100,000 line of credit (LOC) since we started our firm. A few years ago, I recommended that we raise our LOC to $250,000 or $300,000, an amount that better reflected our size. At that time, our annual billings were $2 million to $2.5 million. Even though we have never had to use it, I feel better knowing we have it in place for an unexpected emergency.
One of my two other partners did not want to increase the LOC. The bank offered to split the personal guarantee into three, equal $100,000 portions for each partner, which basically did not increase our individual personal guarantee amount. After months of painful discussions, we renewed the LOC at the $100,000 limit.

Last November, our LOC was once again up for renewal and the topic of raising the LOC limit came up. The reluctant partner proposed that, as a pre-condition to him signing the new, increased LOC, we all sign an amended shareholder agreement with several stipulations that clearly showed a lack of trust in the other partners. Needless to say, we did not agree to sign this amended agreement, and after months of putting our banker off (to the point where it is embarrassing), the same partner has now stated that he is not going to sign any LOC. We’re stuck.

I feel that not maintaining a standby LOC is not in the best interest of the firm. Our options, as I see them, are to have two of the three partners sign the LOC and make adjustments to the role/authority/participation in the profit sharing of the non-signing partner, or remove the partner not willing to sign the LOC.
G.H., Ore.

Dear G.H.,

I agree with you. Operating a firm without adequate provisions for back-up capital is like a cruise ship leaving port without lifeboats. Assuming your bank would even go along with two out of three partners signing personal guarantees, it is not a good idea to allow the third partner to remain in ownership without equal participation in the risk. I suggest the two willing partners offer to buy out the interest of the third and extend to the ex-partner a pay and benefit package reflective of the value he brings to the practice. If the partner refuses, then the two of you should offer to sell the firm to
the third.

Situations such as this are exactly why key documents such as a thoughtfully prepared set of corporate bylaws and buysell agreements between owners are so important. The path to impasse resolution (legally at least) should be clearly spelled out in your governing documents.

What Now?

Dear Dave,

I would appreciate your feedback regarding a look into the future relating to a typical civil engineering and land surveying company of 40 to 50 employees that focuses on residential and some non-residential work for the private sector. It seems that many firms like ours are moving toward a "one-stop shopping" approach by merging with other companies so a variety of services that include not only engineering and surveying but also land planning, environmental, architecture, etc. are available. Other firms accomplish something similar by routinely partnering with companies that offer additional services. As the economy improves, will civil engineering firms such as ours look similar in the future, or will the merger/acquisition model become the norm?
E.T., Ind.

Dear E.T.,

In today’s economy, if you had to pick the worst possible market in which to work (residential site), you’re smack dab in the middle of it! If it’s any consolation, some of the strong markets are showing signs of weakening as well (commercial development, transportation, etc.). Probably the strongest
firms I see today are environmental—or A/Es working with oil, mining, and other commodity-based industries.

Should your firm decide it cannot hunker down and wait for a market reversal of fortunes to occur (who knows when this will be?), your basic options are to try to broaden the list of services and capabilities to your current client base or, via a compelling argument to the contrary, take clients away from
competing firms.

Another possibility is to look to expand geographically, finding clients in a larger territory who prefer your traditional services. Expanding geographically is not that easy because the farther you get from your home base the more unique you somehow have to be to offset the distance disadvantage in
potential clients’ eyes.

Finding partners with complementary services to team with, which can make you qualified for other types of projects in the current territory, is a valid strategy as well.

An economic downturn, if deep enough and long enough, will almost certainly reshape the number of firms and the way they operate. Weak firms will fail and stronger firms that evolve successfully will continue on. There are always a lot of mergers and acquisitions in this profession—especially in periods of either sharp slowdowns or rapid growth. I wish you only the best.

Get answers to your questions about design firm and project management,
finances, marketing, and related topics by sending them to Q&A c/o:
CE News, One IBM Plaza, 330 N. Wabash, Suite 3201, Chicago, IL
60611, or faxing them to CE News at 312-628-5878. Include your
name and telephone number in all correspondence. Your name will not
be used in connection with published questions. David Wahby is
president of Wahby & Associates (www.wahby.com), a management
consulting firm serving A/E clients. He can be reached at 616-977-
9756 or via e-mail at wahby@wahby.com.

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