Back in the Black
Excerpt from Raising Father: a Father Daughter Adventure Memoir
Lisa got her MBA in Organizational Development, a Theory that Compares a business to a living organism. Like a plant or a dog or a person, a business has its own life cycle, with a beginning, a middle, and an end. Around 1996, Lisa started to ask questions about my end – and about the end of WATRY Design Group, Inc.
“You’re 55 years old,” she said. “According to the books, you need a succession plan. You’ve been in business 17 years, you own the company 100% yourself, and the way I see it, you have three choices.”
My ‘choices’ were to 1) let WATRY die when I did; 2) sell to a third party for top-dollar; or 3) sell internally and leave a legacy.
She left me then to think through my options, but I didn’t have to think very long. I called a meeting of my “associates” – a great group of 10 people from the firm with whom I met once a month to talk about the ‘business of the business’ (marketing, finance, product delivery, etc.) – and I said, “Okay, everybody stand up.”
Ten bodies stood up.
“Whoever wants to own this firm remain standing. You all can own it or not own it.”
Two gentlemen sat down immediately. They were excellent engineers and architects and well-loved by Lisa and myself, but as they put it, they “weren’t entrepreneurs”.
“We don’t want the risk,” they said by way of apology, adding, “We’ve seen Nick take money from his own house. . . get a 2nd mortgage to make payroll. . . we know he doesn’t take a paycheck when there’s not enough money. We have families. We can’t ride that roller coaster.”
One of them is Hiep Ho. Years later he would be the first to retire from my company and the wealthiest.
Eight bodies remained standing, including one incredulous daughter. She just started at me, like, what are you doing? This is not how the book says to do it!
“Right,” I addressed the intrepid eight. “You go figure it out. Don’t spend my money; spend your money on your own time figuring out how to own this firm.” (I did let them use the firm’s CPA and attorney).
I had a number in mind for the offer, but I wanted to see what they came up with on their own. Together, they made for a strong bench of leaders – one that would either carry on my legacy, or make an attractive part of the package should I end up selling externally.
I stayed standing that day because I was so caught off guard. But then I started to think it could be fun. I needed a case study for school anyway, so I made WATRY Design Group, Inc. my final project and set about writing the leadership transition plan.
For six months, the intrepid eight met after-hours to debate the best approach. The proposal we wrote eventually filled a whole binder; our offer was on the last page. When we presented the transition plan to Nick, he flipped to the last page, took one look at the price, and said, “That’s not enough.” He put the binder in his desk drawer without reading it and waited for us to leave his office. We were crushed.
Over the next year, four of the intrepid eight quit WATRY, saying, “Nick will never leave the company.” Their exit created no bad blood. Once you join the family, you’re in it for life – and ironically, some of those people hired Dad to do work for them in the ensuing years.
The four of us who remained (myself, Michelle, David, and John) spent the next ten years figuring out how to transition the firm from being 100% owned by Nick to being 100% owned by us. Usually that’s accomplished by selling shares, but Nick didn’t want any partners. He never wanted to be partners with anybody: not in his love life, and certainly not in his business.
Enter The Mentor. The Mentor was one of Nick’s earliest clients when Nick first hung out his shingle in 1975. They’d known each other from Nick’s prior work as a subcontractor. Both the Mentor and his parents were a beloved part of the WATRY family, and Nick trusted him implicitly. He asked The Mentor, a successful business owner, to advise the succession planning.
“Here’s the situation,” The Mentor said one day, after gathering all of us in one board room. “Nick could sell the firm to Lisa, Michelle, David, and John and be done with it. The only problem is, these four don’t have that kind of money.”
“Another option is for Nick to gift them the firm – but again, they couldn’t afford the taxes.
“There are zero assets,” The Mentor continued, other than the employees to attract a competitive buyer. Plus, I know some other people who sold their firms, and they didn’t last a year.”
“Not to mention,” I interjected, “that as such a strong figurehead, Nick would be handcuffed to the new leadership for at least three years. Can you imagine Nick abiding by someone else’s rules?” We all laughed lightly, then The Mentor chimed in again.
“I propose that WATRY Design Group, Inc. go out of business. There’s no tax event for shutting down a company. Then Lisa, Michell, David, and John start a new company – WATRY Design, Inc. (no ‘Group’ in the title), and there’s no tax event either.
New company, new name, new tax ID number, same clients,” I said, catching The Mentor’s drift. “The four of us have been the project managers on all of Nick’s contracts. We have the relationships; they know we’re competent. It takes three to five years to complete a contract from conceptual drawings to the finished concrete buildings. . . “
“Our first clients are built in,” mused Michelle, the architect of record in many of the designs. “Okay, let’s do it.”
“Each of us plunked down a mere $1,000, and with $4,000 total we started a new company. That’s how I came to co-own my father’s business. I’m not an architect or an engineer. I can’t draw to save my life. But I grew up accompanying Dad to construction sites (such was his idea of a ‘vacation’ back in the day) and listening to him talk shop. He’d taught me everything I needed to know.
I felt great about The Mentor’s plan because my clients felt great about it, as did my team of successors. The agreement stipulated that the foursome – now called WATRY Design, Inc. – pay me retained earnings for the contracts I passed down to them, which wasn’t a lot but it provided me some income. The rest of my usual salary took the form of a note that WATRY Design, Inc. paid back to me over the next five years. I no longer had to work full time and was free to start teaching part-time at my old alma mater, Cal-Poly, in San Luis Obispo, California.
It’s funny. Lisa was so concerned about it coming off like she’d bought her father’s firm, and that something unethical was going on that she worked extra hard to prove her worth as a partner. She wanted everyone to know that she approached deals and situations company-first (not father-first) every time, and for her co-owners and clients to feel like they could trust her. She did it by doing the one thing I’d been unable to do in 17 years: get and keep the business in the black.
For most of WATRY Design Group, Inc.’s existence, we’d operated at about a 3% margin before taxes (hence why I sometimes didn’t take a paycheck). In 1996, Lisa integrated some financial project-costing data and learned that what made the most money, of all the structures we built, were parking structures.
“It will never work,” I agonized. “You’re throwing away 80% of the clients! Do you even know what you’re doing?”
“I’m writing the business plan now,“ Lisa said. “Trust me, everyone has a parking problem. You’ll see.”
Sure enough, they landed so many big corporate accounts, municipalities, and universities – and did the work so well – that the four of them got the company’s profit margin up to 25%.
December 31, 2000 was the last day I owned WATRY Design Group, Inc. The following day, all of my clients became their clients. Of course, there was a big New Year’s party.
For the following five years, I received a monthly check from them as payment for the net assets. Their last payment meant the end of my residual income. I received a letter in San Luis Obispo, where I was teaching at Cal-Poly and making less than $2,000 /month, stating that the note had been paid in full. I knew that if I wanted to maintain my current lifestyle, I would have to start freelancing, so I reached out to old clients and began accepting work.
Sometime later, I received another letter: this time a ‘cease-and-desist’ order from WATRY Design, Inc. demanding that I stop doing business under the WATRY Design Group name.
Today I freelance as Nick Watry, Licensed Architect, Registered Engineer, and “Integrator.”
When Michelle, David, John, and I took over and created WATRY Design, Inc., we decided to split ownership four ways: an equal 25% each. We discussed having Michelle or I take an extra 1% so that we’d qualify as a majority woman-owned business for tax break purposes. In the end, though, I couldn’t because I wasn’t licensed, and Michelle agreed that neither she nor I wanted to get jobs based on what was between our legs. As we were the last four standing, and each of us brought something unique to the partnership, equal ownership felt like the right and just way to go. To artificially give one person an unequal share would have been to undermine that.
Even with equal ownership, we knew that we needed a president and a secretary at minimum. The question was how to make those distinctions in a manner that felt fair. At the end of one of our breakfast meetings, we (rather sophisticatedly) spun a bottle of Tabasco sauce. It pointed to Michelle, so we wrote her name down under “President.”
Later; when we needed a more formal way of selecting the leader; we took the vote to the associates. My name was included on the board, but I had them erase it since I wasn’t a licensed architect and didn’t feel worthy. That was one of my greatest career misses. Who knows what would’ve happened if I’d given it a go?
Another reason we started a new company instead of buying Nick’s is that with zero projects in the new company’s books, our liability insurance was zero. We paid for runoff insurance only – significantly less that the monthly premium that WATRY Design Group, Inc. had been paying. It took some time to figure everything out, but when you work collaboratively and don’t just go with the first solution tossed on the table, you end up with a better product.
The first five years, the four of us owned the company 100%. We took artificially low salaries in order to pay back Nick’s note. In six years, however, we started selling shares, and by the time I left in 2011, there were 19 shareholders.
Today WATRY Design, Inc. is still a very successful firm. They’re up to 50 employees and have since expanded to Texas. While I’m no longer involved, the other three still are. Dad and I couldn’t be prouder of their success.
And those three aren’t the only ones. Another half-dozen of the employees currently working for WATRY are people that I hired some 30 or 40 years ago. When they first came onboard, it was with the expectation (if not the outright promise) that this would be their first and last job; we hired for life.
Lisa and I once wrote and presented a paper for the Structural Engineers Association of California (SEACO) entitled “How to Hire for Life” and presented it at their annual conference. Our intent was to upset the competitive mindset plaguing the industry even now. You post a job opening and people will leave their current position without a backward glance for ‘something better’ usually money. But then when they get to another firm, they have no interest in sharing their expertise with the person in the cubicle next to them because they see that person as their competitor. We wanted to champion collaboration instead – which we did by inspiring staff to feel invested in their jobs and in each other, helping them see the bigger picture that we’re all working toward together for the long haul.
It’s the reason we also had a lot of “boomerang employees,” or people who came back to us after leaving for another job, they realized the grass wasn’t greener, and that in truth they’d probably never find anything better. We always welcome them back with open arms.
For all of Dad’s really amazing qualities and the wonderful people he’s brought into the WATRY family, just as many have tried to take advantage of the all too trusting Nick Watry, some of them have succeeded. Mostly they were women, interested in marrying Dad for his money. Then there was The Realtor.
We knew that after WATRY Design, Inc. incorporated, we would need to rent an office space, so in 1998 Dad and I preemptively bought what became the Watry Building in downtown Redwood City. The deed was in his name and would remain so, but I was instrumental in getting the owners to sell us their 1927-era Walgreens drugstore and adjoining parking lot. It was owned by a husband and wife who wanted to see the building go to another California family. Our father-daughter proposition was just the ticket!
The purchase went through for a cool $1 million, prompting Nick to mortgage the house one more time for the down payment. It was definitely a building with character. Single story, high ceilings, a retail space in front. I thought it was ugly, but Nick had a vision for what the space could be. He designed $2 million dollars’ worth of updates, including a colorful Art Deco facelift, and Michelle, John, David, and I helped with the renovation. All told, WATRY Design Group, Inc. donated $250,000 worth of architectural and engineering services to Nick’s building.
We decided to add a second story for our offices, and rent half the ground floor to another business. Doing so qualified us for a low-interest Small Business Administration (SBA) loan. The retail space in front became a bakery (notable because we actually won an award for bringing small business back into Redwood City, or as it was known in the late ‘90’s: “Deadwood City”). Beginning January 1, 2001, WATRY Design, Inc. rented the office space of the Watry Building from Nick; it was understood that the building would one day be my inheritance.
For five years we rented at the market rate of $4 per square foot. We paid for pest control and janitorial, and my husband Rich kept the Watry Building’s books. When our lease was up, we wanted to keep renting from Nick at the same market rate. The Realtor had another idea.
The Realtor owned the building next to Nick’s (a theater) and as Dad will say later, he was a real-life villain if ever there was one. They’d become pretty good friends by that time. The Realtor often waltzed into our offices without the courtesy of stopping at the receptionist’s desk, and he even served as Nick’s best man at his wedding to Wife #3. The Realtor knew that Nick was too busy teaching to concern himself much with the Watry Building, so he offered to manage the building for him – at the newly advertised rate of $5 per square foot.
Well, my partners at WATRY Design, Inc. were an architect, an engineer, and a parking planner. We knew what the space was worth, and I wouldn’t convince them to pay The Realtor’s inflated process. It wasn’t fair and The Realtor knew it, but he just said, “This is a boutique space. If you don’t want to pay for it, I know I can get another tenant in here right away, what with all these big dot-com companies flooding into town.”
Nick listened to The Realtor and left us no choice. We packed up and moved across town to a brand new building at $1.95 per square foot. It was a great move for WATRY Design, Inc., and a terrible one for Nick, who never could find another renter. “Don’t worry, Nick,” The Realtor kept saying, “I know the market. The next business will come, and I’ll make all your money back and then some.”
In the meantime, Dad used up all his float (his savings) to cover not getting rent money every month. Finally, The Realtor said.
He said, “Nick, I’ll pay your rent. But every dollar I put into this space will be equity. I’ll keep trying to rent the space, but if I can’t, I’ll cover the note, in exchange for partial ownership.”
Long story short, it was not rented. The Realtor had no incentive to get a new Watry Building tenant- not when he could be making payments toward owning the beautiful Watry Building. By 2009, he owned almost 50% of the building and the parking lot. What happened in 2009? The economy crashed!
Just like that, on January 1, 2009, The Realtor quit making payments. Once again I was caught in the lurch. Unable to fund the building myself, I had to sell it-but I no longer owned the building outright; The Realtor owned a percentage. So I then had to hire attorneys to figure it out for us.
There were a bunch of other complicating factors in my personal life at the time (I’ll go into them later). Suffice it to say, I simply didn’t have the money anymore to take care of any of it. I thought I might have to declare bankruptcy.
One day, Phil, the son of The Mentor (who had advised the WATRY succession plan a decade before) called to say hello. The Mentor had since passed from heart disease, but his family still owned a couple million square feet of R&D buildings on the San Francisco Peninsula. I had taught his kids to ski when they were little.
I filled Phil in on everything that had happened. I’ve recently lost my wife and my wealth. I have $4,500 in the bank. But I have the Lord with me, and my health, and I’m otherwise fine.” Phil called back later and told me to come see him in San Mateo, California.
I did, and he handed me a heavy backpack. “Here’s 250 gold Krugerrand [one ounce gold coins then worth approximately $300,000]. “Take these, resolve your building ownership, and all I want later is for you to return the Krugerrands.”
“What?” I asked, completely dumbfounded, and started crying.
“My mom and my sisters and I had a family meeting, and we asked ‘What would The Mentor do.” Phil teared up at the memory of his father, and I teared up over their incredible generosity. I could almost hear The Mentor telling me, as he often had, “The world is in gold, Nick.” The Mentor was the one who’d inspired me to buy gold coins and give them to staff at Christmas.
I accepted Phil’s gift humbly, and cashed the coins a few at a time to pay for my various expenses. The Lawyers cost two hundred thousand dollars. I owed $50,000 in back taxes that The Realtor had failed to pay without telling me. (The notices were going to his P.O. Box; that’s the only reason I was forgiven an additional $25,000 in penalties.) Ultimately, I won the case and got The Realtor off my back, but I still had to sell the Watry Building, which I did for $4.25 million, a net profit if about a million bucks.
From that million, I owed Phil his coins back, and half a million went to my estranged third wife. Two years later the Watry Building and the lot sold for $7.5 million. They put another building up in the parking lot and today the Watry Building alone is worth about $10 million. That was supposed to have been Lisa’s inheritance.
I did not go back and do the ‘what-ifs.’ I’m blessed to have come out of this mess unscathed, my heart and soul intact. The theme for me is these lifelong relationships. I don’t know where I’d be without The Mentor and his family. I would do it for them and they would do it for me.
Many years later, Lisa would announce her decision to leave WATRY Design, Inc. Before everything was finalized, she called me to ask one more time: “Are you sure you don’t want me to stay, Dad? For your Legacy?”
We’d never had a discussion about legacy before, but I spoke the first words that came to mind. “I make my legacy every day, Lisa. It’s not about you staying at that firm; it’s about the lives we’ve touched. I’ve designed 3,500 structures in my lifetime. Half of them have never been built. My bliss is drawing them and making them work. I’m going to keep doing that. You need to follow your bliss.”
I care about where I’ve been, but I care more about where I’m going. Sometimes I can’t sleep in anticipation of tomorrow