In the 1980s, changes in the construction industry and overexpansion threatened Kansas City-based U.S. Engineering Company with financial collapse. Henry ŌSkipĶ Nottberg, fourth-generation owner of the company started by his German émigré great grandfather, brought the company back from the brink after years of negotiations and, amazingly, began rebuilding. Then, two years ago, just when the repositioned company was moving forward again, Nottberg was diagnosed with cancer.
Nottberg, then president and CEO, was only in his 40s and had a teenage son and daughter. He had already started planning for his eventual retirement, but now, battling an aggressive melanoma and with no successor in sight, he had to ask himself urgent questions: Did he want to maintain the Nottberg tradition and keep the company in the family? How could he give his children a chance to run the company, if they so desired, when they were old enough? How could matters be arranged so they would have that chance?
U.S. Engineering is an $80-million enterprise which builds piping for systems of all sortsŅplumbing, heating, and manufacturingŅall over the country. It employs 650 people with major branches in the Midwest and Colorado. Nottberg was something of anomaly when he joined the company in 1971 after graduating from Washington and Lee University in Virginia. He was a political science major in a company dominated by engineers. Nottberg rose steadily, however, succeeding his father, edging out an aging aunt who had been secretary-treasurer, and eventually buying out a cousin, Gus, who had been his partner.
Paul Karofsky, executive director of the Northeastern University Center for Family Business, first met Skip Nottberg while leading a workshop for the Young PresidentsÕ Organization in Kansas City. Karofsky spoke with Nottberg at length last November about his illness, his prognosis, and the unique Ōbridge planĶ he put in place for his children. Excerpts from their conversation follow. ŅThe Editors.
Paul Karofsky: Skip, you had really started thinking about succession before you were diagnosed with cancer. When you got the news, how did it affect your plans?
Skip Nottberg: I made up my mind that I wanted the kids to have an opportunity to run the business, even if I died of cancer in the next six months. This is something that we really started on seriously last year. I had the original cancer tumor taken out in 1995, and then I had nothing for a year. But it came back last December and had metastasized to my liver and lung. I didnÕt know how much time I had to live, so I had to rethink what I really wanted to do.
Karofsky: Before we get to the details, take me back a bit. You had already survived several crises in the company. Tell me a little about the history.
Nottberg: We got into an expansion mode during the 1970s and started to diversify into different specialty types of piping. One area was the automobile market. At the time, the automobile industry, especially General Motors, was starting to build new plants, and we got involved in paint-circulation systems. We also had a couple of clients who wanted us to go into other markets so we expanded fast.
And during the latter part of the Õ70s and early Õ80s, the way contracts were written and business was done changed a lot. Large plants were being built and construction management firms like Morrison Knudsen, Bechtel, and Brown & Root evolved and became buffers between the owners [of office buildings and factories] and the contractors. There was a change in the atmosphere because the owners had this buffer and you got into a lot of litigation.
Karofsky: Were you the driving, guiding force behind the company at that point in time, or were you part of a team?
Nottberg: I was running the company from an overall management standpoint. My cousin Gus was in Colorado running the Western operation, and I was running what we call the Eastern operation. We talked, but each of us did his own thing. A lot of times we were almost like two separate companies. Gus was expanding, and I was experimenting with growing our base because I felt the Kansas City economy didnÕt have the growth potential we needed.
I started doing business with General Motors. We did the paint systems in their Oklahoma plant. Then they built a new plant in Shreveport and we made connections with Morris and Knudsen that led us to a big job in North Carolina for R.J. Reynolds. We opened an office in Ohio doing mostly paint systems for General Motors. We also did a number of projects for the MGM Hotel people in Reno and Las Vegas that led us on to some further expansion. Frankly we got to the point in the Õ80s where we expanded too much.
Karofsky: Were you responsible for engineering the cutbacks to manage that overexpansion?
Nottberg: What happened changed the whole company. We had a number of large construction contracts all over the United States that looked like they were going to go to court or into claims. Three were out West where my cousin had obtained the workŅthe new airport in Las Vegas, a big army hospital at Fort Carson in Colorado, and the space command center in Colorado Springs. We [were required to make] a tremendous number of changes on work we had done for Morrison Knudsen and R.J. Reynolds. And even though it looked like the Morrison Knudsen job was going to be resolved, it was really stretching our cash flow.
So in Õ84 and Õ85, we had a couple of years of losses. We had probably three or four times our net worth out in change orders and claims, things we couldnÕt collect or were going to take a long time to collect.
Karofsky: How did you tighten that up?
Nottberg: Our bank and bonding company forced the issue by asking Gus and me to sign personal guarantees. Gus wouldnÕt do it. He was 51 and I was 36. I told him we had three choices: I could buy him out, he could buy me out, or we could liquidate the company. When you have a construction operation, you donÕt get anything in a liquidation. So I rolled the dice and bought him out at book value minus the claims. We also agreed that as we collected the claims, he would get 50 percent. We were able to buy him out at a pretty reasonable price on a long-term note.
Karofsky: Did that leave you and your father as the sole stockholders?
Nottberg: I became the sole stockholder. Gus and I had bought out my fatherÕs stock in 1981. We were 50-50 owners. I knew we were going to have to do a lot of things differently. First, to keep the company going I had to personally guarantee everything for a period of time. Second, I wrote my first business plan.
Karofsky: What year was that?
Nottberg: In 1985, and I didnÕt know whether we were going to survive. We had in the range of 450 employees and went from doing as much a $100 million in sales a couple of years before to the $70 to $80 million range and dropping. We closed offices and prioritized the settling of claims.
We had borrowed up to the hilt. I had been on the board of the bank we did business with since I was about 28 years old and the family who owned the bankŅthe KempersŅstood by me. My line at that time was $3 million and I had to go to $3.5 or $3.7 million. Crosby Kemper went along with it for six months.
We documented what we were owed and started negotiating. We settled all of our claims in about a two-year period without going to court, and we settled at what we thought we could get or better. But in the middle of it all, my dad died and my wife asked for a separation and divorce.
Karofsky: How did you handle all that?
Nottberg: It was very difficult. That was about eight-and-a-half years ago. I had been married for almost 20 years and we had two great kids, 12 and 10. But at least I had saved the company and we started growing again. We started making money. But we also had to pay off all the other stockholdersŅmy cousin, a long-term note of my fatherÕs, my cousinÕs mother, and my wife. It was a pretty challenging time.
Karofsky: What did you do to build the company back up?
Nottberg: I just really spent time trying to choose the right people for the right positions. I added people to our outside advisory board. We got more involved in marketing and hired two vice presidents of marketingŅone out West and one here; they both came from the same outside company and had some industrial background. We got more into industrial work and now have about a 50-50 mix between commercial and industrial. As I developed new business plans, I involved more of our people in the process. I formed a management committee of five key people that meets monthly about short- and long-term things.
Karofsky: So you had done quite a bit to strengthen management before your illness was diagnosed?
Nottberg: About four years agoŅtwo years before the diagnosisŅI started thinking about where the company was going to go if there was no other Nottberg to lead it. I had just gone through five to six years of repositioning the company and paying off the stockholders and could start thinking about the future. I remarried about a year ago and I felt like I didnÕt know if my children would go into the business.
Our bonding company had been putting a lot of pressure on us and asking what my succession plans were. I talked to the outside people on the advisory committee a lot, but I felt I needed more help and wanted the best person available. So I hired Hugh Rice, an expert in the construction industry, who has done about 200 of these business succession plans. We spent a lot of time together and talked about everything from ESOPs to all kinds of other stock plans. We talked about what I wanted to do, what my goals were, what I wanted to see the company do.
First, I identified the guy I felt could be our next president. He was our manager in Colorado, Dwight Brinkman, whoÕs about three years younger than I am and has been in every phase of the business. HeÕs an engineer, a very good thinker. I had put him in charge of the Colorado office about seven years ago and he did a fantastic job. I made him president in August.
Before he came on with us, we set up a stock plan. I gave him some stock options, which I knew would dilute my interest. We said he could buy 1 percent per year of company stock, not my stock. He would have to exercise half an option to keep the other half to buy later on. I think heÕs about half way through that now.
I gave him the stock option because I wanted to see what having a nonfamily member as a stockholder would feel like. Well, itÕs been an absolutely positive feeling. That made me decide to look at how we could open up stock ownership to a little larger group. I wasnÕt very impressed with ESOPs for our business because only about 10 to 15 people make the major decisions in the company, and I didnÕt want every secretary or janitor owning stock. So three-and-a-half years ago we came up with a plan that would start with three other key people in the company. Now 12 people are involved, owning a total of 33 percent of the stock.
Karofsky: How does the 33 percent split out?
Nottberg: Dwight Brinkman has almost half of that. I feel he is the person who needs to have control.
Karofsky: One quick aside on the nonfamily stockholders: As part of the buy-sell, are they able to pass the stock on to their family members? Or, upon their departure from the company, does the company have the right to buy it back?
Nottberg: They have to sell it back when they leave. The advisory board and I felt that was the only way to avoid getting into all kinds of competing interests and complications. In dealing with claims and paying off the other stockholders, I learned that, if you spend all your time on internal things, itÕs negative energy. If youÕre not spending your time on how to satisfy that customer or how to make your employees better trained, your company is not just standing still, itÕs going down. We also didnÕt want to get involved with people getting divorced, people getting other kids. They have to sell the stock back to the company and thatÕs just the way it is.
Karofsky: How was your diagnosis received by key managers and others? Has it changed your approach to the planning process or how you view the evolution of the family business?
Nottberg: When I became the sole owner of the company, I knew I would have a chance to mold it into what I wanted it to be. I knew it needed to change from a family business to a more professionally managed companyŅone that was going to survive any one or two family members. That was my overall goal: assuring that U.S. Engineering survives and prospers.
When I started looking at the planning, I talked to a number of other people who had been through it. Some had done an ESOP, several had done more individualized stock plans. The owners who seemed most successful had been more discriminating in whom they sold stock to and how these people bought into it.
I also started to rethink some of the earlier decisions we had made. My intent was to sell 49 percent of the company and keep 51 percent for myself until my kids decided what they wanted to do. Everybody pretty well knew that. But under the original plan, if something happened to me prematurely, all the stock I still owned was to be sold to the existing stockholders on a pro rata basis. That cut my kids out totally.
So one of the things my health situation brought on was a rethinking of what I really wanted to do. Hugh Rice and a couple of my advisory board members suggested that I get away from using our corporate attorney as my personal attorney because I needed expertise in tax and estate planning. I started interviewing firms in the early summer and I chose some attorneys. Hugh became a kind of mediator, because he knew the company and a couple of my key people very well. He was very helpful in keeping the communications going so that my people could negotiate a new shareholdersÕ agreement whereby my kids would have an opportunity for a period of time to come into the company. We also arranged to transfer some of my stock to a childrenÕs trust to get my position below 50 percent.
Karofsky: So how will the ownership work under this plan?
Nottberg: If I get hit by a bus tomorrow, the kids will keep 25 percent of the company, and the company has enough insurance to buy the rest of my stock. If the children come into the company before they are 30, theyŅor their spouses if they are marriedŅhave the ability to purchase 26 percent back from the existing stockholders to get them back up to 51 percent.
Karofsky: The existing stockholders agreed to this?
Nottberg: Yes. Two of our advisory board members are the trustees of my kidsÕ trust. And if something happens to me, a four-person board that includes the trustees, the CFO, and the company president will govern the company. If they canÕt reach a decision, there is a methodology for bringing a fifth person aboard to become the deciding vote. The four-person board would decide issues such as whether my children are competent to come into the company and have management potential. However, if they havenÕt come in or shown an interest by the time theyÕre 30, they have to sell their stock to the existing shareholders. They canÕt remain passive stockholders past the age of 30. To me, this is good for everyone. It also gives me peace of mind that my children will have the opportunity to come into the company if they want it.
Karofsky: Did you set entry criteria for the children in terms of education or outside work experience?
Nottberg: They have to have a college degree and a couple of years of meaningful work experience outside the company. They have to be a full-time employee. Beyond that, itÕs up to the board to determine their competency.
Setting the criteria was hard. ItÕs so subjective, and we didnÕt want to make it very complicated. After that, itÕs really up to the kids to show what they can do. TheyÕll start at the bottom and be reviewed just like any other employee.
Karofsky: YouÕve established a performance review system?
Nottberg: Right. They donÕt get it because theyÕre a Nottberg.
Karofsky: And selection of one of your children for a key leadership post will then depend upon their performance, and Dwight Brinkman will be their mentor?
Nottberg: Yes. I expect Dwight to be president for the next 10 to 12 years. My son will be 30 in nine-and-a-half years, and my daughter will be 30 in 12 years.
Karofsky: Skip, when you understood that the cancer had metastasized and realized you were at greater risk, did you share that openly with your key managers, customers, suppliers, and bankers? How did they react?
Nottberg: I felt I needed to tell everybody exactly what was happening to me and what my treatments were. I was going to be gone periods of time because some of the treatments are pretty debilitating. We have been very straightforward with the bank, the bonding company, and major customers. WeÕve gone through everything with them. We sat down with individual customers and told them how this stock situation works. Our president and CFO have come along and done a lot of explaining, so that the focus isnÕt just on me. Sharing the responsibility also goes along with my wantingŅeven before my diagnosisŅto step back from a lot of the day-to-day activities and assume more of a strategic role.
We also did something else which is a key element in where we are today. Last spring, for the first time in our companyÕs history, we did an internal survey of our people, followed by an external survey of customers. Externally, we wanted to find out what customers thought of us, what their questions were, and how they assessed our strengths and weaknesses. As a result of the survey, we are addressing one big weakness and providing more customer services. Internally, knowing how employees felt about being here, what their worries and goals were, really helped. We shared the results of the internal survey in focus groups with all of our key people.
I wanted to be open with everyone because IÕm a fairly public person and our company is high profile. WeÕve been around 104 years and I know a lot of people throughout the community. This is probably more of a factor in Kansas City than Colorado, because people in Colorado equate the company with Dwight.
I have shared with those people everything I have been going through and have been very honest about the fact that this is a serious disease. IÕve let them know IÕm going to fight it as best I can and I donÕt know where everything is going to end up, but the company is in good hands.
Karofsky: So you were working on building a more independent organization all along. And being honest and straightforward about your health has actually taken so much stress out of the situation.
Nottberg: Right. The health situation has probably quickened the planning, but not really that much. I had a kind of five-year plan. I said that I really wanted to be out of the day-to-day operations in five years. And it came about a year early.
Karofsky: You seem to echo those who say a wise goal for parents is to present their kids with an opportunity and not an obligation to go into the family business. And to make sure the kids perceive it as an opportunity and not an entitlement.
Nottberg: Exactly. And I feel that my children are learning that. IÕm very proud of them. They both know how to work. Even though they didnÕt have to, they both worked from the time they were freshmen in high school. TheyÕve worked at gas stations, as waiters, and busing tables; my daughter has been a supermarket bagger. You want your children to have opportunities, but you also want them to have their self-esteem.
I feel right now that I am so fortunate in my personal and professional life. I married a terrific woman a year ago who could have walked away when this cancer thing came up. And I have a great company that is now turning out the way I had envisioned it.
Karofsky: I think what you have done is extraordinary. It is the most remarkable gift and legacy you can leave to your family and the people who have worked with you. Whether youÕre here six months from now or 20 years from now, you have taken the necessary and appropriate steps to build for the future.
Nottberg: When I signed those papers to personally guarantee things ten-and-a-half years ago, it was because I believed in our people. I wasnÕt about to put 450 or 500 people, some of them second-generation or third-generation employees, out of work. Many people have dedicated their lives to making U.S. Engineering what it is.
Up until two years ago, IÕd never even been in a hospital except as a board member. You deal with it. You do the best you can with what youÕve got. IÕm just so proud of the people I have here. This company is going to go on for many, many years. Today we are going to review our business plan. WeÕve just completed three of the best years weÕve had in the company. IsnÕt that amazing?
Karofsky: Indeed it is, but not by accident. Skip, are there any lessons about the planning process youÕd like to give to your management team, your family, or others who might read this interview?
Nottberg: I would say, make sure you know yourself and what your goals are before you start the planning processŅbe honest about what you want out of it. Figure out what your priorities are in life, what it is you want to accomplish, and what opportunities you want to make available to people in the company and family members. Decide what youÕre willing to live with in terms of objectivity toward, and protection of, offspring, so that nepotism wonÕt drag the business down. Most family businesses donÕt survive because they forget theyÕre in business to satisfy their clientsÕ expectations.
Also, you have to be able to look every employee in the eye as a human being, not as a servant or somebody whoÕs there just to make you look good. I remember going around with my father on a job when I came to the company. A laborer called him Mr. Nottberg and he said, ŌNo, my name is Henry.Ķ The key is to treat other people as you would like to be treated, to recognize them for who they are and what they have to offer. If you satisfy your customers and treat your employees and your own people right, the other thingsŅmoney, success, prestige, if thatÕs what you wantŅwill come. DonÕt forget, youÕre a custodian. I see now that by making people a part of the company, as stockholders, they feel the company is partly theirs. That was one of the reasons I didnÕt want to merge or sell the company. I wanted to be creative in the technological sense, to be aggressive in what we do, but I wanted the culture of U.S. Engineering Co. to continue for generations.
Karofsky: WhatÕs been the best outcome of your planning?
Nottberg: The best thing about the plan is that it has allowed me to concentrate on my health. When IÕm not going through treatments, IÕm at the office every day. I also sit on our monthly management committee meeting whenever IÕm able to. I still play golf and go to social events to show people, as well as maybe myself, that IÕm not dead. IÕm going to go through the best medical treatment with the best attitude. IÕm going to try to enjoy, but also be productive, every day that I wake up.
Henry ŌSkipĶ Nottberg III died on Feb. 3, 1997. He was 47. He leaves his wife, Linda; a son, Tyler, 20; a daughter, Jamie, 18; three stepchildren; and an extraordinary legacy to 650 U.S. Engineering employees.
Gustav Nottberg, SkipÕs great-grandfather, opened his first machine shop in 1855 in Cologne, Germany. Concerned about the emerging Prussian military, he moved his family to the United States in 1983, settled in Kansas City, and opened Nottberg Iron and Machine Works. He and his three sons diversified the business, providing piping for refrigeration to local breweries and meat-packing houses. From mechanical and piping contracting, the Nottbergs began to engineer plumbing and steam-heating systems. In 1914, facing anti-German sentiment, the Nottbergs changed the name of their business to U.S. Engineering Company.
SkipÕs grandfather, father, and cousin studied engineering at the University of Kansas. When he left to attend Washington and Lee, Skip thought he knew two things for sure: ŌIÕll never come back to Kansas City, and IÕll never go into the family business.Ķ
Nevertheless, when Skip graduated in 1971, he headed straight back to Kansas City and the family company. ŌThey didnÕt know what to do with me because I was a political science major, and they hadnÕt seen one of those around before,Ķ he recalled. That year Congress had passed the Occupational Safety and Health Act, which required a lot of stringent record-keeping that he says no one else in the company wanted to do. So he was given the job of compliance with OSHA regulations.
When the companyÕs accounting firm pointed out it was behind the times in use of computers to manage its books, Skip was sent to an IBM school to learn about programs IBM had developed in the field for the construction industry. ŌThey were supposed to need only minor modifications,Ķ Skip recalled about his efforts to adopt the programs at U.S. Engineering, Ōbut turned out to be a disaster. It was like trying to fit a square peg into a round hole, but it gave me a chance to learn our chart of accounts. It also gave me a chance to prove to myself that I was going to stay with the company.Ķ
After installing its first computer system and upgrading its financial reporting system, Nottberg was gradually given increased responsibilities. His father, who was president of the company from 1967 to 1978, was succeeded by SkipÕs cousin Gus Nottberg, who was president until Skip bought him out in 1982. Last year, Skip turned the presidentÕs title over to Dwight Brinkman and became chairman of the board. - P.K.