Coatings Inspection Company

BUSINESS PLAN

PROFESSIONAL COATINGS SERVICES, INC.

34000 Jackson Boulevard
Chicago, Illinois 60601

Professional Coatings Services (PCS) is in the business of doing third-party inspections for major coatings projects. These major coatings projects are on industrial units such as bridges, water towers, pipelines, etc. The benefit of having a third-party inspector on industrial coatings projects is that this person can make sure that the work is being performed properly and no shortcuts are being taken.

• EXECUTIVE SUMMARY
• MISSION STATEMENT
• SERVICES
• INDUSTRY & COMPETITION
• MARKETING STRATEGY
• OPERATIONAL PLAN
• MANAGEMENT & ORGANIZATION

EXECUTIVE SUMMARY

Professional Coatings Services (PCS) is in the business of doing third-party inspections for major coatings projects. These major coatings projects are on industrial units such as bridges, water towers, pipelines, etc. PCS inspectors will receive training from the National Association of Corrosion Engineers (NACE), which is widely recognized as being the best training program in the industry. The benefit of having a third-party inspector on industrial coatings projects is that this person can make sure that the work is being performed properly and no shortcuts are being taken. The coating application companies performing the work are on flat fee contracts, which create an incentive for these companies to cut corners to finish the job as quickly as possible. The sooner they finish the job, the bigger the profit they make.

PCS will be able to gain contracts immediately because PCS is a company created with the purpose of transferring the ownership of a family business from one generation to the next. The current family business in place is Sullivan, Inc., which was founded by Mark Sullivan, Sr., in 1988. The company currently employs Mark Sullivan, Sr., Mark Sullivan, Jr., and five other people as well as Mark Sullivan, III, during the summers.

Mark Sullivan, Sr., is seventy-years old and has done no estate planning for the business. Since the start-up costs are low for inspection services, one of the best options available to the family is to simply start another business (PCS) that would gradually take over the duties on the jobs of Sullivan, Inc. This strategy would allow for a smooth transition that does not result in a large amount of estate taxes for the next generation.

PCS will continue to be located in Chicago, Illinois, but can send inspectors to anywhere they may be needed in the U.S., and possibly globally. The firm has extensive experience in such areas as refinery and chemical plants, water treatment plants, storage tanks, pipelines, bridges, and overpasses.

PCS will build on the foundation of Sullivan, Inc., by developing inspectors that have the additional benefit of being able to identify and report to the customer potentially costly situations through their Occupational Safety and Health Administration (OSHA), Lead, and Hazardous Waste Operations and Emergency Response Standard (HAZWOPER) training. These inspectors are not the safety authority on these jobs because the coating contractors are the ones that must have a safety person to watch their operations. However, the legal system is set up in such a way that a worker getting hurt on the job can sue their employer as well as the place where the work is being performed. The PCS inspector, being someone that is in areas where few others will go, offers the customer an extra observer of working conditions. This way the company can be made aware of potentially bad situations and work to get them corrected before they become a catastrophe. PCS's distinctive competence is its higher level of professionalization stemming from its ability and willingness to train and develop its employees, as well as offer them financial security, thus turning them into the best trained and most professional inspectors available.

MISSION STATEMENT

Professional Coatings Services's mission is to become the premier coatings inspection firm in the industry by having the industry's most highly trained and professional workforce. The company's success will be built on the successes of its employees. Success will be obtained by providing employees with the best training available. We are selling the skills of individuals and thus want to have the best in the industry. Our people will be on the job site from the pre-job inspection to the final inspection using industry best practices to ensure that the coating system put in place achieves its optimal service life. Our employees also will be able to identify many safety or environmental issues that may come up on a coatings project. This added benefit will ensure that our customers are made aware of small issues that could become major issues in connection with their coatings project. Our customers can be assured when a Professional Coatings Services inspector is on the job that the job will run smoothly and correctly.

Services

Professional Coatings Services (PCS) will offer a complete package of services to assist a customer in the completion of a coatings project. PCS's employees will go through a number of different training and certification programs in order to be able to discuss with customers the wide array of issues that may come up in connection with a coatings project on their site. The services available will include:

1. Coatings inspection: This service ensures that the coatings procedures taking place are being completed according to specifications. Inspection takes place beginning with initial site assessment through to final inspection. PCS inspectors will ensure that the coatings contractor is in compliance with all specification requirements throughout the length of the coatings project. If an issue of nonconformance occurs, the PCS inspector would report the incidence to the customer. Customers will be matched with an inspector whose training level is necessary for the complexity of the job being performed.
2. Failure analysis and Expert witness: This service will be for customers that have a coatings failure that they want to have evaluated so as to determine the cause of the failure. Once the failure analysis is performed, the inspector can provide expert witness for the customer; however, expert witness is rarely used because the majority of cases are settled out of court. Only certified inspectors from the National Association of Corrosion Engineers (NACE) will be provided for such projects because if the matter goes all the way to court, having someone with NACE certification gives the best credentials for an opinion that will need to be upheld.

The main source of income for PCS will come from the coatings inspection service. Failure analysis and expert witness services have the highest margins but are sporadic and not something that can continuously sustain the company. PCS will be active in obtaining coatings inspection jobs and passive in pursuit of failure analysis jobs.

INDUSTRY & COMPETITION

The outlook for the coatings industry is good because rust will continue to occur. Eventually coatings will fail and have to be redone because coatings have a finite lifespan. The recent downturn in the economy has caused the government to cut back on its maintenance spending, particularly in transportation. However, PCS's main focus will not be in the government sector. Cutbacks in the private sector can be expected, but past experience has shown that the private sector suffers less impact than the government sector.

According to a study conducted by BM Technologies Incorporated and funded by the Federal Highway Administration, the corrosion control services industry is estimated to be a $1.2 billion industry. A search in the consultants directory of the Journal for Protective Coatings and Linings produced by the Steel Structures Painting Council reveals that there are 133 organizations offering coatings inspection services.

In the Midwest, there are few inspection firms. Sullivan, Inc. is the only firm located in Chicago. The closest competitor is Farmer & Associates. In the 17 years that Sullivan, Inc., has been in existence, the company has not competed against Farmer & Associates for a job. PCS's biggest possible threat of local competition will come from individuals that might decide to start up in the area due to low barriers of entry, such as no licensing requirements, low start-up costs, etc. Someone trying to start up in the area would have some difficulties because Sullivan, Inc., already holds many of the lucrative contracts. It would be more advantageous for someone to start up in another place where they would have no local competition.

Of all the firms offering coatings inspection, there is only one firm, Expert Corrosion Specialists, that is public. Expert Corrosion Specialists offers several different types of services such as coatings inspection, cathodic protection, and engineering services. Expert Corrosion Specialists, however, is not likely to be a player in the industry much longer due to their dire financial situation. The company reported in its last 10K filing dated September 30, 2003, that the company "may file, or may have no alternative but to file, bankruptcy or insolvency proceedings or pursue a sale or sales of assets to satisfy creditors."

Of the privately held companies, C-Pro Company is the largest. KTA is based out of Pittsburgh, Pennsylvania. They have been in business since 1949 and compete for jobs all over the U.S. Their services include coatings inspection, inspection instrument sales, lab testing, engineering services, and coating and environmental training. Discussions with former employees of KTA revealed that KTA does little to develop their employees. KTA has a common practice of hiring people out of local painters' union halls and putting them on coatings jobs as inspectors for KTA. These people have knowledge of how to apply the paint but typically have little to no knowledge of how to read a specification or work inspection instruments.

The most significant barrier to entry that PCS will face is name recognition. Firms such as C-Pro Company have been around long enough to have their name known in the industry. There will be a tendency on the part of the customer to want to go with the established name in the industry. However, some of the practices that KTA and others have pursued have begun to erode that name. KTA had an inspector get caught last summer taking a $5,000 bribe on a government job and is facing prison time. Expert Corrosion Specialists was caught with some accounting irregularities in the wake of Enron and thus are under constant scrutiny by the SEC. These events give PCS a window of opportunity to establish its name as the premier inspection company without the negatives attached.

PCS's competitive advantage will come from its commitment to its employees. PCS will develop a culture of continuous learning where hard work receives just rewards. PCS employees will know that they are a valuable part of the company and will have a vested interest in the success of the company. PCS's efforts in such things as training, insurance, scholarships, and bonus systems will work together to solidify PCS's commitment to its employees. Other companies will not be able to duplicate the genuine culture developed at PCS.

MARKETING STRATEGY

Promotion

PCS will immediately subcontract two jobs from Sullivan, Inc. The first job will be a chemical plant. Mark Sullivan, Jr., is currently working at this facility and has developed a strong relationship with the customer there. There are four years left on the 5-year contract signed with the chemical plant to take care of all their inspection needs.

The other job that will be subcontracted from Sullivan, Inc., is a refinery. This job provides nearly year-round fulltime employment of one inspector. At times this job will require two fulltime inspectors.

Each year PCS will add one new major contract. Possible contracts for the near future of PCS could be in the transportation and construction sectors. The important part is in making sure that PCS has qualified employees to put on the job. Jobs will not be taken if PCS cannot put a competent and well-trained inspector on the job.

Initially, promotion will be done by obtaining leads from coatings manufacturers, coatings contractors, and general contractors. Mark Sullivan, Jr., has solid contacts in each of the above sectors. Contacts that we currently have from the coating manufacturer's side are Barry Williams and Cynthia Smythe, who own the company YBK, Inc. Coatings manufacturers like to have third-party inspection to ensure that their coating is applied properly. Proper application results in a coating system that achieves its full service life. When a customer has a coating applied and that coating lasts its full service life without any problems, the customer is likely to do repeat business with the manufacturer of the coating as well as the inspection firm.

Within the coatings contractors we have contacts within many of the companies. Coatings contractors will give us leads when they know there will be third-party inspection required on a job and they want to try to get an inspection company on the job that will be fair. General contractors can actually become customers when they hire third-party inspection to protect their interests. Otherwise the general contractors can recommend good third-party inspection to their customers. This group is a newly developed market for us. Mark Sullivan, Jr., has made this contact with a general contractor and developed a good rapport with people there that he is trying to cultivate into a long-term contract with them.

Current promotion within Sullivan, Inc., is passive, and over the past month Mark Sullivan, Jr., has been called about three different jobs that led to work for the company. The next step for PCS will be to take an active approach in selling. One way of doing that will be to host seminars in the area and invite potential customers to these seminars. This way PCS can educate potential customers on the value of inspection and the benefits they can receive from it.

It will be important for PCS to hire on people as soon as possible to replace Mark Sullivan, Jr., on his inspection job because he will be much more valuable as a salesman. He will be able to go visit customers and follow up on leads. If he is able to sell to people in a passive role, he should be able to work great in an active role. Eventually, however, PCS will hire on a fulltime person to take on the selling and let Mark Sullivan, Jr., move into more of an overall business role in the company. The timing of this hire will be decided by Mark Sullivan, Jr., and Mark Sullivan, III, when they determine that the company has the manpower necessary to expand.

This person will have the sole responsibility of seeking out more work for PCS. This person will do such things as cold calling, on-site visits, and brochure mailings. This person will have to be trained in the same manner that an inspector would be so that this person can speak intelligently about what exactly it is that we provide to the customer. It also will be helpful for this person to be knowledgeable so that when they make on-site visits they can identify problem areas to show a customer right there. It is likely that this person will be someone that will be moved from an inspector within the company to the salesperson.

On most jobs, the PCS inspector will have to be a teacher of sorts. This is because most customers have no training or experience with coatings, nor do they have the time to learn anything about them. Working with coatings takes detailed knowledge of chemicals and reactions involved in the process. An inexperienced customer would have to take a lot of their valuable time to bring themselves up to speed before a coatings project takes place. PCS relieves the customer from having to take the time to learn the process, and avoid the headaches that can come from dealing with the entire process. Even the customers that have the knowledge and training of coatings can benefit from not having to take the time to watch every step of the coatings project. These experienced customers can focus on other, more important tasks that must be dealt with in their facility.

Another important aspect for PCS management and employees to work on is to write technical articles to be published in different trade magazines, such as Materials Planning and the Journal of Protective Coatings and Linings. Incentives will be put in place to encourage all those working at PCS to actively seek to have work published. This will enhance the prestige of the organization and the individual, making both more marketable.

Pricing

Currently there are no local competitors for PCS. The closest competitor is Farmer & Associates. For as long as Sullivan, Inc., has been operating in this area, the company has never bid on the same jobs as Farmer & Associates. This is important because the competitors that try to compete with PCS in this area must charge the customer a per diem and mileage. PCS will thus be able to demand a higher per hour price because it will still be cheaper for the customer to pay the extra per hour price rather than paying a lower per hour price and pay per diem and mileage. PCS will intentionally work on growth in the Midwest area to exploit this advantage. However, there inevitably will be contacts made in other parts of the country and even the world that will require PCS to charge a per diem and travel. The distinction is that these jobs will come from customers that are seeking us out and are thus willing to pay to have us come to them.

PCS delivers more service and protection to the customer than its competitors by putting the best trained and most professional inspectors on the job. PCS non-certified inspectors will cost $50 per hour on regular time and $60 per on overtime. This rate is around $5 per hour more than other firms. Customers will be paying a little more per hour for a PCS inspector, but the customer will be getting more peace of mind with a PCS inspector. Customers can be assured that they will be getting more for their money from a PCS inspector.

OPERATIONAL PLAN

PCS will begin operations out of Mark Sullivan, Jr.'s home in the Midwest. The company will be incorporated as an S Corporation. Most of the work of the business is done on the road, at the customer's location. Work performed at the office will be mostly administrative. The office will be open from 8:00a.m. to 5:00p.m. every day but Mark Sullivan, Jr., and Mark Sullivan, III, will be available by cell phone 24 hours a day.

The business will start with two officers and one employee. Two men will be out in the field working while another attends to the needs of the office and business in general. The one in the office will also be qualified to sit in on jobs if necessary. At the beginning of the calendar year 2004, the company will take on another inspector to accommodate another job.

All employees will be put on a salary to ensure that they have a steady source of income. Employees also will have health insurance available through the company. One of the key components of this company will be to have an environment of security and trust for the employees. The current job environment for a coatings inspector is uncertain because they are typically hired on a job to job basis. PCS wants its employees to be focused on their job and not worrying about from where their next job might come. PCS wants to shift the inspector's focus to ensuring the success of the business. This shift can take place by giving the inspector a salary and health insurance, which takes away the inspector's worries so that he/she can focus on the quality of their work for the company.

The payment policy of PCS will be to have customers pay every thirty days for services rendered. Some customers will inevitably pay late and it will be up to PCS management to ensure that bills are paid. Once customers become 60 days late on a payment, any PCS inspectors on that job will be immediately removed. If the debt makes it out to 90 days overdue, legal action may be considered to obtain the funds. It also will be the policy of PCS to discontinue any future business with customers that exceed the 90 days overdue threshold.

Training

All PCS employees will be at the Coating Inspection Technician level, which is successful completion of NACE CIP level one training, or higher. It is important for the employees to have at least a level one training because we want our customers to know that they are getting someone that knows how to inspect versus someone that used to paint but has no knowledge of inspection. PCS also will offer the added benefit of having inspectors trained in other areas so they can offer an extra set of trained eyes for the customer. This is important because typically the inspector is the only person going into the coatings project area besides the crew of the coatings application company. These additional benefits are:

1. Occupational safety awareness: Inspectors would be trained to identify and report safety hazards to the customer. Although the painting contractor is responsible for the safety of its employees, PCS's customers could be sued for allowing an unsafe working condition to exist on their property. Keeping the customer aware of any safety concerns and ways to correct them so that compliance is achieved will reduce the chances of an incident occurring that could be costly to our customer. All PCS employees will have completed the OSHA construction safety and health 30-hour course. This will ensure that the inspectors understand the major issues to look for on a construction site to keep everyone in compliance with OSHA regulations.
2. Environmental issues awareness: The most sought after service in this area is the understanding of lead removal laws since many projects will deal with the removal of former coating systems that are lead-based. PCS inspectors will have Lead Worker Training and HAZWOPER training in order to consult the customer on key issues of concern. These training programs will aid the inspector in being able to identify noncompliance in the field to report to the customer. Keeping the customer aware of any noncompliance can reduce the chances of costly lawsuits or possible government actions. PCS inspectors get lead and hazardous materials training offered at the state level by a third-party company. The company used would be Specialized Training Resources, Inc., which is the company currently used by Sullivan, Inc. Should any EPA training programs become available, PCS would seek EPA certification for its inspectors.

MANAGEMENT & ORGANIZATION

The three individuals that will be the first to work for PCS are Mark Sullivan, Jr., Mark Sullivan, III, and David Miller. Mark Sullivan, Jr., and David Miller are both NACE certified coatings inspectors. Mark Sullivan, III, has completed NACE level one training. Mark Sullivan, Jr., also has certifications for lead work and hazardous materials. David Miller is a former nuclear power plant inspector. Mark Sullivan, III, graduates with a Master of Business Administration degree in May 2004 and will then pursue a law degree.

Mark Sullivan, Jr., will be the senior inspector and president of the company. His duties will be to deal with questions and comments from the inspectors and clients. He also will handle all of the duties of obtaining new customers in the beginning. Mark Sullivan, III, will be the CEO of the company and deal with all the day-to-day administrative duties of the company. He also will have to handle customer phone calls and may need to sit in on jobs from time to time. Employee and customer problems or concerns can be addressed to Mark Sullivan, Jr., or Mark Sullivan, III.