In my first column for Qualified Remodeler in 2005, I referred to the remodeling business as a great get rich slow scheme. If 41 years (in my case) isn’t slow enough for you, I can’t help it. I want to talk about what it takes to implement a get rich slow scheme: how to start, grow, survive and finish at or higher than your target. It is much easier to talk about it than to make it happen, but what’s new about that? The truth is it can happen.
Remodeling as a business is easy to get into because it takes almost no risk capital. Of course that means there will be plenty of competition, as well. At times we have all complained about shoddy operators but frankly they can be an advantage to you by comparison. They are the bottom of the barrel and you should be at or at least on your way to the top of that same barrel.
I like to separate the business into five parts: market definition and development; business planning, structure and execution; design, estimating and product development; field supervision; and product delivery and customer relations. I don’t believe you can leave any one of these parts out and wind up well off financially. Let’s take the steps apart and see if you agree.
Market definition identifies a need for you to fill. Once you have verified the need exists and has some longevity, you need to develop it so you can create a dominant position on which to build your company’s goodwill. It’s bound to be a struggle at first but once you reach critical mass, market-share maintenance will still be developing but at an easier pace. You have to check the definition of your market and adjust as the market changes; with care, you can be the agent of change rather than a follower.
Business planning, structure and execution sound easy, and they are unless you put them off as many good folks do. Nothing dilutes success more quickly than being in a hurry. The business plan is no different than an estimate; you wouldn’t start a construction job without plans and an estimate, and you shouldn’t begin a business period without a business plan. The here-and-now part of the business plan gives you a measuring stick of how things are going in the near term; the plan is updated and you prove how closely to the plan you can execute. The get rich slow part is a bigger, far-off bull’s-eye you check periodically. You can get to that bull’s-eye several ways, including through diversification, integration and flexibility, which can help enable that long-term goal. The important part of it is the small stuff. Don’t ever let anyone convince you the small stuff isn’t important. My wife was an airport executive, and her favorite saying was, “Sweat the details, and the big things will take care of themselves.” As you become better known in your market, your long-range goals will come into focus more easily because your future is more dependable. Inasmuch as you will need some kind of office or shop, buy or build one with additional space to rent to help defray mortgage payments. Own the building personally and lease it to your company. This will provide you with an income when you retire. The business has the same advantages of writing off the rent, and you can depreciate the building.
Design, estimating and product development speak for themselves. A general-purpose remodeling company probably should be a designer to facilitate the estimating and building process. As a design center, you control the client, creating realistic expectations from the start. It also provides the opportunity to determine you can’t satisfy the client so you can exit stage right. As much as we define and develop our market, we have to do the same for our product. Our product is much more than the sticks, shingles, cabinets and carpet. Our properly developed product is a system of which those parts are components. We then market the system.
Field supervision has matured and become quite sophisticated. Record keeping is vital for job-cost analysis. Management skills are needed not only to make sure the roofing is on the top, but also to ensure the client is informed and deliriously happy with the process. These two ingredients create the magic of on-time payments.
Product delivery and customer relations are really very straightforward: Make the job perfect and do whatever it takes to keep the client believing you are, in fact, at the top of the heap. Every client expects the project to be perfect so that’s what we do. Charge accordingly. Long live this comment from your clients, “They sure were expensive but it was worth it!” Customer relations are easy: Communicate and do the unexpected.
Now that you have an established business that is well respected in the community, you must know how to leave the remodeling business, assuming you are the sole owner and you are not giving the business to relatives. There are a couple must dos:
- Identify someone in the business that agrees to finish incomplete jobs should you become incapacitated or worse. This person can be a competitor so long as you are on good terms with him or her. Provide some funds to cover his or her costs for taking over.
- Determine how you plan to leave. Are you just going to close the door and finish what you have underway? This can work, but you should plan to wait as long as possible before announcing it. Then offer necessary employees a significant bonus to stay through the end. Because you are planning your exit, you can build the bonuses into your estimate(s).
You can plan to sell the business to an employee by setting aside some of his or her bonus money into a purchase fund (with his or her approval, of course) and then take a percentage of profits after the turnover. However, this method has a built-in weakness. It keeps you on the scene supervising and underfoot. It is a very good way to foster ill feelings. New ownership needs to have its freedom to manage. Do the proper training so when you leave, you can stay away. No one likes the old guy looking over his shoulder and talking about “the way we used to do it.” Very often these earn-outs, as they are called, don’t work because the lure is to make the purchase price too high. A closely held company is not worth very much when the principal is no longer on the scene. If you, as owner, do most of the selling, estimating and design, your business at most to a new owner will be worth one time the real annual cash flow plus the market value of the assets.
Proper planning and timing can make an exit strategy less stressful regardless of whether a relative, partner or third party is going to take over. This is where owning the building and leasing it back to the company is a benefit. The lease can continue or the company can move and you can sell the building. If you are going to get paid for the equity in the company, make the purchase price more attractive if it happens sooner. The longer the payout term, the greater the potential for problems.
If you tackle the issue of turning over or selling your company before the fact and look at it sensibly, you can get paid a fair price. Remodeling companies are not like car dealerships or hardware stores that sell for a multiple of earnings. They are specialties. Be reasonable, take a fair price and enjoy your retirement. Come to think of it, that’s what I did. My partner took over the business and is doing well—maybe even a little better than I did. Honestly, the pride I have for the fact that he is doing well is worth more than any money I may have left on the table. We’re still good friends and meet frequently. We even go fishing together.
In my first column for Qualified Remodeler, I explained my sign-off—while you’re here—as a phrase we have all heard time and again from clients on our jobs. This is my last column. I will miss doing it, and I hope maybe you will miss our monthly print meeting, as well. This magazine wants to give you the information you want, but sometimes you will have to tell them what that is. Many of you have written to me during these past six years, and for that I thank you. Please work hard and prosper, and start your get rich slow scheme. Tomorrow is OK, today is better and now is perfect, while you’re here ... .