How would you define a successful kitchen and bath design business? Perhaps, by how much sales volume is generated? As a reference point, when dealers meet, talk shop and share ideas, they will often ask each other: “What’s your company’s sales volume?” Yet sales alone are an unreliable barometer of success in this industry. There have been lots of large dealers, doing many millions of dollars in sales, who have had to shut their doors in recent years because the new construction market dried up quickly and builders subsequently couldn’t pay their bills to them.
Perhaps a successful kitchen/bath firm should be defined by how large a gross profit percentage is achieved? Again, this is a common reference point for networking dealers to compare. NKBA stipulated years ago that kitchen and bath dealers should strive for a 40% gross profit margin. Yet I have seen the financial statements of successful kitchen dealers who operate at margins well below that figure.
The kitchen and bath industry is nearly 60 years old, but there is yet to be developed a clear, composite definition of what constitutes a financially successful dealer in this business. At the risk of going out on a limb, I would suggest the following four metrics in tandem to define such success:
- 10% annual pre-tax net profit after a market-rate owner’s salary;
- 15% average annual growth in revenue;
- Minimum 20% owner’s return for those who have sales designers on staff and 30% for those owners who generate all their company sales themselves;
- Minimum 33% annual company return on investment and/or net worth.
LADDER OF SUCCESS
If these metrics are achieved with some consistency over time, a company is going to command a premium price if and when an owner wants to sell it. Indeed, even a kitchen and bath firm can become an engine for wealth – and a prime asset source for a comfortable retirement – if developed properly.
The concern I have is that most kitchen/bath owners today are working furiously in their businesses rather than on them, making a future comfortable retirement from the sale of their career’s work an elusive reality.
A SEN/KBDN 2010 survey of kitchen/bath dealers revealed that 83% of the 200 respondents lacked an annual budget, 90% lacked a written strategic plan and another 90% lacked a reliable business advisor or board of directors. Absent of these critical cornerstones for durable business success, very few dealers will achieve the four previously mentioned quantitative performance measures. Maybe that’s why in my 40+ years of industry experience, I know of only one kitchen/bath dealer who retired a millionaire from the sale of his business.
Do you remember playing the childhood game of Chutes and Ladders? Depending upon where your token landed on the board, you could either climb a ladder to get ahead of your competition or slide down a chute and fall frustratingly behind them. After five very difficult years of business, surviving kitchen/bath dealers can ill afford to make a decision going forward that sends them down even a short chute. That’s why kitchen/bath dealers should devise a “Ladder of Business Success” for themselves to chart their progress toward achieving these four key metrics while simultaneously building their business into an engine for wealth.
What might be distinct areas of dealer business performance that should be measured? I can think of six: (1) launch (or benchmark comparison); (2) sales; (3) community; (4) marketing; (5) management; and (6) financial. Then key milestones should be identified within each performance area for kitchen/bath dealer firms to achieve. Each of these many milestones or “rungs” on the Ladder of Business Success – which may number as many as 50 to 75 – could be weighted on a scale of 1 to 10 points, depending upon their degree of influence on the four metrics that should define dealer success in this industry.
The end result is that a dealer needs to score a total of 500-750 possible points to be at the very top of this Ladder of Business Success – and thereby be assured of selling his or her business at a premium price.
DO A SELF-AUDIT
By way of example, dealers might earn three points on the Ladder of Business Success for receiving an annual benchmarking report that compares their company’s financial performance to a select group of similar-sized kitchen/bath design firm owners. They might earn eight points for interactively developing a three-column budget analysis with consumers, using this practical educational approach as a means to being retained on projects. And they earn another 10 points for achieving a liquid emergency fund equal to 12 months of fixed expenses – to be used for financing future growth or funding survival during the next recession.
Owners who have read this column over the years should have little difficulty in identifying scores of “rungs to climb.”
As kitchen/bath dealers develop their business operations, they are also simultaneously improving service to their customers. For example, installing an automated management system adds an extra measure of staff productivity by enabling them to spend more time consulting with clients than the competition. As a result, progressive dealers should market their companies as having superior customer service.
Dealers who serve as general managers in their operations – and have the time to work on their businesses – probably would love this means of self-measurement. Those who mostly work in their businesses might be distraught by an average total score of only 100 points out of a possible 500 or more. For them, a Ladder of Business Success could serve a useful purpose in having them realize how much further their companies need to be developed.
How successful is your kitchen/bath firm? Are you up for discovering how many points your business would legitimately earn climbing a Ladder of Business Success? Interested parties may contact me directly at email@example.com for a digital file of such a prototypical self-audit. And, if you forward me a completed self-audit, I would be happy to offer an Action Plan of Priorities for your company to pursue over the next several years as a way for me to give back to the kitchen/bath industry.
Ken Peterson, CKD, LPBC, is president of the Chapel Hill, NC-based SEN Design Group, the industry’s first buying and business development group for independent kitchen and bath design firm owners dating back to 1994. Peterson can be reached at 1-800-991-1711 or firstname.lastname@example.org.