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.