The 3 million dollar road Part 4: $3 million and beyond
Before growing from $2 million per year to $3 million and beyond, a contractor needs to make sure his business is running at a very profitable level.
December 15, 2011 by Mike Draper
Making it to $2 million in sales per year doing renovations and additions puts your company in a very elite group. It’s not unusual for infill and custom homebuilders, but only a small percentage of renovation companies make it this far.
By Mike Draper
Before growing from $2 million per year to $3 million and beyond, a contractor needs to make sure his business is running at a very profitable level. There is no point in continuing to grow from $2 million if it’s not. Your business plan can’t be to grow into profitability. At $2 million you are generating enough sales that your business should be running efficiently and profitability. You should be paying yourself a salary of approximately $120,000 – $160,000 per year. This is money that you are taking out of your business to pay yourself for all the work that you do in running your business. It is not how much profit the business is making.
Establish your profit first
Your company should be making a net profit of at least 10 per cent of sales, which would be a minimum of $200,000 in net profit beyond your salary, and should generate solid positive cash flow. If your business is not achieving these results, then your focus for this year should be about making your business more efficient and productive, streamlining your processes, reducing your costs and/or raising your prices. You are better to stay at $2 million in sales and focus on getting your company running properly than you are to focus on growing your sales.
This might seem counterintuitive, but it is easier to focus internally when you have a comfortable workload. Since you just finished the year at $2 million, you most likely have the staff that you need and the trades that you need to complete that volume of work. If you push to sell more, then you will be pushing all of your people to work harder to handle the increased business. But, if they work harder without changing how they work, the results will likely be the same or even worse than they are now. So you have to slow down and focus on your internal processes.
Your business is no longer solely about doing great renovations. It is about running a successful company. What is the definition of a successful company? We define it as “A commercial, profitable enterprise that works without you.” It is now that you have to increase your focus to working “on” your business to a much greater extent. It has to operate by systems and processes, not by you doing the work and staying on top of everything. Consider this business philosophy:
▲ Systems run the business
▲ People run the systems
▲ Owners lead the people
Your primary responsibility to your business is to run it as a business. You must have the systems in place so that it runs without you. You can then choose to work or not to work, but the systems have to be there whether you are there or not. It is absolutely critical for your future success.
There are two reasons why this is so critical:
1) So that your business can continue to scale up in size.
2) To have the capital to invest in property for future growth and development.
It is around this point that you need to make a strategic decision as to how you will achieve the next level of growth. There are two main options:
1) Continue with the traditional renovation projects that you have been doing until now, increase your marketing and take on more projects
2) Start to take on more of your own projects and do more spec work. Adding spec work increases your risk, but you become your own customer.
Let’s look at the pros and cons of both approaches to grow your business to $3 million and beyond.
The traditional route
Should you decide that you are going to follow your traditional renovations model to grow your business, you already have the solid foundation upon which you can continue to grow from the $2 million mark. The continued push on sales will be a primary driver to grow to $3 million and beyond but it takes a big commitment to marketing, advertising and sales; word of mouth alone is not enough to get you there. You will need to spend at least three – five per cent of sales on marketing and advertising. So if you have your sights set on $3 million, at a minimum, you will need to budget at least $100,000 – $150,000 for marketing.
Although this sounds like a lot of money, it can actually be spent very quickly. Careful budget planning is needed to make sure that all of your marketing and advertising activities are laid out at the beginning of the year, and then all expenses must be tracked to the budget. Without being diligent in budgeting and tracking your marketing spend, you will either under spend and stifle your growth or you will quickly over spend and likely not get the results that you planned..
Measuring your advertising success
John Wanamaker, who lived a 100 years ago, once said “Half the money I spend on advertising is wasted; the trouble is I don’t know which half.” When spending so much on advertising, it is critical to test and measure the results that you are getting from each form of advertising. In today’s era, if you don’t know what your advertising is producing and how much it is returning in sales and profit, then you are letting yourself down.
There are many ways today to track the effectiveness of your marketing efforts. You need to be very diligent on tracking your conversion rates and Return on Investment (ROI). It is only by measuring and tracking your results that you will know what advertising you should continue and what advertising you should stop immediately. As a renovator, you can’t spend money building a brand because you are too small. But, you can spend money to generate good quality leads, referrals and repeat business. This has to be the focus for your advertising expenditures.
Perfect follow up
With your advertising maximizing its return, your sales process has to be running like clockwork. As you approach $3 million in revenue, you have to have a least one person dedicated to sales. Their sole function is to respond to marketing leads and referrals, scope out a homeowner’s requirements, present your proposal and close the sale. I realize that there are many other steps in this process, but the point is that you must have dedicated sales professionals in order to cover all of the opportunities. This is not the role of your project manager and it shouldn’t be your primary role either.
Continuing to grow through renovations is simply an expansion of what you have been doing to get your business to $2 million. That is why it is so important to make sure that you are running efficiently and productively at $2 million.
Now, let’s say you decide to do some of your own speculative work to help with the growth instead of just adding more renovation projects. This would mean taking on more financial risk, learning how to research properties and being able to assess construction costs and the final selling price of the spec work you do. However, your financial risk is going to increase the number of jobs that you need to do and the amount of advertising you need to do will be much less than renovations. You also become your own customer, which means less interaction with homeowners. On the risk side though, if your costs are not contained, if your choice of finishes are not what the neighborhood’s buyers want, or you overestimate the final resale value of the home, you can lose a lot of money. During the last housing market slump there were many custom homebuilders that were caught holding one or more properties that dropped significantly in price. The banks stepped in and pulled back their loans, causing builders to sell properties at drastically reduced prices. So before jumping on the spec path make sure that you have done your research and have looked at the potential risks associated with this strategy.
Financing your growth
A profitable $2 million-a-year company with capital in the business, now becomes attractive to a bank for financing. Being “bankable” means that your business can borrow the money it will need in order to take on larger spec projects. Borrowing money for your larger projects will keep your cash flow positive so that throughout the project you have the money to buy material and pay your people. Since these projects take longer and your company is paying the cost of the acquisition of the property and the total renovations, you have to have a large sum of money available to you. Most businesses do not have that much cash available, but they do have the ability to borrow the funds.
If this is going to be your first venture into the spec market, then you need to do a lot of research before buying your first property. The very first thing I would recommend is that you interview a number of real estate agents to find the one that has the most experience finding properties that make for the ideal investment opportunity. A real estate agent with experience and knowledge of a neighborhood is a critical component in your success. It is often said “You make your money when you buy a property, not when you sell it”. What this means is that the selling price is what the market will pay, not what you think it needs to sell for based on your cost and your expected profit. You will only get what someone is willing to pay for it. When you buy, the price that you pay will be your cost base. The better you buy, the more money you will make. A good agent will be able to determine what it should be worth once renovated. This will help you decide whether there is enough upside to make the project worth the effort and risk.
Speculation should be quicker
Once you have purchased your property, you will need to line up all the work that needs to be done. This process is no different from your renovation business. The one major opportunity that you have available is that since there is no one living in the house you should be able to complete the project in far less time. You have no homeowner changing their mind part way through a project, so if an item is out of stock you can simply select another item and continue on with construction. You can also have far more people working on the house at the same time, thereby reducing the total renovation time.
Reducing the renovation time is key since you are covering the carrying costs of the project. Every day that goes by is costing you more money and exposing you to more market risk. So line up the trades, schedule the work in advance and make sure that you stay on target. After all, you are your own customer. If you can’t stay on track for your own projects, how will you ever stay on track when doing a client renovation? This is why we talked so much about having your production process in place before moving beyond $2 million. It doesn’t matter if you are renovating a client’s home or doing one for yourself, you to have the systems in place to run efficiently and productively.
At this point in your business, you can see that you have to make a very strategic decision. Do you continue to run your business as you are today and do more of it, or do you start to add in some spec work? Both models work, but they have different risk profiles. I realize that we have just scratched the surface of these two possible paths, but it is impossible to cover each in detail here.
Beyond $3 million
There are three paths you can take from here:
1) Continue running your renovation business as you have always done and get the results that you always have
2) Take the ideas from the four-part series and try to implement them on your own
3) Hire outside help. (A major Canadian bank did a study that showed that companies that regularly use outside help grow 87 per cent faster than those that don’t.)
It takes hard work, focus and determination to work through the many stages to grow your business, but you don’t have to go it alone. Renovantage specializes in working with contractors to help them achieve their business goals. Should you wish to contact Mike Draper, Renovantage Master Coach, he can be reached at l-866-334-3940 or email firstname.lastname@example.org. CC
Renovantage Inc. is a first-of-its-kind home renovation group of contractors specializing in everything from room renovations to complete additions. Renovantage takes the risk and worry out of home improvement by giving contractors the business tools, systems and services they need to operate efficiently and reach the next level of growth.