Editor's Note: This is the third in our 2009 series, "Earn More, Work Less." To read the previous article, click here. To read the next article in the series, click here.
As a business owner, I bet you love what you do.
You're really good at doing your work with pride, integrity and quality workmanship.
If asked, you tell people you are the best at what you do and stand by your finished product and personal service. You have spent years working hard, building your company, grooming your management team, developing supervisors and foremen, training your crews and growing your equipment fleet. You have a small list of customers who keep your company busy and provide you steady work on an ongoing basis. Your business pays your bills, and there often is a little left over to buy a boat or recreation vehicle to enjoy on the weekends. Life is good as an entrepreneur and business owner.
The Economy Slows Down. Now What?
You continue doing business the same way you've always done and hope the economy gets better, not thinking a slow economy will affect your business. But it doesn't get better, and there are less jobs to bid on now. So you lower your prices to stay busy and keep your crews and equipment working. Your good old customers don't have much new work, so you venture out into new territories. Your competitors lower their prices even more and project bid lists grow from three to six to twelve to fifteen or more. The only way you can get any work now is to be "stupid low" which guarantees you won't see bottom-line profit for a long time. You bid more and more jobs in hopes of landing any work you can find. You start bidding on projects even when you have no experience, track record or expertise. Anything to keep your doors open, crews busy, equipment working and overhead covered. Now what?
You finally land a few new jobs. Relief! Back to work. But within a few months, these new jobs start coming in overbudget. These projects are different than the ones you usually work on, and the unfamiliar contract clauses and specifications cause you some grief. You have a tough time working with these new customers. Your crews aren't very efficient since they know there isn't new work for them when they finish these jobs. It starts costing you money to finish the few projects you have. Your paycheck becomes a distant memory as you begin to feed your company to stay afloat and keep unneeded employees and managers on the payroll while you hope to land new work soon. Then your lenders start calling to meet and review your monthly profit and loss statements before they renew your line of credit. And your suppliers call to notify you that your monthly accounts are late-you must get them current, or you will be put on COD. Now what?
Stop! Time out! Hold Everything!
What are you doing? Why are you slowly going out of business by spending your savings and trying to keep your crews and equipment busy? How long can you survive feeding your company every month? Do you think something good will happen quickly to renew your bank account balance? Will your long-time employees help pay your monthly expenses as a thank-you for keeping them busy when you are totally out of money? Will your under-utilized equipment fleet produce enough cash flow to survive? It's time to stop and take a hard look at what you are doing right now before it's too late.
When work was plentiful, it was easy to stay busy doing the same things over and over to the same customers. You didn't have to look for ways to improve your business, new services to offer or new customers. You just had to bid jobs to your same five or ten customers, win your share and make enough money to stay in business. You really didn't have to be the best, most creative or most innovative. You only had to be as good as your competition. The old saying "A rising tide lifts all boats," applied during the good times. But now as the tide goes out, all boats will go down as well.
During one of my recent "Profit-Builder Circle" two-day business owner boot camps, I asked attendees what they could do to make a profit if they lost all of their business in the next few months. Most didn't have an answer. They were accustomed to doing the same thing for so long, they were stuck. Most said they would just try to survive. Survive? Survive doing what? I again restated the question and asked them to consider that all of their sources of past business would be non-existent, and they would have to do something different. Still no good answers. Do you have an answer to the question?
As I started to dig deeper, one attendee, David, told us he was an underground utility, sewer, water and storm drain contractor in Florida. Ninety percent of his customers are track home builders and 10 percent are public works and cities. The good news was that over the last ten years, he had built a large, successful and profitable company doing over $8 million in annual sales. He had over 25 managers and supervisors, 150 field employees, 100 pieces of equipment, a large yard, an equipment manager, two full-time mechanics and a net worth in excess of $5 million. The bad news: His home builder customers had put all of their projects on hold indefinitely, and he was now pursuing more public works projects to keep his equipment and crews working. On these projects, the bid lists had grown to over twenty bidders, and the only way he could win any contracts was to lower the price below his actual costs. Plus, his $1 million annual overhead expenses were starting to eat away at his net worth built up over the last five years.
I asked David how long he would last waiting for something good to happen. He said he could probably hold on for at least a year. How much would it cost? He said he would lose at least $2 million per year trying to keep everyone working. I asked him if it was worth it to give up his nest egg just to keep his long-time loyal employees and managers working. His options: keep the money or give it to employees hoping the economy comes back fast-not an easy decision. Then I asked what his equipment was worth. He said he could sell all 100 pieces of his equipment for around $5 million net after debt.
Here's the real question for you: Why are you in business? Is David in business to put pipe in the ground, grow his equipment fleet and pay his overhead expenses? Many business owners forget the purpose of their business is not to cover their costs, do work and keep busy. It is to give them what they want. Do you only want to break-even by working hard, and keeping yourself, your crews and equipment busy? Or do you want to own and build a company that produces a constant money flow, passive income, equity, wealth and freedom to you as the owner? Your business is a tool to deliver the results you want and fulfill your dream of business ownership.
David and I discussed his options in detail-keep doing what he had always done and watch his future disappear or consider a radical change. If he sold 80 percent of his equipment; reduced his overhead by twenty people to one project manager, an estimator and a few office staff and just kept a few crews working-he could stay in business at a reduced, break-even level of $1.5 million in annual sales. That way, when the economy turns, he could jump back into the business he excelled at, and his company would be one of the last underground contractors still standing. Then he could take at least $3 million generated from selling his equipment and invest it. I suggested he start looking to buy under-market and under-valued "fixer upper" homes in good locations that he could rent out easily to families at break-even lease rates. I recommended he seek single family homes in clean and safe neighborhoods near business centers, schools, shopping centers, hospitals and government offices. He could utilize his crews during down times to do the repairs and refurbishment on his investment properties.
David made a goal to sell most of his equipment fleet and invest $3 million to purchase 100 houses (100 houses @ $125,000 average price = $12.5 million in value) within the next six months. If each home appreciated at least 25 percent over the next three years, his $3 million investment would reap him at least $3.125 million in net profit. This is a lot more than his construction company would have ever made, even in good times. David realized that his business was not the end, but a means to an end to ultimately get what he wanted.
Barry was also in the "Profit-Builder Circle" and listened to our discussions. He owns a sheet metal fabrication and construction company specializing in high-end metal work, stainless steel, copper and specialty work, as well as flashing and gutters for homes and industrial buildings. As the economy started to slow, Barry told us he hadn't waited to take action. A year ago, he decided to get into the heating, ventilating and air conditioning (HVAC) service business. Several of his key employees were competent in HVAC work as well as sheet metal construction. His estimators (sales people) were already calling on contractors, apartment builders, facility managers, restaurants, retail stores and real estate developers. Most of these existing customers owned buildings that needed ongoing HVAC service-a perfect match to start a business that's recession proof. Buildings still need to be serviced, regardless of the economy.
Barry's business plan was to build a HVAC service business directed at commercial buildings, facilities and properties. He started by investing in his people and sent them to get certified by the major HVAC equipment manufacturers as trained service technicians. Then he moved two of his top managers into the role of customer service manager and business development manager. Today, his HVAC service company generates over $250,000 in recurring monthly revenue and contributes to help pay his overall company overhead and his profit margin. Barry thought out of the box and looked for opportunities that would complement his overall business operation. He realized his thirty years in the sheet metal business wasn't the reason for being in business. He decided to do something about his future and invest in starting another complementary business that would delivery steady returns every month.
I recently spoke at the annual Hardscape North America convention and trade show. Ninety-five percent of the attendees seemed stuck doing only what they do or know how to do. They said their businesses were slow, there was too much competition and they hoped hard work would make things better soon. They are specialists who furnish and install concrete pavers, bricks, barbeques, patio covers or landscaping. As a result, they struggle to cover their costs and make any money. Why? They only do what they are comfortable doing.
The 5 percent of the Hardscape show attendees who are successful had listened to their best customers and made decisions to deliver what their customers wanted. These profitable companies offer complete, turn-key design, build and maintenance services. Many homeowners buy low price and just want pavers or plants and then do the rest of the job themselves. But the high-end homeowners want total outdoor living environments, lifestyle experiences, care-free service and ongoing total service and maintenance. Contractors who offer first-class, professional service packages, make a lot of money and have a long list of loyal customers by offering everything these top customers want. Think about what full-service outdoor management companies can offer to deliver what their customers want: design, demolition, irrigation, landscape, hardscape, walls, fencing, patio covers, outdoor kitchens, swimming pools, spas, waterfalls, patio furniture, ongoing pool maintenance, gardening service, annual tree-trimming, monthly lawn service, fertilizing, pest control, roof sweeping, holiday lighting, house exterior washing, snow plowing and trash hauling. If your company offered a full line of services, could you make more money than you are making now during good times, as well as slow times?
Are you stuck and comfortable doing what you've always done? Haven't tried a new service, market or customer type in a long time? Don't be afraid to get out of your comfort zone and look for ways to capitalize on what you've got to build your future. It's never too late or the wrong time to reassess your business plan and build a new and improved company that offers more, does more and generates a steady stream of revenue. Look at your strengths, weaknesses, threats, opportunities, assets, people, customers and marketplace. Look for opportunities and expand your thinking. Make a decision: Do you want to stay busy or make money?
Construction Business Owner, February 2009
