Construction Business Best Practices Series Step 11: Grow Equity and Build Wealth

Editor’s Note: This article is the eleventh in a series of twelve to lead you toward entrepreneurial excellence by our regular contributor George Hedley, owner of Hedley Construction and Hardhat Presentations. To read part ten, click here. To read part twelve, click here.

Ask fifty construction company owners what a perfect business would be like for them.

You’ll likely get forty-nine different answers. But one common focus will stand out-business owners want their business to create equity and build wealth. Equity and wealth are the outcome of consistently making a profit, retaining it and using it to seek other business opportunities, create passive income and grow net worth. If you followed and implemented the first ten steps outlined in my previous articles on Entrepreneurial Excellence, you now have an organized and systemized company achieving its goals, hitting targets and making profits. Your next decision is what to do with your growing net worth fueled by increasingly consistent profits. Are you on the path to becoming a poor contractor or rich contractor?

Are You the Company CEO?

Think of CEOs in Fortune 500 companies. Every week the newspaper business section reports on their company’s success or failure. Did they hit their numbers? Did they make a profit? Did they grow their revenue? Did their stock price go up or down? Did they purchase or invest in new businesses or new markets? Did they develop strategic alliances or joint ventures with other companies? CEOs of major companies focus on increasing the value of their company’s stock price and quarterly profit earnings. As the stock price increases, their company becomes more valuable. When your company makes a profit, the equity created can be reinvested back into your company, used to seek new business opportunities or distributed back to the stockholders as dividends. When companies don’t make a real profit, or when all of the profits are distributed to owners, your company is not able to grow, expand or seek new business ventures. To grow your company, equity should be used to reduce debt, expand into new business markets, create joint ventures with partners, invest in other opportunities or purchase other companies.

Understand that:

Profit=The financial gain resulting from use of invested capital in a transaction or business-the return, net proceeds or net revenue from a business, property or investment. Profit is what’s left over after all costs, direct and indirect, are deducted from the revenue of a business.

Equity=The monetary value of a business or property beyond any amounts owed against it (mortgages, liens, loans or claims.) It’s the company owner’s net stock value in a business-the financial value of a business offered by a prospective buyer.

Wealth=A great quantity or store of money, possessions, property or other riches. It’s plentiful amount or abundance of anything including prosperity, quality, and the state or outcome of being rich or happy.

Are You Creating Wealth?

As you can see by the prior definitions, profit creates equity which allows for building wealth and finding happiness. To me, wealth includes all things that make you happy and can include investments, money, family, time, freedom, peace of mind, contentment, enjoyment, success or owning a business that works for you. Wealth creation can be an outcome of a financially successful business that generates a positive cash-flow and increasing profits. Financial success allows you to enjoy and design your life to do and get what you want. Wealth allows you to make choices about how to spend your time and money. No wealth will keep you stressed out and constantly working to make ends meet.

Wealth is created from assets that make money without you doing much hands-on work. Wealth-building assets create regular positive cash-flow, reduce debt and are passive instead of needing constant attention and supervision. Liabilities cost money, go down in value and take a lot of work to pay for themselves. Owning a small industrial building and renting it is an example of a wealth-building asset. The building creates a net income every month without much effort or work. Assets that create wealth go up in value over time while reducing debt against them. Assets can also include owning stock in growing and successful public or private companies. Some of the richest people in the world made their money buying Microsoft stock when it was only $10 per share and then sat back and waited for it to grow in value.

Owning a business that works without your constant attention, increases in value, has an ever-decreasing debt and produces a positive cash-flow or profit can also qualify as a wealth-building asset. Owning a business you have to work at and manage on a regular basis creates equity, but doesn’t qualify as a wealth-building asset. In addition, your home, car or pick-up trucks are liabilities and not assets as they don’t create positive cash-flow and actually cost money to maintain. Is your backhoe an asset? Not unless it works by itself, goes up in value every year and produces a positive cash-flow.

Here are some wealth-building real estate opportunities:

•     Create joint venture projects with customers
•     Buy your own building and yard
•     Purchase land and subdivide
•     Build your own building
•     Build a building and rent it
•     Acquire an old property and fix it up
•     Buy a residential duplex and upgrade
•     Purchase old buildings and upgrade

Other Wealth-Building Opportunities:

•     Equipment rental business
•     Equipment service business
•     New business ventures
•     Material sales
•     Service contracts
•     Stock ownership in growing companies
•     Joint venture businesses

What Business Are You In?

Think about your priorities and the purpose for your business. The real purpose is to give the business owner what he or she wants. Your business purpose is not to build buildings, install pipe, hang drywall, paint projects or move dirt. You are in business to make a profit, build equity, seek wealth-building opportunities and enjoy the benefits of business ownership. After twenty years as a commercial general contractor, I finally realized why I was in business. Year after year, I worked hard to scrape out a 1 to 3 percent pre-tax net profit. I endured lots of stress and took extreme risks building projects for customers who made millions of dollars owning and developing real estate. I started realizing that while our construction company did most of the work, our customers made most of the money. Why? Because I was in the contracting business and my customers were in the wealth building business.

Are You a Top 5 or Bottom 95 Contractor?

Construction does not produce a big enough return for the energy you spend and the risk you take. Talk to 95 out of every 100 general contractors, builders, subcontractors or specialty contractors and follow their progress for ten, twenty or thirty years, and you hear the same sad story repeated over and over again. They work too hard for the effort and risk they take. They never make any real money or have enough left over to invest. They can’t stop working and take time off to do what they want to. They wish they could start investing some money to get ahead. They can’t figure out how to make it any better.

I notice a lot of business owners and managers postpone dealing with their financial future until it’s too late. They put their long-term goals on hold behind short-term pressures and indulgences (like boats and motor-homes). I have heard the same sad story many times.

Age 20: “I can’t afford to save now. I’m going to school and only work part-time. Maybe in a few years.”

Age 25: “I can’t afford to save now. I just bought a new pickup truck, and I’m thinking about getting married. Maybe then.”

Age 35: “I can’t afford to invest now. We just had our second child and bought a new house. Maybe after I start my own business.”

Age 45: “I can’t afford investments now. My new business is barely making it, and I need to buy some more equipment. My kids will be going to college soon and I’ll have to pay their expenses. Maybe after they graduate and get a job.”

Age 55: “I can’t afford investments now. I still can’t seem to get my fifteen year-old company to make enough money to get ahead. Besides, the economy is tight right now. And probably it’s too late anyway!”

Age 65: “I wish I had started investing sooner. My business has really worn me out, my retirement funds are next to nothing, and social security isn’t enough to live on. I guess I’ll keep working my business as long as I can.”

Out of every 100 business owners, by age sixty-five, only one will be wealthy, four will be financially secure, twenty-four will still be working in their business because they have to, thirty-one will be dead and forty will be broke and need social security checks to make ends meet. When you start your business, your goal is to stay in business. After a few years, your goal is to always make a profit. Then, you finally realize it’s not how much you make, it’s how much you keep. But you don’t keep enough. The wealthy have a simple goal: It’s not how much you make, it’s how much your money makes! Wealthy business owners use money to make more money. Poor business owners work for their money. I find the more you do, the less you make. Hard work won’t make you wealthy. Hard work keeps your head down. When your head is focused on work, you can’t see opportunities available to you.

Get Into the Opportunity Business!

In 1994, I made a decision to change our business model and get into the “opportunity business” seeking equity and wealth-building opportunities. Our construction company would continue as a general contractor and seek real estate investment and development opportunities. We already knew how to build projects, so why couldn’t we also participate in the overall development process and profits as well? In order to make this happen, we decided to work different and spend at least 25 percent of our time seeking wealth-building opportunities.

As a contractor on hundreds of residential, commercial, industrial or office buildings, we are very familiar with the real estate development process. On most projects, we worked closely with the developer and their equity partners, lenders, architects, engineers, real estate brokers, lawyers, escrow officers, title officers and property managers. As a general contractor, we got our small construction profit, while we supervised or coordinated most of the pre-construction and construction work.

Build a Wealth Building Machine!

Think about what you do. How can you convert your construction company from what it currently does into a wealth-building machine? Continue doing what you do well, and dedicate at least 25 percent of your time seeking investments. My first investment was small. I put $5,000 down and bought a residential duplex in the low income part of town. I fixed it up myself and then increased the rent. This allowed me to get a higher appraised value than what I had purchased the property for. I refinanced it and got a new loan which generated extra cash. With this, I purchased another duplex and did it again. A year later, I sold these two properties and bought a sixteen unit apartment. Following my proven formula, I fixed it up, raised the rent and then refinanced it. This again generated cash for me to reinvest into other assets.

A small start in low cost residential real estate will allow you to build wealth and start buying, investing and developing more assets. When you have a few wealth-building properties, you start looking at your business differently. You change your priorities and stop working so many hours building projects for others and start working on building for your future as well. Today, I only work about ten to twenty hours a week in my construction business and another ten to twenty hours on my wealth-building investments. You can learn how to convert your construction company into a wealth-building machine. Leveraged money makes more money fast. Today, we own and manage over 500,000 square feet of commercial buildings with over 300 tenants. These properties generate lots of rent and positive cash-flow, while increasing in value every year. Getting started is the key. Don’t wait until it’s too late. It’s never the perfect time.

Don’t Buy Another Truck!

When I speak at conventions to construction business owners, I suggest buying rental property before your second truck or tractor. The wealthy contractors are those who own real estate or other wealth-building assets. Poor contractors are too busy working to make any money and have little to show for their hard work. Where do the wealthy contractors spend their time? Are they on their construction jobs working every day or are they meeting with business clients, bankers, investors, joint venture partners, brokers and business friends at their country club?

Get Started Building Wealth for You!

Make adecision to do more than working your business. Now is the time to start creating equity and building wealth. Make it a priority to seek wealth-building opportunities. Do whatever it takes. When I started seeking real estate investments, I didn’t know how to find property, finance it, manage it, value it, or sell it. But with a clear focus on my future instead of just building projects for customers, I began to learn how to create and build wealth.

When I explain real estate financing and joint venture pro-formas and partnership structures to attendees of my Profit Builder Circles, they’re afraid and don’t know where to start. It’s easy to continue to do what you’re comfortable doing-construction. But to become one of the truly successful business owners, you must start your wealth-building program. Call up your banker, real estate broker or your best customer, and take them to lunch. Ask lots of questions. Go to a class or seminar on investing. But don’t give up. Get started small. Learn how to make your money work for you. Seek investors, lenders, consultants and brokers who you can trust and build a success team with.

Now is the time to make a decision to seek at least one wealth-building opportunity in the next three to six months. Start by deciding which type of investment you are most comfortable with. I have built a lot of multi-tenant industrial parks for customers. My first large venture into wealth-building investments was to find an old industrial building and renovate. I was comfortable with this type of project. I knew how to build, upgrade and remodel buildings, and it would be easy to attract friends to invest with me on this type of investment. I found a real estate broker who specialized in older industrial buildings. I asked him to present me with opportunities and offered him ownership for his efforts. Today, twelve years later, this project is fully leased and pays out a hefty monthly cash-flow to me and my investment partners.

The best time to start working on your future and get your finances in order is now! The best time to start a savings and investment plan is now! Make a list of what you would like to own in your wealth building portfolio over the next ten years. Think like this: If I can buy or build one 20,000 square foot building every year for ten years, own 50 percent of them, and they cash flow net 10 cents per month; after ten years, my wealth-building assets will produce a minimum of net $10,000 per month to me. And with inflation and leverage, my portion of these assets will be worth at least $3 million. Sound good to you? You can make this a reality by starting with a vision of your future and what you want. Design your business to allow you to seek wealth-building opportunities and make it a part of your everyday activity. Let me know your progress. I hope to see you at the country club soon.

George Hedley owns Hedley Construction and Hardhat Presentations. He is the author of The Business Success Blueprint Series available in eight workbook and audio CD sets. He is available to speak on his proven system to build profits, people, customers and wealth. Construction company owners are invited to attend his two-day “Profit-Builder Circle” boot camp held regularly. Call 800.851.8553, or visit his website at http://www.hardhatpresentations.com/.

Construction Business Owner, June 2007