Thinking about starting a remodeling company but afraid there's too much competition? Not to worry. In the remodeling and home improvement universe, there's plenty of room for contractors doing as little as $100,000 per year in total volume, and going up from there.
Unfortunately, particularly among small companies, the failure rate measured over a five-year period is high. New owners often don't know how to run a remodeling company -- or don't know what to expect when they launch one. Here are some questions to ask yourself if you're thinking about starting your own remodeling business.
- How much money will I need to start the business and how much do I have on hand?
- What kind of experience, if any, do I have running a business?
- Am I willing to work 60-plus hours a week for the first few years to sustain the company and learn to run it profitably?
- What types of jobs am I good at and what kind of customer should I seek out?
Know Your Numbers
For some time I've been giving a seminar aimed at smaller contractors -- those under $600,000 -- called "Small But Smart." During the session, I always ask how many people in the room mark up their work 50% or more. Invariably, fewer than one out of 10 will raise his hand. The most common mistake made by newer remodelers is that they have no idea what the markup over cost must be in order to make a profit. As has been stated many times in this column, the minimum markup is 50%, and as a company grows, it is 67% and even higher. In the handyman business, the labor figure is over 100%. The biggest reason for this misunderstanding about markup is that most small company owners have never taken courses or attended seminars that show them how to break down job costs. Job cost is labor, including fringe benefits; materials, including sales tax and delivery; subcontractors; plans and permits; and cleanup. Overhead includes sales costs of 6% to 10%; production supervision of 4% to 6%; advertising; office management; tools and equipment; office equipment; and much more. Small companies have a minimum overhead of 26% to 30%, and larger companies range from 30% to 35%.
Marketing, Selling, Hiring
While you're at it, add these items to your entrepreneur's checklist. First off, there's marketing. Figure out what segment of the market you want to serve and what kind of niche you can establish in that segment. Second, there's selling. You'll need to learn how to sell your work to homeowners, because you'll be doing it at night while you're running production during the day. Then there's production itself. Finding and hiring quality help is a must. Good lead carpenters can handle many of the duties that used to require a full-time production manager. A lead carpenter can usually handle about $250,000 to $350,000 worth of work a year. This means a small startup can work with one or two lead carpenters. In the future, good field help is going to be even harder to find. New contractors need to know this -- and be constantly on the lookout -- if they plan to grow. Office management includes running the company processes from top to bottom: customer relations, collecting money, paying bills, and being the administration of the company. Many new companies are operated by married couples. Often, the wife manages the office and administrative aspects.
Open For Opportunity
Though large companies are multiplying, and taking a larger share of the market, the remodeling business is open to new entrepreneurs and will remain that way into the foreseeable future. There's plenty of opportunity for the person who aspires to be his, or her, own boss.