Anyone who has ever paid attention to the growth of a child knows they go through growth spurts. The process can be uneven: They sometimes grow up before they fill out or vice versa; they're alternately awkward or sturdy.
It's similar for a business. The idea of upward and outward growth is one way to frame a discussion about growth strategies for your company, says Mark Richardson, vice president of Case Remodeling and a REMODELING columnist, who considers a company's growth as vertical or horizontal. “Vertical growth is tied into getting more clients. With horizontal growth, you ask: ‘Can I do more for my clients?' and focus on new goods and services,” he says.
Within that framework, there are myriad growth options such as buying or merging with another company; taking on jobs of different sizes or types — or both; developing a unique service; expanding into a new market; or improving productivity. Although company owners may differ in opinion as to which options work best, most agree that growth means increased revenue. (See “Growth and Community,” page 112.) Determining which way to grow depends on knowing what your company does best, looking at what the market demands, and staying on top of your numbers.
ACQUISITION A seemingly straightforward way to achieve vertical growth is to merge with or buy another company. That's what Michael McCutcheon thought when he first bought a neighboring remodeling business. His design/build company, McCutcheon Construction, in Berkeley, Calif., was doing $5 million in volume; the other company did $2 million in volume. So it follows that combining the two should, ideally, create a $7 million company.
But it's not that simple, says Ruth King, channel manager for iBusinessChannel.com and author of The Ugly Truth About Small Business. “You have to make sure you have similar cultures. Make sure you can work together and understand what the potential conflict issues are,” King says. In other words, she adds, “Date before you marry.”
McCutcheon not only got tools, computers, office furniture, a client list, and 10 new employees; the former owner of the other company also came on as a salesperson and business advisor. And yes, McCutcheon's volume increased to just about $7 million — more quickly, he says, than if he hadn't bought the other company. But not until the transition did he discover a culture clash: The other company focused on price, while McCutcheon's focused on customer service.
Four years later, although just two of the initial 10 employees remain, McCutcheon says, “I would definitely do it again. We [gained] capacity and wisdom from [the former owner]. The people resources and brains were what we needed. For what we paid [low six figures], it worked out excellently for us. Plus,” he adds, “we learned more than ever what is unique about McCutcheon.”
Rather than acquire another high-end design/build company to increase their client base, Design & Construction Concepts (DCC) co-owners Michael Menn and Andy Poticha allied with two owners of a year-old windows, siding, and replacement company. The suburban Chicago company now reaches more midlevel clients who need small additions, new roofs, bathroom swap outs, siding, etc.
Each company is a separate entity. DCC does custom work. The other company, Mosaic, does replacement (and, recently, multifamily remodeling work). The gross profits from both companies flow upward to a management company — owned by the four principals — that pays all overhead costs including salaries. Holding two-thirds of the management company, Menn and Poticha are the major stockholders, but each of the four owners has an equal vote.
Menn acknowledges that during the past year — their first — they lost money: “We spent an inordinate amount marketing the Mosaic side.” But he's confident that if 2007 falls like 2006 and they take out some startup costs for computer upgrades and marketing, they'll show a profit.