By Cheryl Weber. If life goes according to business plan, an Owens Corning basement finishing system franchise will be Gary Eichhorst's ticket to future retirement. With its straightforward installation, predictably high profit margins, and precisely tailored business systems, the new venture should eventually exceed his design/build business revenues and be a cinch to sell off down the road.
"The franchise has helped me develop a road map of where I want to go," says Eichhorst, owner of Eichhorst and Co., Spring Grove, Ill. "Once I get it developed the way I want, it will give me an exit strategy because it will have proven revenues year after year."
Whether it's a franchise or a self-started division, many remodelers are creating new ventures from within their core company. It's a business model that's common in the corporate world, where large companies are constantly reinventing themselves to compete in today's economy. Management expert Gary Hamel, author of Leading the Revolution (Harvard Business School Press, 2000) calls the concept "intrapreneurship" -- the process of starting a new company from within an existing one.
Mark Richardson is the intrapreneurship guru in the remodeling world, having helped Case Design/Remodeling, Bethesda, Md., successfully spin off a handyman and a kitchen and bath division from its design/build business, along with the Case Handyman Services franchise it now sells nationwide. "Doing design/build is like having all your investments in oil futures," Richardson says. "The ultimate goal for people looking for stability is to have a balanced portfolio that will take you through the peaks and valleys."
Gary Eichhorst chose the Owens Corning system because it complemented his $1.5 million design/build business. As a specialty product that employees are paid per-job rather than per-hour to install, there's less guesswork involved in profitability. The manufacturer's market research showed that basement remodeling was hot in the Chicago area. But the clincher for Eichhorst was that competition was negligible. The product isn't sold at big box retailers, and there's only one other dealer in the state of Illinois. "Our competition is drywall guys, and if people are concerned about mold and mildew, we can overcome that in a sales call," Eichhorst says. "We can get the job done in less than half the time it takes to put up drywall, and with none of the mess." The thought was, as Eichhorst puts it, that the insulated fiberglass panels "would fly off the shelves."
But getting his new franchise to float wasn't as easy as Eichhorst had anticipated. He spent more than $50,000 to purchase the franchise, $80,000 to build a 5,500-square-foot warehouse and loading dock, and $25,000 to market the product. He figured on selling 50 jobs that first year. Instead, he sold four. "We found people don't know what this product is," Eichhorst says. "It's new; it's more expensive than drywall. Trying to sell it like design/build doesn't work, because people are price-shopping it to the drywall guys."
According to Ann Dugan, executive director of the Institute for Entrepreneurial Excellence at the University of Pittsburgh, business owners often overlook the sales and marketing challenges of a new venture. "You may have excellent name recognition, but nobody knows you in the other line you're starting," she says. "Are your customers a new group you have to reach out to? That decision has financial ramifications." And if you're the one who has to do the selling, she asks, what does it mean for you personally?
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Shifting philosophy and focus, Eichhorst swiftly hired separate salespeople and sent them away to learn the one-night close required to sell a specialty product. With an average job cost of $26,000, a lot of deals needed to go through. He also raised the marketing budget by 50%, and sales are picking up. Eichhorst expects to be rolling by the end of 2003. "We'll have our sales system down pat and have a 75- to 100-job database to help us project costs and labor," he says. "On the seven installations we've done so far, every one has been drastically different."
A different game
Diversification is fraught with more risks than most remodelers realize. How do you figure out whether it's right for you and your company? Richardson says there are a medley of legitimate reasons to create new business progeny. One is personal fulfillment -- you're bored and want a new challenge. Another is to own your client base, creating a relationship that's more sustainable. Diversifying is a way to make more money and give your team members a chance to advance. And it's a salient exit strategy. Multiple divisions allow you to create something that has equity as you wean yourself from daily operations or move on from the business.
On their own, though, small companies often lack the working capital, the internal flexibility, and the competencies needed to successfully add a new layer of service. Without a business plan dictating the allocation of cash and human resources and the pace of growth, diversifying can decimate the core business. When Mike Gervais, owner of Prime Construction, Burlington, Vt., bought a DreamMaker Bath amp; Kitchen franchise in 2000, he financed it with a nest egg of Prime Construction profits, a minority partner, and three private investors. With annual revenues of $750,000 this year, on projection, the operation is just now breaking even.
As Gervais learned, it's not always possible to leverage the talents of existing staff in a start-up situation. Good managers, he says, are the key to his company's success. He parted ways with his first DreamMaker manager, a veteran of the company, who wasted time trying to reinvent the franchise manual.
Gervais' other spinoff, Prime Handyman, up and running since 1999 and incorporated as a separate entity this year, generates revenues of $450,000 and 18% net profits. "Running the handyman division takes a lot of management expertise," Gervais says. "Our first manager was a field guy who had great people skills but the management end wore on him physically and mentally." Gervais replaced him with a candidate with 20 years of both management and handyman experience.
Indeed, Richardson recommends investing the time and energy to gain a working level of capital and skills before diving into a new venture. "Reinventing the wheel is a painful process," he says. "Figure it out, exhaust the alternatives, and create a business plan that will dictate your pace. The reality is, when you diversify, you won't make much money if you go for a gentle slope approach. If you approach it aggressively, you will see the return you want."
On the other hand, Richardson advises lowering your risks for the first six months of a start-up. Build a client base before hiring a sales manager. And when your competency improves, move into more complex training, processes, and jobs.
Although internal spin-offs can tap into the resources of the parent company, they need to be segregated, with their own systems and their own profit and loss statements. "That's where many diversification ventures fail," Dugan says. "If you've put aside 12 months of working capital, at the end of those 12 months, someone needs to run up a red flag and say, 'We have to put more money in.' It's not helter skelter, robbing Peter to pay Paul. If the new thing is not a separate entity, it won't get the attention it needs."
Given his own company's track record, Richardson is a big believer in diversification as a growth strategy. "So much of this is looking in the mirror," he says. "If you have the wherewithal, it's the smart way to grow the business. In 1996 we did $8 million gross locally; this year we'll do $30 million. It's a product of the parts, not that one piece is so much more." --Cheryl Weber is a writer in Severna Park, Md.