Way to Grow

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.

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.

King agrees that by the second year Menn and Poticha should be OK, and she offers the following mathematical rule of thumb: “If you want to go from $1 million to $1.5 million, that's a difference of $500,000. Divide that amount by 10. You need $50,000 in cash to grow to that level because you'll increase marketing, receivables, and vendor costs.”

Like DCC, which saw opportunity in smaller jobs, many established remodelers are taking on niche, maintenance, or handyman services to increase revenue.

Rather than start a new company, Alan Lutes, owner of Alpha Remodeling, a design/ build company in Ann Arbor, Mich., decided that an in-house small-jobs division could help increase revenue.

Lutes studied market indicators and knew that remodeling was going to be soft. He watched the tanking auto industry, the bankruptcy of other companies, and the negative job growth. “The handyman thing makes a lot of sense,” he says. “We went back over our lead flow. We figured that we referred out more than a million dollars [in handyman work]. Plus, we had a client base of over 1,000 clients who already thought … great things about us. It's a wonderful way to add people to your customer list so that when they're ready to do a large project you're already there [for them].”

Since it's easier to do projects similar to what your company is already doing, Lutes chose jobs a notch above handyman. He says it was difficult to find people who were multitalented enough to be jack-of-all-trades while also understanding profit and markup. And he also found that a lot of people who called themselves “handyman” were operating illegally. “That would be a liability,” he says. “By being one notch above, the sales model is a bit different; project management is different.” But the model is something Lutes understands.

Growing your business horizontally by offering existing clients a new service may also lead to vertical growth as more people learn about your specific service.

Cory Hogan owned what he calls an “all-purpose remodeling company that did every kind of project possible, including basements.” After several years, he discovered that he enjoyed doing basements and that the work was profitable, so he began to specialize in them. There was great demand in his market and, at first, no competitors. “Since 2001, we've averaged 248% growth each year. This year [2006], we'll finish out about $1.5 million,” says Hogan, whose company is now named Upscale Downstairs. Each basement (average price $40,000) takes about 12 weeks to complete; the company does about 50 jobs a year.

Hogan knows that doubling the size of the business every year is not realistic, but he's not worried about the speed of growth. Before starting this venture he wrote a business plan, setting two- and five-year goals. The company changed everything it did, including its policies and its attitude; they now write everything down and hold weekly coordination meetings. Hogan invested a lot in administration. He scaled back the number of employees from 15 to 10, running jobs mostly with subcontractors and a lead carpenter. He spends a lot of time marketing but has delegated his other responsibilities so he can “keep the ship steered.” He realizes that as the company becomes more established, growth will taper off, and he's prepared for that.

What Hogan does for basements, Bob Amberson, in Phoenix, does for kitchens —with a twist. As of January 1, Amberson Cabinets became known as 1 Week Kitchen Inc. Amberson brought everything in-house and invested in tools, infrastructure, and training in skills such as solid-surface fabrication. He's saving money in the long run, he says, by not supporting the shops — and the insurance costs — of each individual trade.

Kitchens range from $10,000 to $20,000 — mostly rip and replace — and Amberson offers a wide variety of cabinets and counter-tops. It takes three to five weeks to get the materials and one week for labor. “The whole concept,” he says, “is to avoid having people living without their kitchen for five weeks.” Between May and December the company had done 25 kitchens. “In the last three months [of 2006], 1 Week Kitchen has done more business than [Amberson Cabinet] did in the whole first half of the year,” Amberson says.

These kinds of unique services will make your company stand out from others, King says. “If two people are bidding the same [basement] job, and you only do basements, prospective clients will think you have more expertise because your business is built on this one thing. It's hard to be all things to all people. If you're small, it's easier to grow by niche.”

Once Amberson fine-tunes his 1 Week Kitchen, he foresees creating franchises. And Hogan hopes to, as he puts it, “excel in community A and then move into community B.” Expanding geographically into a new market is another way to grow the client base, which will ultimately grow revenues, says Case Remodeling's Richardson. (The company is well known for its handyman franchise.)

But is there an optimum time to move? “Our first priority is to maximize profit and grow within our existing market,” Lutes says. “To what level can one company reasonably capture market share? We have 200,000 people in our market and we have to push out about 30 miles before I can hit bigger demographics.”

King, who has worked in the HVAC industry for many years, suggests this way to determine whether it's time to move into a new geographic market: “There are permits issued in most states where people are remodeling. Take the total number of permits and divide by the total number of houses in that geographic area for one year. That's the percentage of houses that actually get remodeling done that year. If your percentage of the market is approaching that, go find another market. But don't try to go from San Francisco to Los Angeles. Go to the next county, city, or town. Do the same calculations for [those places]. See who's already doing business there and if it's right for expansion. Then find yourself a good operations manager or office manager who will take responsibility for getting projects done right.”

Although Jim Gibson, of Gibson Builders in Washington, D.C., didn't embark on a lot of formal market research, he had a fair knowledge of Maryland's Eastern Shore, about 90 miles from his office, when he opened Gibson East. The area is a big draw for second homes and retirees from the Washington, D.C., area. “We were asked to look at a $1 million-plus job, and we didn't want to go down there, but when you're getting [lots of] those calls, you start thinking,” says Gibson, who does about 80% of his work in custom and spec homes and 20% in remodeling, historic renovation, and restoration.

Gibson's best superintendent was willing to move to the area. He and Gibson partnered to open the second office, which runs as a separate entity. The client list is long and he isn't doing a lot of advertising or marketing. “I'm where I want to be now and want to manage what we have,” says Gibson, who sees a strong future in second-home builds and remodels.

By waiting for enough demand from current clients and sending a super who he trusts, says King, “it's a perfect way for [Gibson] to grow. That's the best way to do it, if you can.”

Everybody aspires to do more with what they already have. Improving productivity can help you increase top of the line, but it may be difficult to see the connection to growth. “I don't know if I looked at processes as a growth strategy,” says Dale Nikula, owner of Encore Construction, a $7 million company in Dennisport, Mass., “but [rather] what I needed to have in place in order to grow.”

Nikula has systems and checklists for everything. This level of organization has helped his company go from a construction firm to a design/build company with in-house design services. Encore represents two cabinet lines, and has a home services division for small replacement and maintenance projects as well as a home-watch service for traveling clients. “Each of these types of jobs requires us to look at how we are going to produce them. What systems will we need to put in place to produce jobs profitably and to make sure we maintain a certain level of service? Processes help decide where and how we are going to grow.”

To tighten production in order to grow, Starcom Design/Build, in Columbia, Md., went from a lead carpenter to a project manager system. “We weren't efficient with lead carpenters,” says owner Bob Weickgenannt. “Project managers have allowed us to be more efficient, which equates to more net profit.” He gave carpenters six months to see if they could fit the new model, and just one of the four qualified to become a project manager. Weickgenannt now has three people in sales and design, and subs out all trades. “There wasn't capital there to grow [with the old system],” he says. “Our profit has tripled since doing project management.”

Gaining efficiency may not have to be so drastic. “One way to do it,” King says, “is to ask employees, and then implement their suggestions. For example, ‘If we had to save $100 per month, how would you do it?' or ‘In order for you to be more productive for one hour a day, what would it take?' Don't ask, ‘How can we decrease overhead by $10,000?' Most workers can't get their heads around that.”

Whether you consider input from employees, books, or mentors, you have to grow with direction and intention. “Focus on core competencies,” Richardson says. “If you do residential stucco, branch off into doing stucco on commercial buildings.” And whatever your goals, make sure you have enough cash on hand. “You can grow yourself out of business by not watching your cash,” King warns. “You need at least six weeks of payroll in the bank before you start to embark on a growth strategy.” Of course, overhead will increase before revenue catches up. Grow up, grow out. Awkward alternating with sturdy. But in the end, those increased revenues will help you create opportunities — and isn't that why you're in business?

John Abrams, co-founder and CEO of South Mountain Co., a 30-year-old employee-owned design/build company on Martha's Vineyard, Mass., has a different take on how to judge growth. “Conventional wisdom implies that small businesses are those that just haven't had greater success yet,” he writes in his book, The Company We Keep, detailing South Mountain Co.'s history and the importance of being part of a larger community.

In an interview with REMODELING, Abrams defined growth as “a larger work-force — more mouths to feed — which may result in a better or stronger bottom line, or it may not.” He adds that, “It may also have other effects that are either desirable or undesirable.”

In his view, there is more than one bottom line. “We have at least three that matter to us,” he says. “The first: that we're making sufficient profit to allow us to do everything we want to do — pay people well, do good work in the community, provide for our future. The second is environmental; we want to have the lowest impact we can. And the third is social; we want to provide a service and do the best and most meaningful work we can. We always look at all of these.”

Abrams recognizes that for remodelers with less than $1 million in volume, it's “tough to have the office infrastructure to really be able to look hard at your business all the time and think intentionally about where you want to go. But when you get over that,” he says, “it's time to change your business and think about it not only as a provider of services but as a community of workers that needs direction, needs to think critically and outside the box, and to think long-term. Then you have the possibility of insisting on designing the future you want instead of accepting the future you get.”