Life Cycle of a Remodeling Business
The life cycle of a remodeling business can be divided into four phases: Development and Start-up, Growth and Expansion, Maturity and Succession, and Exit. To ensure success, a business owner needs a plan for navigating each phase of the business life cycle.
During the Development and Start-up phase, the remodeling business is establishing itself in the marketplace. By the time the Growth and Expansion phase is reached, workflow processes have been established, and the company embraces new growth opportunities. A remodeling business in the Maturity phase has an established client base but needs to evaluate its stability. The last phase of the business life cycle is the Succession and Exit, where the company is either passed on to a future owner or closed.
1. Development and Start-up
The Development and Start-up phase could also be considered the pre-planning and launch. It typically runs from inspiration to start the company through the first few years. Before becoming a business owner, learning the trade through training, work experience, or a combination of both is essential. Building a solid foundation is crucial to moving into the Growth and Expansion phase.
Business Name and Formation
In the Start-up phase of the business, the name is chosen. The business name should not be used by someone else, and it should be meaningful. A name search can be performed through a search engine screening, your state’s Department of Secretary, and the United States Patent and Trademark Office. Once the business name is chosen, it is difficult to go through a name change. The business name will be used for legal purposes and marketing. The name deserves careful consideration as it becomes a brand that customers identify you with.
Check with your state’s Secretary of State for business formation requirements. Limited Liability Companies (LLC) and Corporations must register the business with the Secretary of State. You may need to consult with an attorney to determine the correct formation for your situation and assist with the registration.
Contractor registration and licensing requirements vary by state. In some states, the Contractor license and registration are handled locally.
Start Up Assistance
A business plan is essential to provide guidance and direction for the company. Not only is a business plan is a valuable tool for the business owner, but it may also be required to obtain loans and grants. You can get started with a good business plan using a template. The SBA offers two business plans, a traditional business plan template which is very detailed, and a lean startup business plan which concentrates on crucial business plan components.
Assistance is available for startup businesses. A great place to start is with SBA and Score. The U.S. Small Business Administration (SBA) administers assistance through Small Business Development Centers. There is a network of over 900 Small Business Development Centers offering counseling, training, and technical assistance. This is a cooperative effort between the private sector, educational, community, and federal, state, and local governments operating with a lead organization in each state which coordinates with subcenters in communities.
Score is an SBA partner consisting of chapters throughout the country. Score offers individual help for business startups, business plan writing, marketing, and a mentorship program. Assistance may also be available through the unemployment department, library, and other organizations in your community.
A key person in the business will be a qualified accountant. Accounting can be handled in-house or outsourced. It must be handled by a trustworthy person and overseen for accuracy. A CPA should perform a year-end review for accounting performed in-house. The process for keeping everyone accountable and reducing errors is called checks and balances. Proper accounting involves adjusting entries to match the tax return. This step consists in making general journal entries to close out the year. A skilled bookkeeper can make the entries, or the CPA can provide adjusting entries to the bookkeeper.
An attorney serves a vital role in avoiding liability issues. An attorney can assist with the business formation paperwork. They can draft lien paperwork, contracts and deal with collection problems.
Develop a Brand and a Niche
Find a niche in an area where you are comfortable and capable of performing high-quality work. Rather than being all things to everybody, differentiate your company from others by becoming an expert in a particular area.
Market to the types of jobs that you want to work on. Providing a specialty helps to define how and where to market. For instance, a fence and deck builder might seek pre-fabricated homes, landscapers, or developers. A remodeler may find trade shows and community involvement are the best way to market.
2. Growth and Expansion
Scaling a remodeling business for growth and expansion requires planning and investing. The remodeling business is becoming established at this stage. Jobs are increasing, and the company is interested in expanding. Expansion needs to be methodical and strategic. Working with an accountant to plan for incremental growth will help maintain proper cash flow.
Client relationships are still developing in the growth and expansion phase, and scheduling may challenge the company. There may be a need to add office staff and management positions. This growth may require moving into a larger office space and upgrading equipment leading the company to seek out loans.
Managing cash flow is multifaceted and requires regular monitoring. Cash flow represents the money that is coming into and leaving the business. The timing of incoming revenue, project schedules, payroll processing schedule, and expenses affects cash flow. Projection reports used in conjunction with budgets, estimates, and job costing reports help forecast cash flow.
Cash flow can be controlled by having a solid contract with clear payment terms. Payment terms for contracts typically require a percentage or deposit upfront to cover the cost of materials. A small project may not require payment until the project is completed. More extensive projects typically require payments in stages or time intervals.
Keep receivable balances to a minimum by requiring the final payment due upon completion or within a short timeframe, such as three days.
Determine the client’s payment method before starting the job and communicate payment timelines.
With the payment options available today, construction companies can avoid dealing with delinquent customer payments and unpaid balances by offering an electronic payment method. Electronic payments can easily be set up through a bank or PayPal.
Mechanic’s Liens offer a mechanism to collect unpaid receivables. The procedure to file a lien must be strictly followed, which varies by state. The first step to a Mechanic’s Lien is a Preliminary Notice providing the client information on their rights. Correctly filing paperwork for a Mechanic’s Lien allows for a lien against the property for failure to pay. There is an expense to file the paperwork, and payment may not occur until the property is sold, typically making this the last choice. It’s far better to avoid the payment issue before placing a lien on a property.
If a remodeling business doesn’t regulate the growth rate, expenses can outpace revenue. Adding employees adds to the company’s indirect expenses for training, insurance, administrative costs, and more. A company must weigh whether there is enough work to support an additional employee or if there is a potential of work slowing down again, in which case allowing overtime or hiring temporary employees may be a better short-term solution.
Minimize Cashflow Issues
In theory, an adequately estimated job will bring in the revenue needed to cover expenses. However, the timing of outgoing costs may not align with incoming revenue. There are ways to minimize this issue. One method for regulating cash flow is taking advantage of credit lines for materials. Credit cards can be used effectively in this manner as long as balances are paid by the due dates. Otherwise, interest becomes an additional expense, which is poor planning. Using a credit line or credit card enables materials to be purchased for a project before receiving payment from the client. Typical credit terms for lumberyards allow until the 10th of the following month to make payments. Lumberyards may even offer a net discount if the account is paid before the due date.
Equipment is one of the best investments a remodeling business can make. The proper equipment makes work more efficient, receives special tax treatment, and improves the balance sheet. Equipment becomes a fixed asset to the company and has a tax advantage of being depreciated. Banks like to see assets when considering a loan, and assets can be used as collateral.
Like personal finances, a business should establish a strategic and diversified approach to saving. Liquidity is the ability to meet expenses with readily available funds, mainly cash and short-term investments. Building a contingency fund will help to cover unexpected cash flow issues. Liquidity is needed to cover emergencies. Lenders also use it for determining creditworthiness.
A company reaches maturity when it becomes stable and no longer adds positions. The remodeling business has established its brand at this stage of the business life cycle, and growth has slowed down, but revenue is dependable and predictable. As an owner, if you planned right, you’ve delegated most tasks, and you’ve established a retirement plan for yourself. Maturity is the stage of the business lifecycle before the owner makes their exit.
Maturity presents new challenges for the potential of declining. Morale issues change with maturity; companies may find long-term employees becoming disgruntled and burnt out. Long-term employees who have reached the pinnacle of their career may be looking to retire as well as the owner of the company. As the company matures, so do employees’ ambitions and goals. The maturity stage is the point of the business life cycle to decide whether the company will continue, be sold, or close after the owner retires.
4. Succession and Exit
After a career of fixing up homes, the day has come; it’s retirement time—no more demands from customers, subcontractors, and all the government agencies.
Before leaving, there are decisions to make and paperwork to complete. If the business is shutting down or selling, wrap up any commitments.
- Finish any jobs in progress
- Collect final payments
- Make final payments to employees and subcontractors
- Pay taxes
- Cancel insurance
If there aren’t any employees, a sole proprietor will close the business checking account after all transactions have cleared the bank, close out any registrations with the state, and file a final tax return. If there are employees, a qualified accountant or payroll specialist can assist with completing the final filings and paperwork.
An LLC, partnership, or corporation will need to refer to the Operating Agreement for the succession, transfer, and exiting procedures. The company should consult an attorning if it plans to shut down, sell, or transfer ownership. If the business is closing, dissolution documents will need to be filed to shut down the business formally.
Congratulations! You’ve built and succeeded in your remodeling business. Go enjoy your retirement years!