Life Cycle of a Remodeling Business
The life cycle of a remodeling business has four phases: Development and Startup, Growth and Expansion, Maturity and Succession, and Exit. A contractor will be successful if they can navigate each phase of the business life cycle.
A remodeling business establishes itself in the marketplace during the Development and Startup phase. When the company reaches the Growth and Expansion phase, workflow processes are efficient, and the company embraces growth opportunities. In the Maturity phase, the company is well-established with a stable client base. The final stage of the business life cycle is the Succession and Exit, when the company is passed to a future owner or closed.
1. Development and Startup
The Development and Startup phase includes pre-planning and launch. It is the period from inspiration through getting the business up and running. 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
The company name is chosen during the Start-up phase of the business.
The business name should:
- Be descriptive
- Uniquely yours
- Easy to spell and pronounce
- Conform to state naming rules
Perform a name search through a search engine screening, your state’s Department’s Secretary of State, and the United States Patent and Trademark Office. Choosing the name of the business is an important step. It can be a time-consuming process to go through a business name change.
Limited Liability Companies (LLC) and Corporations register with the Secretary of State. Check with your state’s Secretary of State for business formation requirements. You may need to consult an attorney to determine the correct formation for your situation and to assist with the registration.
Contractor registration and licensing requirements vary by state. In some locations, registration and licensing are at the local level.
Start Up Assistance
A business plan is used to provide guidance and direction for a company and required to obtain a business loan or grant. A business plan template is available through the Small Business Administration. The SBA has two types of business plans: a detailed traditional business plan template and a lean startup business plan which concentrates on crucial business plan components.
Assistance is available for startup businesses. 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 cooperative effort is between the private sector, educational, community, and federal, state, and local governments operating with a lead organization in each state that coordinates with community subcenters. A great place to start is with SBA and Score.
Score is an SBA partner with chapters throughout the U.S. They offer individual help for business startups by providing business plan writing, marketing assistance, and a mentorship program. Support is also available through the unemployment department, library, and other organizations in your community.
A key person in the business will be a qualified accountant. Checks and balances are the process and procedures set in place to keep everyone accountable and assures no one has total control. A CPA can perform a year-end review to access accounting performed in-house. 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 a 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 contracts and lien paperwork 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. Differentiate your company from others by becoming an expert in a particular area.
Market to the types of jobs that you want. Providing a specialty helps to define how and where to market. 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 establishing itself in the market. The number of projects is increasing, and the company is growing. Expansion needs to be systematic and strategic. Working with an accountant to plan for incremental growth will help maintain proper cash flow.
Client relationships are 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.
Cash flow represents the money coming into and leaving the business. The timing of project schedules, payroll schedule, and expenses affect cash flow. Projection, budget, and job costing reports help to forecast cash flow. The management of cash flow requires regular monitoring.
Control cash flow with a solid contract with clear payment terms. A deposit on contracts is typical. The deposit is a flat amount or a percentage charged to pay for costs, such as materials, before beginning work on the project.
Include a due upon completion clause in the contract. If the project is over an extended period, set up progress payments at regular time intervals or stages; accepting payments by credit/debit or PayPal can help to prevent collection delays.
Tips for collecting payments:
- Determine the payment method before the beginning of the project and communicate payment timelines.
- Require the final payment to be paid upon the completion of the project or within a short timeframe, such as three days.
- Avoid dealing with delinquent customers and unpaid balances by offering an electronic payment method.
- Mechanic’s Liens offer a mechanism to collect unpaid receivables. There is a legal procedure to file a lien, 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.
Expenses may outpace revenue if growth is not controlled. 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 and the potential for a slowdown. Allowing overtime or hiring temporary employees may be a better short-term solution.
Minimize Cash Flow Issues
Cash flow is the timing of the money coming into and leaving the company. A properly estimated job should bring in the revenue needed to cover expenses. However, because of timing, outgoing costs may be due before receiving payment for the work.
Minimize this issue by taking advantage of credit lines for materials. Lumberyards may allow until the 10th of the following month to make payments. Lumberyards may even offer a discount for paying early.
A business credit card helps to build the credit score for the business. Use credit cards effectively by paying balances by the due dates to avoid paying interest.
Equipment is one of the best investments a remodeling business can make. Having proper equipment makes work more efficient and improves the balance sheet. Equipment is a fixed asset for the company with tax advantages.
Like personal finances, a business should establish a strategic and diversified approach to saving to cover emergencies. Liquidity is the ability to meet expenses with readily available funds, mainly cash and short-term investments. By building a contingency fund, money will be available to help to cover unexpected cash flow issues. Lenders use liquidity to determine creditworthiness.
Maturity is the stage of the business lifecycle before the owner retires. The company has weathered ups and downs in the economy and is seeing another generation of workers moving up. The remodeling business has established its brand at this stage of the business life cycle, and revenue is dependable and predictable. As an owner, if you planned right, you’ve delegated tasks and established a retirement plan.
4. Succession and Exit
After a career of fixing homes, the day has come; it’s retirement time—no more demands from customers, subcontractors, and all the government agencies.
Wrap up commitments:
- Finish jobs in progress
- Collect final payments
- Make final payments to employees and subcontractors
- Pay taxes
- Cancel insurance
A sole proprietor can close business checking accounts after all transactions have cleared the bank. They will 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.
Filing Articles of Dissolution with the state will end a business entity. An LLC, partnership, or corporation will refer to the Operating Agreement for the succession, transfer, and exiting procedures. The company should consult an attorney if it plans to shut down, sell, or transfer ownership.
The IRS guides the final steps for closing a business. Click here for the IRS steps to fulfill federal tax obligations.