Adventures with Lyrical: Buying a Business (REPOST)
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Cad
scientia potentia est
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What if instead of adding equipment and adding volume, you just started bidding higher on jobs? Figure if you bid 30% higher on jobs, how much of your business would you lose? Would it cure your backlog? Why not run a smaller, more profitable business rather than expanding and adding crews and equipment? Why not just charge more for the work you're already doing since you're overloaded anyway?
Shonuff
Mr. Poopybutthole
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Because we are known for our fair pricing. We've raised rates about 3-4% in the last couple of weeks. I don't want to do anything that will hurt us down the road, and I've already raised rates above national average. I've picked up a bunch of business from one of my major competitors who raised prices by 30%, when I run bids, the customers tell me they won't use him (or even call him) any more because he is too proud of his product.
We are in uncharted territory, because this time of year, my industry is cutting prices. So in a way, I have raised prices compared to this time last year.
I'll talk it over with my Manager in the morning.
Cad
scientia potentia est
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Right now you're losing some percentage of business due to being overbooked, and in the future you'll probably lose more. Of course you won't get some jobs if you raise prices; but you will still get some significant percentage of them. If the percentage you lose is the "right" amount, then you'll cut your overbooking but still stay busy, just at a higher price point. If you're actually bidding on jobs and not advertising set prices, then your prices can be fluid as your job situation dictates it; you can lower your bids later on if/when you have guys sitting.
Tmac
Adventurer
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Price point.
The graphic designer who works in my office does some freelance work on the side. Right now he's slammed, so I'm encouraging him to test his price point and test his value. He generally charges $75 an hour, but he's worth at least $100, which is why he's slammed.
You have a great opportunity to test what the market will bear. Apparently it won't bear a 30% increase, because your customers are telling you they won't use the other guy. Well, what about a 10% or 15% increase?
Shonuff
Mr. Poopybutthole
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I'd be OK with a 10% increase. I've been so busy today and didn't get a chance to talk to my Manager. I think I could raise prices 10% and not get complaints. 30%? Probably not.
Shonuff
Mr. Poopybutthole
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I'd be OK with a 10% increase. I've been so busy today and didn't get a chance to talk to my Manager. I think I could raise prices 10% and not get complaints. 30%? Probably not.
Another crazy sales day, $18.8k today between the Secretary, Manager and Estimator. I'm probably going to have add another crew, whether I want to or not. The ones doing the selling are questioning why they are still selling. I tell them let me worry about adding new equipment, the more they put on the backlog, the more options it gives me. They seem like they are wanting to get complacent, so they got a kick in the ass today from me. They haven't been here in the lean Winters, when the guys got only 20 hours a week. So they got the "I remember when we starving, so quit being a bunch of pussies or you'll be out on the street" speech, and then we have a huge sales day.
edit: the final count was 22.6k. Every time we sell 20k in a day, I buy them the most expensive dinner I can. The last time we went out, I spent $30 a plate. They were at 17k, and said they wanted steak.
Eomer
Trakanon Raider
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Shit, if I could raise my prices 10% I'd do fucking cartwheels. Obviously I'm in a much higher volume, lower margin business, but increasing my margins is by far the best and easiest way to make more money as compared to increasing revenues. On the flip side, we've basically sworn off estimating any further work until the new year, because we just can't take any more on, at least not that's going to happen in the next year. There has to be a point you get to where you say "no thanks."
Shonuff
Mr. Poopybutthole
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That seems un-American turning away business (that's OK, you are Canadian). Seriously, I'm going to keep increasing my backlog until I'm forced to get more equipment. We are already devising a plan to add another crew with the least amount of equipment possible.
I'm not turning away shit. But I am starting to realize that our Sales and Marketing is outperforming production by far.
Life is short, I'm going for it. I project that NPBB&T this month will be closer to 45-47k. It's a long month, and I'm not facing 8k in repairs like I have the last two months. Why not reinvest that back in the company, so I can have more months like this?
opiate82
Bronze Squire
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Sounds like you are going down the right path. I agree that you may have room on pricing and if you can take it, go for it obviously. But adding more crew/equipment will allow you to operate on lower margins but with a higher volume while maintaining your bottom line should your competition start putting pressure on you (price/advertising/etc.).
Eomer
Trakanon Raider
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I know you're joking about the Canadian thing, but in my opinion a lot of business owners are too fixated on top line revenues, and not necessarily bottom line profits. Again, I'd rather do half the work for twice the margin than vice versa. Obviously it's never that simple. But expanding to handle more sales harbors it's own risks. It doesn't sound like you're anywhere near any sort of inflection point where suddenly you have to rapidly expand the business or management or buy a huge amount of equipment to handle your volume. For me personally, that's pretty much where me and my bro are at. We're a medium sized company, and at this point we've made the decision to remain a big medium sized company, as opposed to expanding in to a small large sized company, if that makes any sense to you. For us, the risks of expansion are too concerning, so we've elected instead to pick our spots a bit more and try to increase margins by running what we have that much better, and only going after work that we have less competition on.
A lot of that calculus is driven by the nature of our market. Construction by itself is cyclical, and in boom/bust Alberta, that's even more the case. It was only 18 months ago that we couldn't keep our staff busy bidding work at barely above cost, and were seriously considering laying off several key people to shrink the company back down and get costs down. It feels like we're at the start or even partially in to another 3-5 year boom cycle, but every boom is followed by a bust so we've got to keep that in mind as well.
Shonuff
Mr. Poopybutthole
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My profit margins are 10% lower, but total profits are way higher than in the last few years. It's because I'm spending almost $15k a month in advertising now, the previous owner didn't spend that in a year. I expected net margins to be lower, but that's because I've added new laborers and equipment, and it took until June for them to mesh. I was spending so that we could be the biggest in the area, but it took months for the crews to get up to speed. When you make changes to workflow and who does what on the crew, you'd hope they take automatically, but sometimes it takes time. So I had increased advertising and payroll, but revenues didn't really jump until June.
Shonuff
Mr. Poopybutthole
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I'm a service based business, and have to tell people I can't do their work until 2014. I'm going to need to do something. The only negative thing you'll see on my company on the Internet is on responsiveness, it's an issue. I can stick my head in the sand, and look at my bottom line and say I'm doing great, but I'm not going to do that.
I can see what you guys are both saying. But I would agree that throttling your work load via price is smarter money than expanding.
If you bid 5 jobs, and land all 5 jobs, you create a backlog. Lets say they are all 20k each. that's 100k. Lets say it costs you 10k to do each job. That's 50k cost 50k profit. Now say you raise your bids by 15% and only land 3 out of 5. That's $69k in, and 30k spent. That's 39k profit as opposed to 50k profit. Lets say you land the 4th one also. Now you're at 92k with 40k cost. You're actually at 52k profit.
Lets say you can do 3 comfortably with no backlog. 4 people you can push the crew and at 5 you have to get new equipment/crew to keep up.
Extrapolate the cost of equipment/crew over say 5 years etc. You might find you're taking significant risk to only get a little more money. A LOT of businesses fail when they expand. That second location etc. Most owners fail to realize that while what they have right now is running great, as you add on more to oversee, overall quality goes down. Your handle on the crews etc gets spread out even more.
I'm sure you realize all of this. I'm sure none of this is new. All I'm asking you to do is run all the numbers on 5 years. Use the numbers from your current crews etc Factor in all the same equipment breaks, how many employees rotated in and out of that crew etc. After you run all of those numbers, then see how much there is to gain. There is ALWAYS more money to gain, but at what price? Would you expand your business if I told you, you'll make 20% more money every year from now on, but have a 20% chance of filing bankruptcy each year? To me it sounds like you're in the optimal place, basically having to turn away work. That's a great spot to be in.
Lots of people call ahead to ask for a reservation for a good restaurant and will wait an hour + in the lobby. You can always rebrand yourself as the quality guy where they are lucky to even get your time to do the work as you have more work than time.
If you bid 5 jobs, and land all 5 jobs, you create a backlog. Lets say they are all 20k each. that's 100k. Lets say it costs you 10k to do each job. That's 50k cost 50k profit. Now say you raise your bids by 15% and only land 3 out of 5. That's $69k in, and 30k spent. That's 39k profit as opposed to 50k profit. Lets say you land the 4th one also. Now you're at 92k with 40k cost. You're actually at 52k profit.
Lets say you can do 3 comfortably with no backlog. 4 people you can push the crew and at 5 you have to get new equipment/crew to keep up.
Extrapolate the cost of equipment/crew over say 5 years etc. You might find you're taking significant risk to only get a little more money. A LOT of businesses fail when they expand. That second location etc. Most owners fail to realize that while what they have right now is running great, as you add on more to oversee, overall quality goes down. Your handle on the crews etc gets spread out even more.
I'm sure you realize all of this. I'm sure none of this is new. All I'm asking you to do is run all the numbers on 5 years. Use the numbers from your current crews etc Factor in all the same equipment breaks, how many employees rotated in and out of that crew etc. After you run all of those numbers, then see how much there is to gain. There is ALWAYS more money to gain, but at what price? Would you expand your business if I told you, you'll make 20% more money every year from now on, but have a 20% chance of filing bankruptcy each year? To me it sounds like you're in the optimal place, basically having to turn away work. That's a great spot to be in.
Lots of people call ahead to ask for a reservation for a good restaurant and will wait an hour + in the lobby. You can always rebrand yourself as the quality guy where they are lucky to even get your time to do the work as you have more work than time.
opiate82
Bronze Squire
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Corndog, you are right in his current situation. But marketplaces can change in a hurry. If a competent competitor moves into town, or one of his current competitors finds some different (better) management, it could put significant pressure on his prices. In that case, being able to absorb the decrease in pricing with more volume will help maintain his bottom line.
I agree, I was thinking about this today actually. I'm thinking it might be a good practice for Lyrical to obtain the quotes from his competitors on every job he lands. If you can either offer a slight discount or just get your customers to give you those quotes and you put them into the excel database. You'll be able to watch if your competitors are getting hungrier and learn their percentages. In fact after lets say a year of data. You could probably guess within $500 what their bids were. This is the same as price shopping except you can't really just call them up and ask.
This would also let you keep tabs on them to see if they're creeping up on price and in your market etc. So you can adjust as soon as they are etc.
opiate82
Bronze Squire
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You are exactly right. I routinely call other pizza places around town and do just that. It is a little different for me because I am much more of a quality place and will never compete with the likes of Domino's or Pizza Hut with their $10 pizzas, but it is good to keep tabs on what your competitors are up to. While I don't have to match most of my competitors prices, I do have to match the market trends. For example, when the recession hit and consumers were extremely price-sensitive, all of the big chains went to deep discounting in order capture market share (basically thinking they could survive on even smaller margins while their competitors such as mom & pops could not). I was forced to do the same to maintain my market-share.
Shonuff
Mr. Poopybutthole
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I'm not going to make major changes to our business model anytime soon. What we are doing is working. We are known for fair pricing, that's not going to change. The guys that started jacking up their rates are the ones that got in trouble. One of them started charging $100 per man and got a bad rep, and now he's living in a trailer. I think $80 a man hour is fair. It's just a matter of how many I can put to work. I have a ton of overhead, and very low variable costs. At two guys working at $80 an hour I lose my ass, even three. But when I've got six or seven going, the business becomes a license to print money. I'm not going to jack up rates, if the issue is how many guy I can keep working at one time.
As far as getting to the point where I've "made it" or that I'm in a sweet spot, I'm not. We might be the biggest in the area, but our industry is so fragmented. Sales are up 50% over the last two years, and we could easily double from here. Two years ago, I looked at the census, and calculated that we were barely doing 1% of the market, and then I started planning. So now, maybe we have 1.5% of the market. And think about it, with 1.5% of the market, the company will make 45k net profit this month. Imagine what 5% looks like?
I made myself a promise long ago to never think I've made it or that I'm in a sweet spot. No matter what, I will keep growing, and then when my opportunities were max out, I'd start/buy another business. When I was looking at buying businesses, one thing I saw is that most Entrepeneurs stop working so hard when they make 20k profit a month. They get bored and do other things. A lot of times, their businesses started going backwards because they stopped caring. Probably, when I can do 100k net profit a month on average, I'll buy a house in Vegas and snort cocaine off of hooker's asses all day. Or I'll multibox 40 accounts in an MMO, wear a leather harness all day, and screw hookers of questionable ages. But that time isn't now.
I'll just have to grow smart, and dip my toes in slowly. It's like when I added an Estimator, I spent very little, and he brought in 15k in the first week. I didn't even buy him a car, I comp him miles and gas. I can add a third crew and give them minimal equipment. They won't be able to pull $80 per man hour, maybe only 45 an hour, but I can take that money and buy equipment eventually with retained earnings and not debt. For them to get to $80 an hour, they will need 65k bare minimum in new equipment, but once the crew has started paying itself off, it's easier to make that adjustment. I need extra equipment anyway, right now when something breaks, I'm losing about $750 per day (God forbid the part is back ordered). So I'm losing 3-4k a month when an important piece of equipment breaks down.
I'll be in the sweet spot when I get all of this expensive equipment paid off.