Handling the growth pains
Sales are up. Is it time to expand? The answer is not as easy as you think. Here are some points to consider on some of the most common ways to expand:
Expanding product lines/service offerings
Often, successful entrepreneurs think their past success will translate into other businesses. Sometimes it works out, sometimes it doesn’t. Keep in mind the core competency of a person running a lumberyard is distribution. To be successful every day, this person’s job is to get material from A to B in the most efficient manner. How about the hardware business? The requisite skills to run a successful hardware store/department: Dealing with homeowners, retailing, advertising/marketing and hyper-focus on inventory turns by SKU. Competencies necessary to run a successful component business: Manufacturing, with skillsets in production economics, and a much higher level of focus on safety. Seasoned investors would push you to ask yourself if your team or you have these skills, and if not, go out and hire someone who does.
Expanding existing product lines or getting into a new product line altogether is a common way to expand. Food for thought: Do you have the space to carry all of the complementary products necessary to make an impact with customers? Will manufacturers and distributors in this space make you competitive in the marketplace? Do you have enough focus to compete with those who specialize in these product lines? Can we treat each product line/service offering as a business within our business? We’d expect a learning curve in new product lines and capitalize these projects properly; it might take some time to get momentum.
Expanding the sales force
We’re always in the market for a good salesperson, aren’t we? Keep in mind the typical lumberyard’s working capital is approximately 20% of sales; hardware stores are a little better. This means that for every $1 increase in sales, your cash flow decreases by $0.20. Do you have the capital (equity or debt) to take on a salesperson, which will increase your sales 25%?
If you have the balance sheet, a great salesperson can be a game-changer for a business. Keep in mind it’s in a salesperson’s nature to always believe they’ll bring 100% of their customers with them. Budget for 50% of their estimate, and expect margin pressure. Also, make sure you can budget the hard cost of the new salesperson for two years, and give them some runway so that they have a chance to be successful.
There is nothing more exhilarating than completing a deal or opening up a new store. Whether or not you should pull the trigger on one is a whole other matter.
We want to buy low and sell high. It’s an age-old adage, which has made folks money forever. The current environment is probably one of the best times in the last 50 years to expand geographically, and if you’re successful, drive significant shareholder value. Plus, diversifying into multiple geographic markets may reduce the overall business risk profile from things like a new competitor entering the market or a military base closing. At the same time, nothing scares us more than a deal gone bad, as bad deals have sunk many great companies.
Questions to consider before you do so:
- Are you bringing unnecessary capacity to a market which doesn’t need it? What would a new competitor do to margins? Will you have to “buy” customers to gain market share?
- Does your management team have the time to analyze and then integrate the deal/start up the new location? Losing focus on the core business, that which is making you money today, can get you in trouble.
- Is the timing right? Those near retirement, who are considering selling the business in the next year or so, should tread very carefully.
- Is it prudent to spend the company’s hard-earned capital in a fragile recovery, with the stock market at or near all-time highs, our country’s dysfunctional political atmosphere or the inflation outlook?
As a business owner or manager, your job is clear: Drive shareholder value. Wanting to get bigger is simple. Getting there comes down to strategic planning, risk tolerance, balance sheet strength and potential return on investment relative to the risk you assume. As you look to expand, do your diligence and try to take on reasonable risk as you navigate the opportunities.
Jason Fraler is principal and founder of Anchor Peabody, a private equity investment and financial advisory firm specializing in the U.S. building products and construction industry. Contact him at [email protected].
“Make sure you can budget the hard cost of the new salesperson for two years, and give them some runway so that they have a chance to be successful.” — Jason Fraler
Up the scale
Whether we’re in a boom or a bust economy, there’s no shortage of luxury items in the home channel — and in fact, brand equity for many of the nation’s high-end companies has only improved in recent years, with well-heeled customers virtually shielded from the squeeze of the recession.
Then again, when it comes to home improvement retailing, luxury can mean anything ranging from prohibitively expensive building materials to upscale flashlights that may only retail for a little under $200 — attainable enough for many middle-class Americans.
Whether they’re apt to grace the glass cases of neighborhood hardware stores or the hallways of luxury homes, here’s a roundup of HCN’s favorite upscale products.
Coast A25R Rechargeable LED Flashlight
The definitive must-have for survivalists everywhere, or perhaps just a crowd pleaser on Father’s Day? In either case, this high-end stainless steel flashlight is made for the pros but comes tricked out with bells and whistles all users can enjoy, including a USB charger, a backup rechargeable battery pack, 466 lumen output, extra-wide flood beam and a bulls-eye spot beam that extends up to 560 ft. away.
Price: $179 (coastportland.com)
Gladiator Garage Storage System Packages
With these customizable garage storage kits, Gladiator (of Whirlpool Corp.) proves that garage storage can be strong and beautiful at the same time.
Price: $538 and up (gladiatorgarageworks.com)
GE Monogram French Door Refrigerator
Built with tempered glass, fabricated steel and anodized aluminum, this luxury model is GE’s first-ever Monogram French door refrigerator, launching January 2014.
Price: $7,499 and up (monogram.com)
Altoz Precision Mowers
Altoz is the latest in a spate of promising start-up companies that seek to revolutionize their respective spaces. In Altoz’s case, the lawnmower market gets a much-needed update in the form of this commercial-grade zero-turn precision mower.
Price: $8,299 and up (altoz.com)
Big Green Egg
The subject of its own cult following, the Big Green Egg possesses storied grilling, baking and smoking abilities thanks to its high-quality ceramic design, now optionally nestled in its own custom table. (biggreenegg.com)
Progressive Nutrition Top-Line Xtreme Horse Supplement
Good enough for the dressage horse but robust enough for all levels of physical demand, Top-Line is packed with amino acids to restore necessary muscle to topline-deficient horses.
Price: $109 (prognutrition.com)
Inspire Aledora Slate Roofing
New to the roofing scene this month is Aledora Slate Roofing from Inspire Roofing Products (part of The Tapco Group), to be introduced at the 2014 International Builders’ Show in February. Aledora is a direct response to the many pain points involved in slate roofing, including cost, weight, breakage tendencies and maintenance requirements. The thick slate alternative nails the authenticity factor with surface texture, jagged tile edges and natural shadow variance. (tapcoroofingproducts.com)
Moen Isabel Showerhead
Combine an 8-in. diameter with Moen’s advanced, self-pressurizing Immersion technology for unparalleled water pressure and multi-function luxury.
Price: $470 (moen.com)
Jen-Air 24-in. Steam and Convection Wall Oven
Chock full of features and cooking-mode options, the newly launched steam and convection oven from Jenn-Air brings combi-oven restaurant technology to the home. (jennair.com)
Marvin Integrated Interior Shade System
This recent release from Marvin is designed to fit all Marvin windows and doors sans-measuring, open from the top or bottom, and offer precise light control. (marvin.com)
Maytag Maxima XL Front Load Steam Washer
As if the Overnight Wash & Dry cycle isn’t enough of a selling point, the Maxima XL is capable of providing an extra-tough Power Wash, energy-saving Cold Wash, a special allergen-removal cycle that eliminates 95% of common allergens, and an Optimal Dose Dispenser that can store 12 loads’ worth of detergent. With a capacity of 4.3 cubic ft., it certainly earns its XL title.
Price: $1,449 (maytag.com)
Proper Toppers: What’s up with roofs?
Asphalt shingles dominate the residential roofing market — crowning some 4-out-of-5 homes in the United States, according to the Asphalt Roofing Manufacturers Association.
But other roofing materials (metal, wood, slate, synthetic slate, clay and concrete tiles) are gaining in popularity as homeowners seek alternative roofing products that provide enhanced durability, energy savings and reduced maintenance, or that complement regional aesthetics.
Consumers have also become increasingly aware of the importance of the roof in the protection and curb appeal of their homes. Accordingly, features such as aesthetic possibilities, environmental attributes and fire resistance have entered the equation alongside cost considerations.
Roofing materials are available in an incredible range of styles and colors. The most popular asphalt shingle colors include earth tones, black, brown and tan, but the palette now includes new deep reds, blues and grays that allow the homeowner to match the roof to the siding. Initiatives that encourage cool or reflective roofs are putting enhanced focus on warm neutrals and other light colors. But improved insulation and technology that reduces heat absorption has increased the viability of black and dark colors.
“Deep, strong colors are now being used on home exteriors,” said John Ferraro, general manager for ARMA, “and a neutral asphalt shingle roof color can allow the body color to showcase the home. There are also regional preferences, said Emily Videtto, executive director of shingles and new product development for GAF.
Color has always been a consideration, but cool roofing is rapidly becoming a major factor as well. Cool roofs are highly reflective options that stay significantly cooler than normal roofs in summer. Certified by the Cool Roof Rating Council, products are rated by their thermal emittance and solar reflectance index: the higher the number, the cooler the roofing material. In some areas, cool roofs qualify for utility rebates or government tax credits.
In recent years, hurricanes along the coasts, storms in Tornado Alley and high-profile fires in the West have increased the demand for roofing
materials and systems that offer enhanced protection from high winds, hail and fire. Many roofing products now also include algae or stain repellents.
But, remember, actual performance depends greatly on the quality of the installation.
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