Growing Pains: Avoiding the Pitfalls of Expansion
We all remember those awkward years of growing pains where it seemed like every lesson was learned the hard way. Mom and Dad always tried to tell us about the pitfalls around every corner, but their advice seemed outdated, and we chose to learn our lessons the hard way. Unfortunately, business doesn't work that way. In business, if you learn your lessons the hard way, you will find yourself out of business very quickly.
With so much at risk, how do you know when it's time to expand your business, and how do you avoid jeopardizing a currently successful operation? Start by assessing your company, your goals and the risks associated with expansion.
To Grow or Not to Grow?
According to Dr. Thomas C. Schleifer, consultant and author of Construction Contractors' Survival Guide, when a contractor decides to expand his business, timing is everything. "If a company has been stable for a while and profitable, then to grow and do more of it makes sense," says Schleifer. "If a company is marginal, then there's little sense in growing." If your company is not operating at performance levels standard in the industry for similar-sized companies, then Schleifer says you would do better to focus internally and become disciplined, then "move out." Schleifer says being ready to move out "means having enough financing and quantity and quality of management to handle additional work." Contrary to what many assume, growth is not always good for contractors.
"If you look at contractors who have financial difficulty, the majority of their problems are growth related," says Monroe Porter, president of Proof Management in Richmond, Virginia. "All the problems that you had when you were small magnify themselves over and over."
For this reason, expansion is a decision that needs to be examined thoroughly, meaning several factors must be considered and researched at length: Why do you want to expand? What do you hope to gain from expanding? How are you going to expand?
"It's important to remember that an acquisition or expansion is a means of accomplishing a goal," says Ben Brahinsky, director of mergers and acquisition at FMI. "It's not the goal itself."
Ways To Expand
Once you've answered these questions, your next step is to decide the best route to take to expand your business. The two most common tactics are expanding your existing business and buying other similar companies. Both have their advantages, but one common element holds them together - staying with the familiar. Regardless of the path you choose, it is imperative that you stay in the niche you know.
Schleifer says a good way to expand is by "taking more work of the same type that you've done, within your own market and in small increments of geographic growth surrounding your own market."
However, you can still manage to stay in your niche even if the company and the location are new to you. You can do this by buying a company that is in your core competency that has already established itself in that market.
"If I buy a business that's there, now I'm one of the existing companies," says Brahinsky. "I didn't make the market more competitive, and what I acquired was an organization and its relationship to the ongoing community and the ongoing momentum and energy of that business."
In any expansion effort, you will make mistakes. The most common is not preparing for the worst.
"Make sure you have enough capital to play 'What if,'" Porter stresses. "What if you lose money for two years? Can you afford that? What if you get a bad job? That's a lot easier to play than 'Oh, no!'"
Some of the most common mistakes contractors make when expanding are buying businesses that are outside their core competency, outgrowing their employees and production, overextending the company's financial resources, overextending management capabilities and simply installing their own systems and processes as opposed to using the best existing methods of each company.
In summary, mistakes result from "underestimating the difficulty of integration," Brahinsky says.
You may or may not make these mistakes, but you will encounter certain risk factors. Some of the risks are moving into unfamiliar territory, losing key employees, financial problems, spreading your management team too thin, and the possibility of losing what was once a successful, profitable business. One of the greatest risks is expanding too quickly. "Construction has always been a business that is really risky," says Porter. "You have to fight the weather. You have competition. You have rules and regulations. When you start to expand quickly, the odds go up that you're going to get a bad job, and it's not uncommon to find that one job loses more money than the contractor made in the rest of the business." Another significant risk is losing your new key employees because you alienated them by installing your own systems and processes.
"Frequently, in a merger and acquisition, some of the key people will leave because they're not comfortable with the new management, and what you end up with are a lot of problems," Porter says. "Construction is a people business, not an asset business. It's important to remember that the people who are good at buying businesses aren't necessarily good at running them."
To avoid losing your middle management, Schleifer recommends including the entire management team in the discussion on how the two companies will merge. "That way, whether it goes well or goes poorly, at least you don't have a backlash of your own managers turning on the decision," he says. With that said, is expansion worth the risk? It is if you can avoid making the common mistakes that lead to such high risks.
"While I'm not anti-growth," Schleifer says, "growth has been associated with most of the 10 common elements of contractor failure. If you just take a traditional job of the same size you've been taking, you're doing work that you commonly do. If you begin to take larger jobs as a method of growth, all of these larger jobs are simply bigger than those you've done before, and there's additional financial risk."
Porter compares expanding a construction business to a game of poker.
He says, "If you're playing with three people, a pair of eights might win. As you get bigger and you're more spread out and you get more jobs, that pair of eights is not going to win. Somebody else is going to have three of a kind."
Setting Yourself Apart
With so much at stake, how do you survive? Here are some tips to help you stand out from the competition:
Value your employees. "You're actually buying the people and you have to treat them well," says Schleifer.
Study the market, get credit reports, make a list of the area's key players and talk to the people in the community. "In the course of a couple of days, a consultant can figure out who the players are, how the market is and what's going on," says Porter.
Earn the reputation for being on time, on budget and easy to do business with. "Trying to make the process easier on the owner and the general public seems to be the best sales and marketing tool which would differentiate companies," says Schleifer.
Do your homework. "I think anybody, before they acquired, would do themselves a great service if they understood better the process of value expectations - educate yourself on the acquisition process, the acquisition climate, the changes impacting the construction industry," says Brahinsky.
If you grow cautiously, slowly and wisely, you can dodge the brunt of the growing pains most construction companies suffer. Learn your lessons from other companies' mistakes, and instead of dealing with awkward growth efforts, you could find yourself the most popular kid on the block.