What’s the Right Business Structure for You?
Different contractor business structures provide the right one for each business development stage. Each offers money-making opportunities, but the space between each and the money made can decrease in the transition from one to the next. Emerging from contractor networking sessions that specifically track this from thousands of data points, these natural transitions shown in the diagram below follow company sales growth. This article covers the advantages and barriers at each stage, and some tips on what’s required for success in order to move to the next one.
Professional Tradesperson: This contractor works in the field, charges high prices and gets most work by referral. This contractor model typically has $200 to $300k in sales. The owner works as foreman, has one or two other employees and does a few estimates at night or on the weekend. Because he still is on each and every job, he does not need a lot of systems or record keeping. He or she also does not need a lot of advertising, as he does not have to sell very many jobs to keep busy. He also does good work so referrals are strong. This model works for those who like to work with their hands and don’t like to manage many people.
There are several drawbacks to this model. First, it is hard to stay small because when doing good work and just earning wages, business can grow quickly. When this owner stops working on the job the profit numbers no longer work.
Another mistake is most contactors working at this level don’t charge enough. They basically charge a little above normal wages, say $25 to $35 an hour, and never make it financially. Such a low rate just does not cover all costs. They need to be charging $40 to $45 an hour or more. For example, the average cost to operate a heavy duty pick-up truck including gas, insurance and replacement cost is $14,000 a year. Working 40 hours a week, 50 weeks a year equals 2000 hours, so a pick-up truck costs $7 an hour. That’s why many contractors of this size drive older trucks because they do not build replacement costs into their prices. There are many other unrecovered costs such as disability insurance and retirement savings.
Home Alone Contractor: This contractor does about $500k to $1m in sales with administrative help and at an inexpensive (home) facility. This contractor begins developing key lead field people while the owner sells projects and oversees them. The biggest mistake contractors make at this level is having inadequate administrative help. Contractors tend to have an inexperienced family member or a $10 to $12 an hour employee who just answers the phone. Some contractors by nature tend to be disorganized so a strong, organized administrative person can help by keeping the books, do the job costing, screen and set appointments, order material, call customers about colors and schedule deliveries. The right person will not need to be told what to do but will rather take charge and guide the owner. A contractor working in this setting needs a highly skilled person at $16 to $18 hour for 20 hours a week rather than an inadequate, full-timer at $12 an hour.
Because this company has only two or three crews, the owner can still check jobs regularly. With the administrative person at the office, the owner can spend much time selling. This type of contractor can make $100k to $200k salary and profit.
Common mistakes for this type of contractor other than having a poor administrative person is to start adding salespeople and production managers without competent office staff and systems. This results in much less profit and disorganization sets in quickly. Without a plan to develop lead people and some preplanning, the owner can become a glorified job site babysitter and material picker upper. If you want to make $50 an hour, you have to do task work that pays $50 an hour.
Owner-Driven Organization: This contractor does $1m to $1.5m in sales and is the most profitable model. This model is much like the Home Alone model except the owner is a high energy sales machine and the administrator is extremely strong and manages details. Strong foremen have been developed so jobsite babysitting is minimized. One senior field person might help schedule, do warranty work etc. but they still spend enough time in the field to pay for themselves. This type of contractor can make $200k to $400k a year and can be extremely profitable, but this is all based on owner capacity.
When these types of owners tap out their time and capacity, begin to add assistants, project managers, salespeople, etc., profits do not grow with this expansion. Many of these owners simply want to sell and do not have the personality or will not take the time to manage other managers. Again our advice for this type of owner is to have disability insurance and at least someone in the organization who can measure, estimate and quote jobs should he become sick. Frequently, this type of business makes no more than $1.5m and $2.5m in sales.
Contractor Management Team: This business will have sales between $2.5 to $50m and success depends on the owner’s ability to manage managers. Owners of this type of business must realize that their job is no longer being a star but rather about their ability to create stars. This business will have managers over departments and/or branches, or a controller who can maximize IT and constantly works to build a field organization to do the work. Owners who appreciate the analytical nature of business tend to do better and enjoy this type of business. This organization is an institution and not as dependent on the owner to drive sales. Many contractors strive to get to this point but a lot of them do not have the patience or personality to manage this type of business. Time and commitment is required to build an organization that will be profitable at this level.
In summary, my observations come from 30 years of contractor consulting and I have the data to prove it. Allowing growth to push beyond the maximum profit level of each business type creates a painful transition to the next business structure with more stress and less profit. If you would like less stress and more profit while getting to the next level, call me at 800 864-0284.