Spread your risk with a new business niche: Contractor's Corner

By Dave Stafford

Who wouldn’t want an extra million dollars of solid business? Any business is a gamble, but a wise man spreads his risk. A reasonable amount of diversification makes sense whether you’re in the stock market or in the flooring business. When you have more than one business niche, you’re hedging your bets.

Perhaps you started out in the retail end of the business and have evolved into commercial flooring. That is certainly a start, but as you grow in the commercial segment and increase your annual volume, you should look at additional segments. There are many options from which to choose, including healthcare, property management, institutional, government and the like. It is not my purpose to focus on any one segment, rather to explore the stages you’ll likely go through in the selection process and give you some tips from my experience.

Review your current business over the last couple of years. How much sales volume is in property management or with commercial builders? Have you done a lot of smaller jobs with local hospitals or the university? Or has your company become the go-to contractor for the local school system for emergency jobs? Does anything jump out at you, a stealth business that’s low key, blending in with other areas? Then, rank these segments according to sales volume and gross profit.

The dirty little secret is that most of us do not carefully track our business at the beginning. Rather, we react when the phone rings or develop relationships with existing clients. We evolve into those areas where it is easy to do business. Here are a few typical examples, “Hey, Jim, my wife and I really liked the job you did for us on the hardwood and carpet for the house. I’m a commercial property manager, have you done any tenant build out work? Would you be interested in taking a look at a space we are getting ready to remodel?” Or, “You’re a church member, and I know you’re in the flooring business. We need to get some carpet for the new sanctuary and activities room, can you help?” Perhaps, “My wife was just in the hospital. I was looking at those ugly floors, and I heard they’re going to build a new hospital, hmm….” Or even, “I see where the county schools are asking for $15 million to remodel and upgrade during the coming year. There’s got to be some flooring involved there.”

In your quest to expand your horizons, the first suggestion is to take a hard look at your current core competencies. How easy is this business to perform in concert with your other areas? Are there aspects of this new niche that could be disruptive to your other business, or can it be seamlessly integrated? Where do you shine, and where do you struggle? For instance, let’s say that seam-welding and flash-coving are not done by your resilient crews; resilient flooring, other than VCT, is a very small part of your business. You’ll probably not want to push headlong into healthcare for hospitals and nursing homes.

Test your theory about this new niche from a team perspective—sales, operations and installation, to start. Does anyone have experience in this new area? Talk with friends or associates that are not direct competitors about your ideas. Have they had experience in that segment; do they tell you to run, not walk, away from that area, or are they positive? If they’ve had experience, they will likely give you some good tips. In one case, I wish I had had the benefit of their experience because I would have uncovered the significant problems I would face and avoided thousands of dollars in experience costs. What is the downside for your current business? Are you and your personnel able to summon the extra energy or time to focus on this new segment? Is this niche synergistic with your current profitable business?

The amount of physical space or warehouse operations layout can be critical for any new venture. Will there be bottlenecks in traffic flow or storage challenges? Will you run afoul of fire code or other safety regulations? I found that certain chemicals used in liquid-applied flooring required segregation, and there was always the potential for leaks of toxic materials. Do a walk-through in the morning when you are dispatching crews and think about how loading or unloading might have to change.

Then there’s the financial end of segment. How solid is your current business, and can you cover the costs associated with entry into this new segment? If not, where will the new money come from? Some require much larger credit lines, extended terms for payment, and time allowed for payment by clients. Can you handle a $200,000 bid, with a gross margin of 20%, and typical payment time of 60 to 75 days from your client? Can you pay for the product within mill terms of 3/30, N/45 with the cash flow from your other business? The last thing you want to do is damage your successful business with a lower margin new business niche.

How long will it take you to set up new relationships with your vendors or increase your credit line with existing mills? My counsel is to use current suppliers if at all possible, providing they have the right product mix. Yes, you might have to pay a slightly higher price right now. It’s better to pay that extra quarter a yard where you have a reputation with a known supplier.

Make your mistakes small ones by avoiding diving into the deep end of the pool. A bid on a smaller job might not be as emotionally satisfying, but the mistakes you make will be smaller and more easily absorbed.

I’ll bet we all know of a competitor that either went bankrupt or nearly so through inexperience. “The only way Cyrus got that job was because he didn’t understand it. There was no way the project could be installed in 45 days.” Ease into your new segments by carefully tracking the sales volume, gross profit, problem resolution stats, and growth prospects within your area.

How easily is this new business generated, and at what sales promotion cost? How long will it take you to be a major player in this niche? What are the startup costs, especially with equipment and training? Is there a lot of potential crew downtime while business is being developed? If your installation was flawed, how expensive was it to correct? Was it like re-stretching carpet or a total loss? Can we make a profit in this niche that is reasonable? Even though it might look good on paper, and seems to be profitable, is it really? And a key question: how much time and money will you commit before making a final decision on the new niche?

Do you actually like this type of business, or is it so aggravating, stressful, and downright frustrating that you even want to do it? With some types of business, you just cannot charge enough to make it worthwhile with all the emotional turmoil that is generated. I once stopped doing a type of business with the Pentagon for that reason. The handholding, screaming and other drama from majors, colonels and even a general or two just wasn’t worth it. I once interrupted the tirade of a full colonel by asking if he was willing to transport my installation crew by helicopter to the Pentagon landing pad from a nearby base so as to avoid a 20-mile traffic jam. When he said, “No, I can’t do that,” I told him, again, that we would be there when traffic permitted. Human nature is that we do not look for difficult things to accomplish unless it is very profitable.

So you may benefit from my mistakes over the years, I offer the following tips.

• TIP #1: Be wary of any new niche that focuses on a specific product or with only one type of product. You will be extremely vulnerable to manufacturer eccentricities and pricing pressures after you’ve spent thousands in promoting that niche. It is much better to have a greater focus on the delivery aspect of a product type with your own installation crew where you control your destiny and profitability.

• TIP #2: Consider where you see a need in your market area, and how many potential targets you have in your geographic area. Will your great new idea translate into a successful new commercial segment? It may be better for you to be the second guy in and let someone else pay for the experience. Being on the cutting edge with exploration can be an expensive habit to support.

• TIP #3: Determine if there is excessive risk with this type of business, either from the products required or the inability to consistently install the products. Some flooring is extremely difficult to install to an acceptable standard. Then there’s a potential liability from product failure or the toxic nature of the product itself, or required components. Perhaps the biggest risk may be your involvement in a highly publicized failure that results in injury. “There was a foul odor from that adhesive, and I had people calling in sick all day.” Winding up on the front page of the Washington Post is tough to bounce back from for any company.

• TIP #4: A “jack-of-all-trades and master of none” approach guarantees low profitability. Trying to do business in too many areas is just about as bad as too few segments. Your excellence in one area is enough to eliminate small mistakes, which can add big to your bottom line. Make your list, get some experience, and then concentrate your energies.

“Gambling is a way of getting nothing for something.” That’s what you want to avoid. Do your research, learn from the mistakes of others, check your strengths; minimize any weakness. That’s the way to find your best new commercial niche. The result will depend upon your own flooring expertise, experience, financial wherewithal and tolerance for pain.

Print the Article