Remodeling Job

Alan Underwood struggles with a problem that plagues many entrepreneurs of the one-man-band variety: how to maintain momentum.

A spurt of new business for his Studio City general contracting firm, Underwood Construction, means long hours on the job site while marketing and other new business-development chores go unattended. When business slumps, cash flow ebbs and Underwood doesn’t have the resources needed to drum up new remodeling work.

To make marketing matters worse, the job site is something of a refuge for a hands-on person like Underwood, he says. It’s an issue he has agonized over for several years.

“I always find myself ending up at the job site more times than I like. That’s a weakness for the growth of my company,” he said. “It won’t grow until I take my tool bags off and concentrate on marketing and business development.”

Underwood was spurred to ask for help when preliminary sales figures showed business down 30% at $150,000 last year compared with three years earlier. A year-end flurry of work pushed sales to $250,000, but after 12 years in business, he says, volume should be higher and steadier.

Marketing is the key to his goal of doubling sales to $500,000 this year and ensuring a steady flow of work, Underwood says. He’s made some moves on his own but he still feels torn between tending to existing customers and finding time to rustle up new business.

The business could use an organized marketing plan, agreed consultant Harold Hammerman, a retired general contractor and a consultant to the Small Business Administration’s SCORE program.

But marketing is not the biggest problem Underwood’s company faces, Hammerman said. He is more concerned with the lack of capital.

“This is not a handyman’s job. He has to have some capital to sustain himself,” the consultant said.

Long-term and working capital are vital to the operation of any business. In Underwood’s case, permanent financing, such as a line of credit, would provide the working capital needed to cover the costs of remodeling jobs before payment is received. Long-term capital would pay for advertising, for example, and new or upgraded tools and machinery.

Hammerman estimates the construction company needs $50,000 to $150,000 in capital to operate effectively.

A bank loan or a line of credit are the typical sources of outside capital for a business with a good credit history. Like many small-business owners, though, Underwood has gone through the wringer trying to weather the vagaries of the construction business. His company managed to survive the recession while many competitors failed, but when a couple of customers skipped out on paying--a problem common to all businesses--Underwood Construction’s capital and credit took a hit.

A business partner may be the answer, Hammerman says. He suggested Underwood look for a working partner who can put some money into the business, or who has the credit to get a loan. A partner qualified to handle the construction side of the business would leave Underwood free to concentrate on marketing, advertising, sales and overall management, the consultant said.

Would anybody be interested? “I would be if I were a younger man,” said Hammerman, president emeritus of the Western Regional Master Builders Assn. Underwood is “talented and he’s extremely bright. . . . I was impressed with his knowledge of construction problems and costs.”

Another small general contractor might be a business partner candidate, or Underwood might want to hook up with his longtime foreman, Hammerman said. If the foreman owns his own home, he may have access to credit the company needs.

Before he can ask for capital from a potential partner or a bank, Underwood needs to put together a business plan, Hammerman said. The plan will serve as a sales tool for an investor and an operating manual for the company.

First priority: Set a month-by-month budget that includes expected sales and expenses, including marketing costs, Hammerman said. The plan should also clarify the company’s target market, including its geographic and demographic reach. It should lay out exactly what type of advertising and marketing the company will do each month and include job descriptions for Underwood and a potential partner.

“It doesn’t have to be a book,” Hammerman said. “But it should be a description of the business” month-by-month for a year.

Once the business plan is completed and the search for a partner underway, Underwood can begin to implement the low-cost marketing and business development strategies Hammerman recommended.

Until new capital is at hand, the contractor will have to pinch promotional pennies, Hammerman said. He’d like to see the company set aside 5% to 7% of gross sales to pay for a consistent advertising and marketing program, the national average for general contractors, he said. At current sales levels, though, that’s $12,500 to $17,500 a year, or less than $1,500 a month. It’s not much, but even that may be out of reach for Underwood until sales steady.

For now, Hammerman recommends that the company post advertising signs at all its job sites and, with the owner’s permission, leave them there for a couple of weeks after the job is complete; hold open houses at completed remodeling jobs with the cooperation of homeowners; and create a simple, four-color sales brochure.

“He should get somewhere between four to six inquiries a week,” Hammerman said. “If he’s good in his marketing, he’ll sell one job every two weeks, maybe a little better.”

It’s a numbers game. The more sales calls made, the more jobs the company will land. “Therefore, he can’t continue using his tool belt too long,” Hammerman said.

The average cost per lead in California for general remodeling jobs is $150 to $200, the consultant said. That means it will cost Underwood that much in advertising and marketing to get one potential customer to call him.

Nationally, only one of every seven calls to a general contractor leads to a sale, Hammerman said, and “anybody that tells you otherwise is either selling too damn cheap or he’s a liar.” So Underwood can expect to pay $1,500 to land each job. That’s 3% to 5% of the cost of a room addition in an average-income area, Hammerman said. That’s a big bite out of the 20% to 22% gross margin with which Underwood operates.

Hammerman suggested the contractor put most of his marketing resources into “the cheapest thing you can do”: a flier. It should be an 8-by-10, two-sided, four-color flier folded twice into a brochure, he said. It should have a color picture or two of Underwood’s best work, his phone number and a return card. There should be a blank space at the bottom where the contractor can stamp in the address of his latest job site.

Hammerman suggested he distribute 2,000 fliers within a five-block radius of the site. Five thousand fliers, including distribution, will cost $2,000 to $3,000, Hammerman estimated. “That seems like a lot; however, he is going to get more results out of that than any other type of advertising.”

He discouraged Underwood’s inquiries about a mass mailing, saying the method is too expensive for him and ineffective for contractors in general. People skills are also critical in handling the often tension-filled job of remodeling, Hammerman said. He has worked with many general contractors to improve communications, including writing contracts and job schedules. “A contractor has to be a good communicator, not just a damned good carpenter,” Hammerman said.

Underwood, who has a degree in English literature, articulates his goals, strengths and shortcomings clearly and has begun to shift his efforts to marketing, Hammerman said. The business could really take off, though, with an infusion of new capital, the consultant said.

“He’s a very bright man. He understands where his problems are,” Hammerman said. “A man can do a million dollars’ worth of business with a typewriter, a truck and a phone, but first he has to have some capital.”

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

This Week’s Business Make-Over:

Name: Underwood Construction

Headquarters: Studio City

Type of business: General contractor

Status: Sole proprietorship

Owner: Alan Underwood

Founded: February 1986

Financing: Cash flow

1997 sales: $250,000

Employees: None

Customers/clients: Primarily homeowners, but also property management companies and commercial and multifamily property owners

Main Business Problem

Lack of marketing, new business

Goal

Double sales in 1998, secure a steady flow of work, hire people to handle increased volume

Recommendations:

* Find $50,000-$150,000 in capital, perhaps through a Small Business Administration loan or a business partner.

* Set up a month-by-month business plan that shows how the company will operate over the next year.

* Focus on low-cost marketing and business development strategies, including job-site signs, open houses and a four-color brochure.

* Set aside 5% to 7% of gross sales for a consistent advertising and marketing program.

* Learn to communicate more effectively with customers.

Meet the Consultant

Harold Hammerman, a retired general contractor, is a consultantfor the Small Business Administration’s SCORE program. He isfounder and past president of the American Building Contractor’sAssn. and president emeritus of the Western Regional MasterBuilders Assn.