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Hard Times Not the Best Times to Diversify Business
Diversification may be a hot topic during hard times when small builders and remodelers are looking for opportunities to increase their sales, but today’s housing downturn is probably not the best time to begin expanding into new lines of business, Mike Weiss, CAPS, CGB, CGR, GMB, a contractor from the Indianapolis area, told the Oct. 9-12 Remodeling Show in Las Vegas.
For one thing, remodeling and home building are not countercyclical, he pointed out, and going from one to the other doesn’t necessarily make good business sense during a housing downturn.
For another, the impulse to diversify may be misdirected. “Some people don’t make a success of one effort, so they go somewhere else and make the same mistakes,” Weiss said.
“You have to do self-analysis,” he advised. “Find out if you have the ingredients to make it successful, then find the product to diversify into. Do it when you want to, not because you have to. Finding different work in hard times is usually not profitable and it is not a good time to experiment.”
Finding Advantages in the Slowdown
Rather than diversifying, remodelers can put a housing slowdown to their advantage by going out and finding good employees who have lost their jobs, he said. Some employees, he observed, “haven’t built a nest egg for their business and will cut the most expensive employee on their payroll even if they’re the best person in the company.”
Downturns are also a good time to lease out extra space or buy a piece of equipment or other asset from a competitor who needs the cash, he said, and they also can favor integrating some new activities into a business. For example, instead of waiting for a framing subcontractor to become available, hire one of your own, and bring them in and farm them out when they aren’t busy.
Remodelers should also be spending their time determining if they have been undertaking jobs that are actually not good for their business. “Try to use things developed by trial and error, or networking, to develop a diagnostic to improve the way you’re doing things,” Weiss said, describing how he filters out one-third of his calls because they are not within the chosen sphere of his business and then whittles his qualified leads down much further to get the jobs that are best for his company.
Diversification does have its advantages, he noted, including providing new growth and challenges for the company, mitigating the vulnerability of a single market activity, balancing the work load and seasonal activity, capitalizing on the reputation and talent in the company and providing new advancement opportunities for existing key personnel.
On the negative side of the ledger, diversification can lead to squandering capital generated by the core business, can over-obligate existing personnel, can compromise the success of the core business, can delay pulling the plug on unprofitable activities and can eat up time and erode competitive advantages.
Don't Give Up a Cash Cow
When investing their excess earnings in a new activity, Weiss warned of the importance of sticking with the core business. On their way to diversification, “people will give up a cash cow,” he said, and that’s no way to run a business.
Successful diversification requires the ability to delegate, organize and investigate and a company that is well-capitalized, that is set up to run well on its own, knows how to market and keeps its focus on earning regular profits, he said.
Weiss cited several reasonably safe opportunities for remodelers to diversify into — light commercial, residential, subcontracting, design and construction management. Small industrial complexes, office parks, multi-tenant incubator warehousing and store-and-lock installations offer reasonable safe possibilities for partnerships. Storage facilities, he said, are “absolute cash cows if you have a way to run them.”
Suggesting how to find some natural paths to diversification, Weiss discussed his own business experiences with the cabinet dealers to whom he sent his clients. He went from dealer to dealer and found that many dealers would allow customers to exceed their budgets. “The dealers weren’t paying attention to how good a customer I was,” he said, so he became a cabinet dealer, buying directly from the manufacturer. “I can now offer clients a better cabinet for the same money or the same cabinet for less. The kitchen designer on our staff is me.”
“When looking at diversification, look at stuff where you won’t go, have a way to get out and set a time when you will get out,” Weiss said.
He advised not using the existing business to meet the capital requirements of a new enterprise unless it has built up a six-month cushion. A business plan is paramount, as are good systems that can be applied to the new diversification opportunities, he said.
 New Master-Level Designation for Remodelers Available Soon
Starting in February, Certified Graduate Remodelers (CGR) can attain further recognition for their commitment to educational excellence and longevity in the remodeling industry by earning the Graduate Master Remodeler (GMR) designation — the master level of the current CGR designation.
For more information, visit www.nahb.org/GMRinfo or e-mail GMRinfo@nahb.com.
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