Obstacle Course

And maybe you've just hit a wall.

Whatever the situation, growth is possible. But the path is never a smooth one, even in an up market. If you've already expanded, you know what we're talking about; you've probably encountered a few obstacles along the way.

Surprisingly, the real obstacle to growth isn't a lousy market, experts say. The roadblocks are usually internal.

It's all about how you manage the business.

Here are the most common obstacles to growth, along with proven strategies to get you over the hurdles and back on the fast track.

OBSTACLE: Working in the business, not on the business

STRATEGY: Step back and look at the big picture — and don't forget to hire help

Custom builders know that frustrated feeling of running in place. Days are spent putting out fires at job sites. The nightly crush of paperwork never seems to end, leaving little time to actually manage the business.

That's what it was like for Andy Rosenthal, president at Rosenthal Companies of Potomac, Md. He started his custom home building company 17 years ago as a one-person operation working out of his house, with part-time help from his wife and a field supervisor. That was fine building three or four houses a year, but as his business grew, he couldn't keep up. "We needed a way to move forward without being distracted by the day-to-day work," Rosenthal says.

Most custom builders wear too many hats, says Dave Ketchen, a professor of management at Auburn University in Auburn, Ala. Besides management expertise, Ketchen has had two custom homes of his own. In his experience, custom builders spread themselves too thin, just like other entrepreneurs. Ketchen tells the story of how, for his own house, he had to remind the builder to charge for wood floors worth thousands of dollars. "He knew about building, but not about business," says Ketchen.

It's hard to grow a business alone because there are only so many hours in the day. Ketchen's advice: hire help. But he admits it's difficult psychologically for a small business owner, whose company is somewhat like a child, to hand off even partial control.

Rosenthal brought his two sons into the business and hired a part-time bookkeeper, along with another field supervisor. Rosenthal figures his company will build eight to 10 houses this year, doubling dollar volume. In fact, business is so brisk Rosenthal has rented office space for the first time. "We can't work out of the house anymore; we have too many people here," he says.

Obstacle: Growing revenues but not profits

Strategy: Watch the bottom line

Celebrities who summer in the Hamptons on Long Island like the work of J. Barrows, a custom builder in Wainscott, N.Y. Dealing with star-size egos can be a formidable obstacle, but President John Barrows says his real challenge is profits. He currently builds three to four large homes a year, along with four to six smaller ones.

"My objective is to grow net profit, not revenue," he says. Barrows thinks too many builders increase revenue in the mistaken belief that profit margins will keep pace; the focus is on taking more jobs rather than working more efficiently. "You have to keep your eye on the ball," he says.

Barrows is on the right track, says consultant Bob Whitten, managing partner at SMA Consulting's Orlando, Fla., office. "It makes no sense to grow revenue unless the profitability is there," he says. Custom builders should have a gross profit margin of at least 18 percent. If they don't and they want to grow their business, it won't help to add revenues. Profit margins might even slip with added business because bigger companies are more likely to be less efficient than small ones.

Instead, Whitten advises builders to prepare their company for growth: streamline systems and drive net profit margins to the desired level.

Obstacle: No capital

Strategy: Show me (how you handle) the money

"Every time we went to the bank they looked at us like we had the black plague," says Andy Atkins, vice president at Meritus Signature Homes. Like a lot of young custom builders, Atkins and his partners wanted to grow their company. They had pooled their own savings — a total of $6,000 — to start the business and had grown it very slowly from there. They watched every expenditure. "If we couldn't pay for it, we didn't buy it," says Atkins.

After 18 penny-pinching months, the Seneca, S.C., company was finally approved for a $150,000 line of credit. "We had to show the bank we were paying the bills, building houses and making a profit," says Atkins.

Now, with a good banking relationship in its pocket, the company is poised for another growth spurt. Last year the team did about 45 homes, most custom. And Atkins plans to open several new offices with the bank's help. Ironically, banks that wouldn't loan him money call now for his business.

External circumstances, such as lack of capital, can appear to be an obstacle, says business consultant Lisa Nirell at EnergizeGrowth.com in Bend, Ore. But builders should ask themselves if the obstacle is truly an insurmountable one. If it were, then no other builders would be able to grow their companies, and that's certainly not the case. As Meritus Signature Homes shows, a slow growth track from the outset that pleases the bankers can lead to more rapid growth later.

Obstacle: Saying yes to every project

Strategy: Know thy self; narrow your focus

Are you building $500,000 projects when your skills are really better suited for the $2 million range? Custom builders hate to turn down work, especially if they think business might slow. But it's best to take the time to identify your ideal client and project, says Dennis A. Dixon, president at Dixon Ventures. Dixon is a general contractor in Flagstaff, Ariz., who wrote "Finding Hidden Profits: A Guide for Custom Builders." "Too many builders take the wrong kind of business," Dixon says.

Doug Ford narrowed his company's focus by only taking projects on land already owned by the client. While staying focused on that business model, he gradually expanded his business, D.D. Ford Construction, in other ways. He now offers maintenance services after project completion, and he runs a cabinet shop that sells to other builders.

Revenue at his Santa Barbara, Calif.-company should hit $18 million this year. A big part of his company's recent growth comes from remodeling projects, a segment with a higher gross profit margin than new homes. "We're growing at a steady rate," says Ford.

Obstacle: You have no plan

Strategy: Take out a blank piece of paper and start writing

You can't know where you're going without a road map. Entrepreneurs like to think they don't need to plan, and the smaller the business, the less time there is for planning. But a custom builder who wants to grow needs a strategic plan.

"Put it on paper," advises William A. Allen, president at William A. Allen Consulting, in Redmond, Wash. A good plan includes financial and production goals. It also addresses the systems and people needed to get there. "Share the plan with employees. You can become bigger only if you embrace the creativity in the organization," Allen says.

Rosenthal hired a business consultant to help develop a strategic plan for the business. Rosenthal's goal is to grow his business to fund his own retirement and to build a viable operation to support his two sons who work at the company.

"We decided to shoot for the moon," he says. "We know our core business, how many employees we want, and where we want to be in five years." Though the plan started as a 10-page document, Rosenthal eventually wants his plan to fit on a single sheet of paper. To that end, key managers each devote three hours a week to the plan. Managers meet once a week and make revisions. Says Rosenthal: "Once we have the plan, then we'll put the systems in place to reach our goal."

Obstacle: Clients can't hire a company they've never heard of

Strategy: Marketing, marketing and more marketing

Think marketing doesn't work? Think again. Wayne Farabough started in the custom home building business in 1997 with one project. Ten years later, the business does about 10 homes a year ranging from 5,000 square feet to 18,000 square feet. "We found our market in the upper-end custom niche," says Farabough, a managing member at Perfection Homes in Tulsa, Okla.

How did he get there?

Farabough builds a spec home every year as part of a local Street of Dreams. The money raised goes to a local charity, and Farabough eventually sells the home. "The event showcases our work well," says Farabough.

Custom builders tend to rely on word-of-mouth referrals, but a thought-out marketing plan is key to growth, says Nirell. Advertising is one way to boost sales, but don't overlook more unconventional methods either.

Matt Belcher at Belcher Homes in Kirkwood, Mo., became an expert on green building. "We get a lot of media attention from that," he says. As a result, he was recently selected as the builder for a new 17-acre green development in Columbia, Mo.

Another example: Atkins wrapped his vehicles in the company logo — a moving ad. And his Web site got 80,000 visits in the last three months after he paid to have his site listed at the top of a search engine's results. In a week, he typically gets four qualified leads from the search optimization program, outperforming all other advertising he's tried. Atkins calls it the "best advertising money I have ever spent."

Obstacle: Can't find or keep good people

Strategy: When you find them, reward them

Wanted: A trustworthy field manager with killer skills.

A help wanted ad like that could have been placed by Witter Construction Company, Aiken, S.C. "It's very hard to find that person," says President Herb Witter. He knows the right manager can take his company to the next level, but he hasn't had much luck. In some cases, the person was asked to leave, and in other cases, they left on their own.

Witter solved the problem by bringing his son into the business. But now that Witter wants to turn the business over to his son, he needs another field supervisor to take his son's place. "It's the biggest obstacle I face," he says.

Finding experienced people is getting a bit easier now that home building has slowed, though the availability of top-notch field supervisors definitely depends on the local market, builders say. Savvy builders do everything from networking with trades to staying in touch with skilled workers employed by other companies. But just as important, experts say, is to keep good workers once you find them. That way your business won't be plagued by turnover, and only a committed workforce can put your business on a growth path.

"Get employees to care about the business," suggests Fletcher L. Groves III, vice president at SAI Consulting, Ponte Vedra Beach, Fla. All employees should be taught to understand the custom home building business. Share financial information. "It's all about transparency," says Groves. Once everyone knows the numbers, then employees can be given the responsibility to move the numbers in the right direction.

Groves just finished revamping one builder's compensation plan. When certain levels of gross income (net income also could be used) are reached, everyone gets a bonus. Every dollar above the base line is split: one-third to retained earnings, one-third to the owners and one-third to employees. Bonuses are parceled out in "buckets" and paid out every 45 days to motivate employees. Also, the payoff is progressive. Early buckets of bonuses represent a smaller percentage of the total pool than later buckets to keep employees on track all year. The system reinforces an important message, Groves notes. "It's like the company owner is saying `I can't win unless you win.'"

Employee empowerment helps companies grow, Ketchen says. "Don't pay people on an hourly basis," he suggests. And when profits go up, be willing to share.

Obstacle: There are not enough good subcontractors in my area

Strategy: Court the good ones

Reliable subs can make or break growth plans. The Crasi Co. of Cuyahoga Falls, Ohio, has annual revenues of about $5 million. "It's very true in our area that there are fewer skilled subcontractors," says President Tony Crasi. "Good craftsmen are hard to find."

As a strategy, he uses a kind of training approach. For example, Crasi found a drywaller who was young, hardworking and whose work quality was pretty good. Crasi gave him more work, and gradually more complex work. "We are developing a bond with him," says Crasi. "But it's a slow process. It doesn't happen overnight."

Ketchen says to not overpay subs but warns to not be a scrooge either because you'll end up low on the subs' priority list. For the most vital systems, such as plumbing, pay that sub a little more than the others. "They'll be loyal, and that'll help you grow the business," says Ketchen.

Obstacle: Beware of cost-plus pricing

Strategy: Switch to fixed-price contracts

Many custom builders offer their clients the option of cost-plus pricing, but it can be an obstacle to growth. Cost-plus projects can easily spin out of control, eating into time that could be spent on new projects.

"Cost-plus pricing may be low-risk, but it's also low-profit," says Dixon. His fixed-price model helps him stay in charge. He won't estimate a job unless he has 100 percent of the specs in hand. The contract provides for five allowances, at most. Dixon quotes an hourly rate for his time, as well as for the other supervisors on the job. "The fixed-price contract allows me to remain in control," he says.

Dixon says the fixed-price model "filters" unprofitable jobs. "I do fewer projects, but I'm making more money," he notes.

Obstacle: Systems that don't work

Strategy: Formalize workflow

Custom builders often stumble because of their deal-driven mentality, says Groves. "They lurch from project to project like they have never done this before.,"

A better approach: Develop the systems and controls so each transaction has a similar flow. "A predictable chain of processes makes builders more productive and more profitable," Groves says.

Simonini Builders in Charlotte, N.C., has developed a proprietary database system. It tracks contacts; estimates; schedules; change orders; account payables and receivables; warranties; and punch lists. All company employees, even the receptionist, uses the system. Marketing Director Scott Teel says the system — run by an in-house computer programmer — cost millions of dollars. "But the return on the investment has been dramatic," he says. It's the only way, he explains, the company has been able to build at the volume it does, about 100 custom homes a year.

Obstacle: Cranky customers who always change their minds

Strategy: Manage them with solid contracts, written notices

"If you don't do what a customer asks, you'll probably get sued or fired," notes Orren Pickell, president of Orren Pickell Designers & Builders. The Lincolnshire, Ill.-based company has annual revenues of about $60 million and builds about 30 custom homes a year. Pickell says the biggest obstacle to growth is not being able to fulfill the wishes of multiple clients at the same time. "I've built my business around the word yes," he says.

The contract, plans and specifications are used to manage the client. For example, Pickell adds all change orders to the specifications — in writing. The change order details the amount of time and money involved. Customers are asked to sign the change order and return it within three days. If Pickell doesn't get the change order back, it becomes official.

Pickell emphasizes the importance of having client communication in writing. "I used to do it verbally, but they don't remember or don't care to remember. "It's essential to have pricing and timing in writing."

Obstacle: We've plateaued, leveled off, hit the wall; we're stuck

Strategy: Diversify

Many custom builders hit a ceiling at six to 10 homes a year. One way to make the jump to the next level is to diversify into other lines of business. A new hire may have a particular skill that allows the business to expand in that area. One builder hired a master craftsman carpenter and then sold custom cabinetry to other builders. "You can grow your business if you are willing to invite that kind of creativity into the organization," says Allen.

Tim Metler saw a market opportunity while running his custom home business in Orem, Utah. He recognized a need for a tracking system that seamlessly meshed bidding, scheduling, customer management and warranty calls. So he designed a construction management software program for small custom builders. (see the software at www.BuilderHelper.com.) "We used our company to solve our own problems and then market it to other companies that face the same challenges," says Metler.

After just 2½ years in business, BuilderHelper revenues are about equal to those of Metler's custom home building business. Metler declined to give actual numbers but says BuilderHelper, with 10 employees, is growing much faster than his construction company, which has four employees. "We already have several thousand customers, and we're looking for more salespeople."