SAN FRANCISCO — In the continual quest for more sales and profit, invariably the subject of diversification arises. Diversification discussions usually include the topic of disaster restoration, so it might be appropriate to explore the reasoning behind a major effort to diversify and particularly to expand in the arena of disaster restoration services.
Diversification into any new business is a serious commitment, but restoration may require even more exploration than other related businesses. The large potential orders are alluring, the processing sounds easy, and the volume can help utilize excess capacity.
It is normal to have this driving incentive to increase sales volume, which is absolutely legitimate with a few caveats. I’ll attempt to list considerations to ponder before deciding to capitalize on this potentially lucrative source of business.
REASONS FOR CONSIDERING DIVERSIFICATION
Maximization of market potential is a driving consideration if the potential is examined in its entirety. Both sales volume and resulting profit should be explored thoroughly. Many times, sales stories have been shared that on the surface look tremendously exciting, but the retroactive profitability analysis shows extremely disappointing results. You have all heard the initial excitement of the Groupon wave that was often later followed by the exclamation, “Never again!” Sales are exciting but ultimate profit is what really counts.
Maximization of return on assets also drives the diversification decision: “I have all this capacity that should be utilized.” Remember that filling a plant doesn’t fill a bank account. But if there is profitable utilization of that capacity, the rewards can be dramatic.
Life cycle of company ownership is another consideration for diversification. If near-term retirement is the goal, a new division will probably push that plan further into the future, even though it could better provide for the eventual retirement. If the business has been newly acquired or is in growth mode, additional lines of business may be a necessity to meet the sales and profit goals for growth.
Succession planning can also be a good reason for adding restoration to your operation. If the next generation (or other potential future owner) is ready to join the enterprise team, the new venture may be an appropriate place to utilize their skills.
STEPS TO MAKING THE RESTORATION DECISION
Estimate the potential in your market first before anything else. If the market potential doesn’t exist, every other issue on the list is academic. So consider:
- Total population numbers, density and lifestyle breakdown all contribute to the success of restoration operations. The population must be sufficient and appropriate to support your efforts.
- A climate conducive to fire incidents is beneficial to predicting restoration potential due to furnace puff-backs and heating seasonality.
- Non-fire disasters such as hurricanes, tornadoes and flooding, although seemingly more common, are regional and definitely not as predictable.
- The number of and expertise of competitors is also critical to this decision. This is an aggressive, competitive business where networks and contacts are crucial.
CHECKLIST OF CREDENTIALS
Once you have determined the potential for restoration business in your market and decided there is a profitable share for you to capture, consider your credentials for competing effectively:
- The ability to manage multiple diverse operations is essential to the success of any new endeavor, especially to a venture into the disaster restoration arena. A restoration operation is not traditional dry cleaning as usual.
- The ability to fund a major division creation and expansion is also key to the success of this enterprise. This is not an overnight solution to increased sales and profit. A substantial initial investment is required for:
- Dedicated management to direct the division (even if it is initially part-time), understand the business and manage the effort.
- Infrastructure above unused plant capacity. Major sorting, marking, storage and, frequently, a drying room and deodorizing facilities are needed as well.
- A dedicated, effective, professional business-to-business sales effort, which is probably the most common success factor in this business. It is expensive during the building phase when there are no initial sales coming in.
- The ability to weather uncertain cash flow is probably the most challenging issue to owners. It is important to remember that:
- Disasters are unpredictable.
- Victims are often unpredictable and emotional. They may prefer the cash offered by the insurance company after you have done all the preliminary work, so don’t work on or count on the job income without an agreement from the victim and/or the insurance company. Middlemen, such as contractors, are not the ultimate decision makers.
- Insurance companies are not individuals. Don’t rely completely on your contact’s information.
- Collections are key. It is important to understand the aspects of this business that can cause delays in collections, such as waiting for permits to rebuild or scheduling contractors and/or their subcontractors. Also, major corporations such as insurance companies aggressively manage their accounts payable and so you must aggressively manage your accounts receivable to collect. You must pay your labor and expenses early, so deposits and clear payment releases need to be negotiated and clarified.
- Access to a flexible workforce is essential due to the unpredictable nature of this business and the immediacy of the response when this work does materialize. The ability to respond on the schedule of the victim and/or their insurer is vital to the success of the current job as well as future referrals. Rest assured that the next provider is on their call list.
- An around-the-clock monitoring mentality is critical due to the immediacy of the response required to service the work. Disasters aren’t confined to normal business hours.
- Showing empathy for victims helps during an extremely stressful life event for your insurance company client or its customer.
TO AFFILIATE OR NOT TO AFFILIATE
It is likely that if there is significant restoration business to be done in your market, there are already one or more franchisees and/or restoration association members covering your area. But you may be considering the opportunity to affiliate due to an acquisition or an additional offering becoming available. Even seasoned restoration operations have found good reasons to affiliate, finding that the benefits outweigh the associated costs and restrictions. Some of them are:
- National recognition
- Network contacts
- Management training and support
- Production, tracking and billing systems and procedures
- Marketing expertise
SHORT-TERM ROI VS. LONG-TERM ROI
The most telling analysis in determining if the restoration business is appropriate for your expansion goal is to weigh the short-term return on investment (ROI)—which may likely be negative—against the probable long-term ROI.
This is challenging because the up-front investment in infrastructure, management, sales effort and training is significant and there is no guarantee that the long-term return will be sufficient or consistent. For example, imagine the impact of Hurricane Sandy in one year vs. a no-disaster year the next.
Disaster restoration can be a good addition to your offerings, but it is not for the casual participant, the faint of heart, the timid, or the business unable to fund the operations and fluctuations resulting from the uncertainty of volume and profit flow.
If you have the cash for investment, the dedication to make it profitable, the sales effort to combat brutal competition, and the fiscal stamina to focus on the long term, then it may be the right path for you and your company.
Have a question or comment? E-mail our editor Dave Davis at [email protected].