When it Comes to Diversifying, Look Before you Leap!

Target Audience: Construction Industry Professionals, Contractors, Construction Business Owners, Construction Accountant Interest, Construction Management, Diversification Focused Companies, Residential Contractors, Commercial and Residential Construction Specialists, Accounting Consulting Firm Interest

You’ve trimmed all the visible fat from your operations and improved efficiency as much as you can. Yet your bottom line still isn’t where you want it to be. So now you’re thinking about diversifying into a new market or service to improve your bottom line.

Not a bad idea. Done right, diversification can be a lifesaver. Done wrong, however, it can be, at the very least, a letdown and, at the very worst, a quick path to disaster.

Is Your Market Diversification-Friendly?

A good place to start diversifying is in your local market. If you’re a residential contractor, for example, you might look into whether commercial construction projects in your area are booming.

When you look to get into new markets, however, you’ll likely be up against many established relationships. For example, a developer that has worked with the same commercial contractor for years could be tough to win over. You’ll need to offer some solid reasons — and possibly a substantial price cut — to have much of a chance.

Alternatively, you could look into strategic partnerships or acquisitions to diversify. For example, an HVAC contractor that buys a sheet metal shop probably has effectively diversified within his or her specialty.

You could also consider looking outside your local market. Just bear in mind that, if you do take on jobs out of state, you’ll likely face tax and permit challenges. Union contractors also need to be mindful of having to use local labor forces that they’re unfamiliar with. And, obviously, you’ll lack the knowledge and “home field advantage” of your market. Nonetheless, this may be a way to outflank your competitors.

Are You “Strong” Enough?

Another factor to look at is your construction company’s strengths (such as a highly skilled workforce or any specialized equipment you can bring to the table) as well as its weaknesses (poor cash flow at the moment or outdated software). Be objective, honest and realistic.

In addition, be careful: Don’t assume your crews will be good at building banks just because they’re good at building houses. Commercial construction isn’t the same as residential. The building materials are different; the property owners tend to be more experienced and knowledgeable than homeowners; and the field is crowded and competitive. If you don’t have supervisors with commercial experience, you may need to hire some.

On the other hand, commercial builders may face risks jumping into residential construction, such as building additions or rehabbing condos. They, too, will face the challenge of procuring a somewhat different set of materials. They’ll also have to obtain different kinds of permits and compete against more entrenched rivals.

Is the Timing Right?

At the end of the day, diversification is a matter of timing. If, after studying your market and operational capacity, you can’t identify a realistic opportunity, you should probably postpone the idea. You may be better off gritting your teeth, tightening your belt and looking for new ways to build your core business. Diversification for the sake of diversification doesn’t make sense, but you should never stop looking for opportunities to expand and improve your business.

To contact Feeley & Driscoll, please click here or call us at 1 (888) 875-9770.