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Why Most Small Contractors Fail

 
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Old 09-18-2012, 08:44 AM   #1
 
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Why Most Small Contractors Fail


Saw this on twitter....


http://www.shawnmccadden.com/the-des...usinesses-fail
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Old 09-18-2012, 08:57 AM   #2
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Re: Why Most Small Contractors Fail


I am SO thankful I have the partner I do. He is a QuickBooks fanatic. Every single tube of caulk MUST be accounted for and when inventory is off, he wants a full accounting of where it went. Maybe a PITA sometimes, especially for a sales oriented guy like myself. But he knows where every single dollar is, every minute of the day. He takes every single discount available to us on invoices, we don't owe anybody a dime and we have plenty of money in the bank.

We actually had several credit balances stretching out over several months with one supplier because he paid for material early before the returns could go back and credits applied. When I said something to him about it the other day, he said well.... they're too slow about getting our credits back to us and I'm not going to lose that 1% discount by paying early.

Tough problem to have I guess....

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Old 09-18-2012, 10:38 AM   #3
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Re: Why Most Small Contractors Fail


Interesting that he used a 2007 "pre-recession" report (using even older data no doubt) as his supporting info. Didn't read that report but I'm guessing it can't be all that relevant 5 yrs later in a market that most guys are trying to stay steady as goal number 1 and growth as a priority further down the scale.

And comparing companies with payrolls of $30,000 against $350,000?

No sh$t the $30,000 company has a higher failure rate, that's not enough to support a one man band...
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Old 09-18-2012, 12:05 PM   #4
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Re: Why Most Small Contractors Fail


SPEAKING STRICTLY RESIDENTIAL

Most small contractors fail because they are founded and lead by "crafts"-men and not "business"-men.

The truth is ugly but most of these so called "craftsmen" do not and could not even truly earn that title. Most would hardly qualify as employees at a properly run company.

They get in, swing it out for a year, or two, or three. Starve, get run out, or stay stubborn and keep plugging away making less on their own than they would working a menial job at a real company. Happy to call themselves contractors.

MOST contractors never developed a business plan. MOST contractors barely know how to price a job. MOST contractors can't even return a phone call. MOST contractors don't, and can't, and wouldn't. Reality is construction is a low bar of entry industry that attracts the bottom of the rung from all across the board who really skew the numbers. It's like real estate agents...10% make all the money and 90% will never figure it out.

That's the reality. Now you can sugar coat it, flip it upside down and put a cherry on top. That's our industry. Systems are just one rung on a long ladder of what is needed to succeed.
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Old 09-18-2012, 12:30 PM   #5
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Re: Why Most Small Contractors Fail


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Old 09-18-2012, 12:40 PM   #6
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Re: Why Most Small Contractors Fail


Quote:
Originally Posted by Heritage View Post
SPEAKING STRICTLY RESIDENTIAL

Most small contractors fail because they are founded and lead by "crafts"-men and not "business"-men.

The truth is ugly but most of these so called "craftsmen" do not and could not even truly earn that title. Most would hardly qualify as employees at a properly run company.

They get in, swing it out for a year, or two, or three. Starve, get run out, or stay stubborn and keep plugging away making less on their own than they would working a menial job at a real company. Happy to call themselves contractors.

MOST contractors never developed a business plan. MOST contractors barely know how to price a job. MOST contractors can't even return a phone call. MOST contractors don't, and can't, and wouldn't. Reality is construction is a low bar of entry industry that attracts the bottom of the rung from all across the board who really skew the numbers. It's like real estate agents...10% make all the money and 90% will never figure it out.

That's the reality. Now you can sugar coat it, flip it upside down and put a cherry on top. That's our industry. Systems are just one rung on a long ladder of what is needed to succeed.
This is probably the perfect post.

I will also add that in our industry, its a lot of "who ya know" and not "what ya know" unfortunately.
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Old 09-18-2012, 12:58 PM   #7
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Re: Why Most Small Contractors Fail


Quote:
Originally Posted by ROVACON View Post
I will also add that in our industry, its a lot of "who ya know" and not "what ya know" unfortunately.
Sure, "who you know" gets your foot in the door but "what you know" typically keeps you in the game...
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Old 09-18-2012, 06:03 PM   #8
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Re: Why Most Small Contractors Fail


Quote:
Originally Posted by ROVACON View Post
This is probably the perfect post.

I will also add that in our industry, its a lot of "who ya know" and not "what ya know" unfortunately.
i like the way the other guy put it
i`m an example
i`m a very good craftsman, very personable , and clients like , and trust me whole heartedely
but admitedly im` not as good a business man as i need to be .
i`v gone from having 6 - 8 employees, back to just me and a carpenter or 2 periodically , or helper now and again ,
and i`m physically , and mentally running myself into the ground.
i`ll always be busy, because i grew up in this town , and i have so many clients , but i`m not making the money i want or need to make for my future.
i`m fighting tooth and nail right now to get back to a company with employees .
first time i did it , was effortless , it just happened , from " who i knew "
but once there , i basically coasted , and didn`t keep pushing. so it slid down year after year in size.


i`d love someone to teach me how to be the business man i need to be .
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Old 09-18-2012, 06:04 PM   #9
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Re: Why Most Small Contractors Fail


not easy admitting that ,and writing it for all to see.
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Old 09-18-2012, 06:28 PM   #10
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Re: Why Most Small Contractors Fail


Business wise........joining this forum was the best business decision I ever made. Yes I have learned a lot about the trades but everyone has taught me much much more about the business end.

Pretty sure I could have kept going when I was in business for myself last time. I know for certain, when I get back out there, I will never look back because of the info right here on CT.
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Old 09-18-2012, 06:39 PM   #11
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Re: Why Most Small Contractors Fail


Quote:
Originally Posted by ROVACON View Post
This is probably the perfect post.

I will also add that in our industry, its a lot of "who ya know" and not "what ya know" unfortunately.
Who you know is just another business decision. It's not "Luck" that some people know all the right people. A good businessman will put themselves in situations to meet the right people. get to know them, and use that to his advantage. Some people do it naturally and don't even realize it. Others (like myself) have to make an effort to go out and meet people and get to know them.
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Old 09-18-2012, 07:48 PM   #12
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Re: Why Most Small Contractors Fail


Most small business owners don't know their costs until they have no money left.

Also, those who should easily be successful have a hard time getting there due to these contractors coming & going.

How many here pay themselves a salesmanship wage & hourly wage if they do the physical work?
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Old 09-18-2012, 08:54 PM   #13
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Re: Why Most Small Contractors Fail


Quote:
Originally Posted by BamBamm5144
Most small business owners don't know their costs until they have no money left.

Also, those who should easily be successful have a hard time getting there due to these contractors coming & going.

How many here pay themselves a salesmanship wage & hourly wage if they do the physical work?
I do.

I also find that when I loose a job to another contractor the difference is usually in the overhead column. They are happy working for an hourly wage while I'm not I want a business owners wage. I want to get paid for as much of the time as I put in on the job and off the job.
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Old 09-18-2012, 10:01 PM   #14
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Re: Why Most Small Contractors Fail


Quote:
Originally Posted by BamBamm5144 View Post
Also, those who should easily be successful have a hard time getting there due to these contractors coming & going.
That's a marketing thing. But again goes back to running a business rather than being a just craftsman.
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Old 09-19-2012, 05:43 AM   #15
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Re: Why Most Small Contractors Fail


Quote:
Originally Posted by Spike7 View Post
not easy admitting that ,and writing it for all to see.
In a nut shell to be a good leader you must be able to do the work yourself. What I'm saying is you cant shouldnt hope the knowledge of a sub you have to direct. With this knowledge/ability comes cost savings, ability to survive and thrive in hard times with lower over head.

Second big mistake keep your debit to income low. To many contractors need the start to half point of every up turn to bail them selves out. That is a bad cycle that most never brake. When the cycle starts be ready to swing and capitalize. IE take it to the bank and keep it.

Third mistake most make is finding a comfort zone in life and never trying to come out of it.

To be honest I laugh at most contractors today. Nothing more then glorified coordinators. That's Not how we have survive and grown for 70 plus years. You can read all the self help you want bottom line is you create everything in your life no one will or can.

Pricing when they complain your getting typically what the market area will support. Or close I dont care what other charge no 2 company's are the same.

Last edited by Flag ship; 09-19-2012 at 06:49 AM. Reason: add more info
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Old 09-19-2012, 07:18 AM   #16
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Re: Why Most Small Contractors Fail


Quote:
Originally Posted by summithomeinc View Post
Who you know is just another business decision. It's not "Luck" that some people know all the right people. A good businessman will put themselves in situations to meet the right people. get to know them, and use that to his advantage. Some people do it naturally and don't even realize it. Others (like myself) have to make an effort to go out and meet people and get to know them.
Same here. I am getting better though. I am much better at my craft then running my business (I'll admit that) but each year has gotten better in regards to salary and profit. I probably could do much better a little quicker, but I am also a little hesitant about growing too fast.

Anybody else feel that way?
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Old 09-19-2012, 10:59 AM   #17
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Re: Why Most Small Contractors Fail


Quote:
Originally Posted by ROVACON View Post
Same here. I am getting better though. I am much better at my craft then running my business (I'll admit that) but each year has gotten better in regards to salary and profit. I probably could do much better a little quicker, but I am also a little hesitant about growing to fast.

Anybody else feel that way?
Most contractors when asked about growth they think more work (clients) more employees. Expansion can be achieved with distributing products sold. For example I supply most products are clients need kitchen cabinets windows door molding stair etc. I have to do less volume but my retention of the work performed is much much higher.

Most are guilty of over looking the simplicity of growth, bigger isn't always better for all.
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Old 09-19-2012, 11:39 AM   #18
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Re: Why Most Small Contractors Fail


Most people who start it out, have worked for and learned from theirs boss. But before learning important tricks of the trade or how to run a business, how to talk to customers, etc they start counting bosses money and think they don't need him.
They get a truck, some tools and off they go and in a year or two they fail.
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Old 09-20-2012, 08:23 AM   #19
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Re: Why Most Small Contractors Fail


Great discussion so far, excellent posts too.

I'm on track to do 230k in business this year, yet I'm failing.

The over head and profit are not what they need to be. This winter I plan on rethinking my plan, looking for new ways to find customers, bigger projects, and how to be at the top of my game. I have goals, like a shop, office, and new van. Unfortunately an 800 sq ft shop/office runs 1600 a month where I live. So it's a big goal.

I continue to raise my prices and will do so again this winter. As it's been beaten to death on this forum I find it difficult to compete with guys willing to work for 25 an hr or less and promise the world to a customer.

In the spring everything was great guns and I was killing it. (all through the winter I could not keep up) I was turning away projects I felt I didn't want to do. My prices were on track to what I thought they should be. Suddenly my close rate was at 25%. Mind blowing to say the least.

I spreadsheet every bid, so I know my labor and materials. I get material costs from suppliers. And at the end of the job (or through the progress of job) I track costs (materials and labor) I just did that for 4 small jobs 2-5k size yesterday and it wasn't a pretty picture.

I'm not going to "fail" because I'm busy as can be. But at some point I feel like giving up.
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Old 09-20-2012, 09:53 AM   #20
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Re: Why Most Small Contractors Fail


I have dealt with small businesses for almost 40 years. I started my first business when I was 18. The majority of the small to midsize businesses I have known over the years have failed....most sooner, some later.

These are some of the causes that I have seen to be consistent with failure:

1. Under-capitalization: just not enough money invested to survive the first 3 to 5 years

2. No research: This applies to #1. No one wants reality to spoil their dream. Finding out if the market will support another business like yours; how much money will it take to start, growth and survive the first 5 to 10 years.

3. No plan. This means you didn't figure out how you are going to get from point A to point B. No business, marketing, employee, financial or contingency planning. How are going to get from "baseline" to the next level, then the next level after that and so on. Are you going to be the worker bee your whole life? Are your going to grow and develop the business to the point where you have free time, income and other people to run things for you? It isn't going to happen unless you have a "road map" on how to get there.

4. Crafts person vs Business person. This was an excellent point brought up in previous posts. Most failures have to do with an excellent crafts person who struggled or simply failed at business, finance and growth planning

5. Using "exceptions to the rule" as your guide. Most small businesses fail. Some succeed for upwards of 10 years, then fail. Some succeed for 20 years plus. But I hear stories all the time of how "so and so" had no business background, no money, no customers, etc.....but he made and now he's a millionaire with a growing business, or, people point out something like Facebook and say: look, there's a guy who just made billions of dollars off a simple idea. Well, no one wants to think about the thousands of other in the same situations that lost everything and failed. The idea is to take what you can from those that succeed, and, learn from those that failed and why.

6. Changing environments and old ways of doing business. The world changes constantly and so does the business environment. What worked 3, 5, 20, 50 years ago at a specific time and place, doesn't mean it will work now. There are basics that do transcend time and location, but simply copying what someone else did doesn't mean success. Would you start a video tape rental business now, because it worked 30 years ago?

7. Not able to change from "employee" type thinking to "business owner" type thinking. This is another example I see all the time. You see it with hacks, illegals, below & average ability craftsmen.

They don't understand the reasons the business charges $50, $75, or $100 per hour. All they see is that they are only making $15 to $20 per hour, and, they feel ripped off. They think that by simply doubling their hourly wage, they will double their income or triple it. And, at the same time, undercut every other (legitimate) business competitor. These guys end up change ordering up their work, cutting corners, use cheap materials and tools, and, they still lose money in the long run. They also tend to have no insurance, no license, cheap clients and zero growth in their future. And all it takes is one major expense, like an injury, accident, broken down vehicle or getting ripped off on a big job, and these guys are out of business........only to get replaced by hundreds of others just like them.

This also applies to guys (a lot of union types unfortunately)who only want to work Mon-Fri, 9 to 5, with hour long lunch breaks, multiple breaks during the day. They also tend to avoid jobs that take "too much" effort, and, constantly have time overruns on jobs.

8. Getting into a comfort zone too soon. This means that you adapt to whatever condition you find yourself and stick with it, even if it doesn't work. You see this with people who have adapted to the welfare lifestyle. It becomes too easy to not work or get ahead. Something is true for business. It becomes too easy to just complain about lack of work, not finish projects on time, not accomplishing your goals, etc.

9. Not engaging others who can help you out. Right now I have 5 other contractors who send me work. They do the marketing, advertising and sales that get me jobs. And, I am still looking for more contacts to send me work. At the same time, I am working on my own plan of self promotion, so that that I am less dependent on others.......and......so I can hire more employees and grow the business to where I want it.

A lot of contractors see things as making on their own. This is an illusion.

10. Different management at different times. There is a reason why most companies go through a succession of CEO's at different stages of growth. The guy that started the business is not necessarily the right guy (and thinking) needed for growth, nor, the same guy needed for when the business starts to mature or diversify. Many businesses have failed because the "dictator for life" refuses to adapt or delegate responsibilities to others.

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