So you want to build a million dollar residential remodeling business, right? Sounds good to me!
But, let’s make it more specific — narrow it down somewhat and define some terms, okay? For instance, let’s talk about the million dollars. Do we want to just generate a million dollars’ worth of business, or do we want to create a profit of one million dollars?
And not just a gross profit, but a net profit, because we want this business to be worth our effort. Let’s think about the things we’ll need, so that we can get the results we want.
In order to understand net profit, let’s do some math, because we know that we first need to earn a gross profit, which we’ll project to be 15%. That’s the goal. And, according to averages, we can expect our net profit, after taxes, to be 5%, coming from the 15% gross. The average net profit is based on survey results from NAHB (National Association of Home Builders) reporting results from 2015 and 2018 of 5.3% and 5.2% respectively.
Continuing on, we can calculate that generating $20,000,000 in gross revenue is required in order to achieve our $1,000,000 at 5% net (1,000,000 / .05). Seems kind of high? Well, if we could manage to earn a 10% net profit, instead of 5%, then we could set our sights on a $10,000,000 revenue goal instead.
Right about now you might be saying to yourself, “Ten million bucks? I’m not interested in anything that size.” And based on the amount of projects it takes to get there (which we’ll discuss soon) — you’d probably be right.
In fact, based on results from our own survey here at BuildBook, the average annual revenue of residential remodelers was around $1,200,000.
However, the purpose of understanding the math is simply to make sure you align your thinking with your goals. Granted, there may be a few of you reading this article that will be shooting for that $20MM/year, right off the bat. But many of you will likely be interested in having a, shall we say, “less aggressive” gross revenue, like one million dollars.
To make it easy for you, we’ve created the simple calculator below that allows you to plug in a few numbers to see how many projects and how much revenue you would need in order to reach your net profit goal.
Are you seeing the value of the math? It greatly simplifies your decision-making process, doesn’t it?
Now, check this out.
Generating $10,000,000 in annual revenue works out to roughly $800,000 +/- per month in business. While that is sinking in, divide that by the average size remodeling job you are hoping your company will get.
Let’s say you begin with bathroom remodels. They might be $5,000 to $20,000+ each, but let’s call it $20,000 average, for sake of illustration. The math will show you would need to do 40 bathroom projects over the course of a month. How many crews and trucks would that take? Is your answer “Yikes!”, or is it “No big deal”? It makes a difference!
On the other hand, if your goal was closer to a million dollars gross revenue, then you’d have a average monthly revenue goal of $80,000. At $20,000 per project, you can see that you’d only need to complete four bathroom remodels a month, or one per week. Now … what would you need in the way of crews and trucks to handle that? Or, could you handle that yourself, as the project manager / superintendent plus one good foreman and a small crew?
Hopefully your goal is starting to become clearer to you. And again, you are arriving at it not by gut-wrenching decisions, but by allowing simple math to light your path. That same light can illuminate either path, and allow you to see which way seems more likely for you to succeed, at least in the short run. Nothing to say you can’t raise your goals later.
Lastly, to give you some basis for comparison: based on the results from our own survey, residential remodelers completed an average of 41 projects per year, which works out to roughly $30,000 per project.
Let’s add some more ingredients into our remodeling contractor stew. Using gross revenue of $1,000,000 per year, here are some rough numbers you can consider, and come from remodeling industry data. These percentages are based upon contract value (revenue).
70% Cost of Sales: labor (wages, taxes), materials & supplies (including fuel, permits, etc.)
25% Operating Expenses (office, rent, utilities, marketing)
5% Net profit
5% net profit, $50,000, is the projected net profit of a $1,000,000 remodeling business.
NOTE: these numbers are not exact. You have to know your own numbers — those are the ones that really matter. The important thing here is to realize that you now have a kind of template to look at as you do your feasibility study of the remodeling business.
More importantly, it’s going to show you something closer to the reality of the industry. You can will now resist the temptation of looking at that $80,000 per month revenue, figuring you can probably buy the materials for $40,000, do it yourself and pocket $40,000. Too often, that’s the way we contractors think.
The great news is, whether your goal is generating $1,000,000 in revenue or $1,000,000 in net profit, you can achieve it by following the right steps.
For the sake of argument, let’s take the simpler goal of generating one million dollars in gross revenue and consider the steps it takes to get there. At a minimum, what will you need?
Summarizing this process, here are the takeaways of how you do this over the first few years:
You start by capitalizing on your skills in the industry: either you’re a top-notch craftsman or you have tremendous business insight into how the industry works and how to leverage it to your advantage. You (or your partner, if you have one) will likely need to get a contractor’s license in your specialty and should plan on using your own pickup trucks and cell phones in the beginning.
Your goal in this step is to start building momentum while keeping your cost of sales and operating expenses to a minimum.
You’d love to have a good foreman, but until the business can afford one, you’ll want to be in the field to do at least some of the work as well as stay on top of all the paperwork.
In the meantime, you should constantly stay on the prowl for good people to come work for your company and to grow with you. Since you won’t be paying them much at the start — because it’s a “Start-Up” company, you’re looking for other dreamers.
This step is all about building the foundational team that you can trust and rely on while still keeping your cost of sales to a minimum.
Once you have a solid team in place and enough cash in the bank to cover fuel, office rent, and the weekly wages of your crew (including worker’s comp and taxes), you can turn your focus to working on the company rather than for the company.
In the beginning, as both the owner and operator, your company was being built on your reputation. Now that the company has matured, it’s time to turn your reputation into your company’s reputation (i.e. brand).
Transitioning out of owner/operator is something that many business owners either prefer not to do, or find too difficult to accomplish. It requires a strong desire to grow, a tolerance for risk, and a willingness to put faith in the team you built around you.
If your goal is to generate a $1,000,000 in net profit, this step is almost certainly a necessity.
For those of you that with goals that are less lofty, skipping this step can still result in building a remodeling company that provides a good living and rewarding lifestyle.
No matter what your goal is, if you continuously turn out superlative work and provide your clients with fabulous experience, you’re bound to build a company that will make millions over its lifetime.
Whether your remodeling company is already up and running, or you’re still mapping out your plan, BuildBook is the tool of choice for residential remodelers that want to streamline their projects and deliver an outstanding client experience. Try it free for 10 days.