For most contractors, I would sound like “Captain Obvious” if I were to tell you to plan before you purchase a new piece of equipment, for a new service that you have never performed. Yet, this is exactly what I found with a client just a short time ago. Wanting to enter another specialty service for their customers, they had been discussing for a few years on whether they should purchase a special piece of equipment, that they did not have currently. On again, off again, it went for almost three years of talking about adding the new service. Then, last year, they suddenly found out that another contractor, who had ordered this same piece of equipment, was backing out of the purchase. The equipment vendor called and let the owner know that this piece of equipment was theirs to purchase.
When I arrived at their office recently, the owner escorted me about the yard, as it was the first time I had visited their location. I had to stop to ask the owner about the “shiny” new piece of metal that looked like it hadn’t made its maiden voyage. The owner simply confessed that he had purchased the equipment a year earlier. When I asked him about how they were going to use the equipment he admitted, “Well, we don’t even have anyone who can run the equipment right now, and we don’t have the crew to support the effort.”
Now, if you see anything a little bit backwards in this story, you are spot on! This was a very good contractor who is growing, performs quality and profitable work, and wants some help about growth for his company. So how did a contractor, who is experiencing success, fall for the shiny new piece of equipment just waiting to be purchased?
Let’s look at a safe, and proven, strategy when purchasing equipment, especially equipment that may not be simply replacement equipment, but equipment that will allow you to be better equipped to enter a new service for customers.
- When you are considering a new service to add, always determine if there is a need for the service. For example, if you are looking at adding curb and gutter work, involving concrete, and your market area is overrun with contractors who perform curb and gutter, you may weigh the benefits of subbing out to one of the existing contractors or by entering the same service yourself. Additionally, do you have any current workers with any concrete and curb and gutter experience?
- When a new service market is under consideration, always consider what equipment will be needed. Your workers need the appropriate equipment, and tools, to perform the work productively and safely. However, the needed equipment should be strictly screened as the cost to purchase or to lease has grown more expensive. Look for your best options that fits your budget and plans.
- Before purchasing any equipment, develop the strategy of how you are going to enter the market that you are purchasing the equipment to support. Are you going to reach out to your current client base and update them on the new service you are considering? Go back to those customers who have encouraged you to enter this new service and confirm, “Are you going to give me the work?” Develop a rough estimate of what the potential revenue might be for first few years of work.
- Consider who is going to operate the new piece of equipment as well as the support crew. Do you have those individuals today? If not, are you committed to hire the needed expertise and help? Do you have existing workers who you can move into this new service without harming the existing crew they may be leaving? Tough questions such as these can give you more confidence about entering a new service division.
- Finally, have you considered a budget to open the new service effort. Most contractors are getting better at creating a yearly budget for operations and cash flow purposes but creating a budget for the new service effort could be very helpful. You want to keep your eyes on the costs, especially the early months of the new service, to monitor how we are actually doing.
I love seeing contractors who test their boundaries, including that of expanding their company to include other services, BUT, only after a good dive into the specifics of service needs, costs, resources, including equipment, and the clients who will purchase such services.
There is absolutely nothing wrong with acquiring new equipment, but purchasing any new equipment just because it is suddenly available is usually not a wise decision, no matter if it was a great buy. Just be sure that what you buy, especially for new service markets, has been thoroughly vetted and you have a plan on execution. You may be wiser to strengthen and expand your current services rather than exploring new services that you have neither experienced people nor the customers to support your new service.
