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Discover the 5 stages of construction company growth and what they mean for your success. From startup to maturity, learn how to navigate challenges and seize opportunities at each stage. Watch now to understand where your business stands and plan for the future!
Topics we cover on this episode include:
- 01:47 – The Startup stage
- 03:06 – The Survival stage
- 05:05 – The Success stage
- 08:16 – The Growth stage
- 11:41 – The Maturity stage
- 15:55 – Generational challenges
- 20:22 – Market factors that affect each growth stage
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Wade Carpenter, CPA, CGMA | CarpenterCPAs.com
Stephen Brown, Bonding Expert | SuretyAnswers.com
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TRANSCRIPT
[00:00:00] Wade Carpenter: Have you ever wonder what stage of growth your construction company is in and what it means for your success? Today we’re going to explore five distinct stages of growth that construction firms go through. Startup, Survival, Success, Growth, and Maturity.
Understanding where your business stands can help you navigate the challenges and capitalize on the opportunities of each stage.
This is the Contractor Success Forum. I’m Wade Carpenter with Carpenter Company CPAs. With me is my co host, Stephen Brown with the McDaniel Whitley Bonding and Insurance.
Stephen, do you see contractors struggling to identify those stages and manage their business through that?
[00:00:37] Stephen Brown: It is. And Wade, first of all, I want to say that the idea for this topic came from Schleifer’s Construction Manual. 2018, it came out. If you don’t have a copy of it, it’s fantastic resource of common sense advice. Anyway, he is a professor, a student of the construction industry.
The five stages of growth in a construction company
[00:00:58] Stephen Brown: And I don’t know who did the research over thousands of construction companies, but they identified these five stages of growth. And it’s not that one stage is good or bad. It is what it is. But the important thing to realize that our listeners need to know is that each stage, certain factors can throw you into another stage. And you have to be prepared for that.
You have to realize this is a natural part of growth. Just like you were growing a tree to bear fruit. It grows at different stages, right? So do construction companies, and this has been measured time and time again. And so instinctively you may think, what stage you’re in, but it’s always good to think back and really analyze what Schleifer has to say about each stage so you can determine what stage you’re in. And so you can see what elements might be coming up that you’re going to have to face in the current stage you’re in that could make you or break you.
It’s neither good nor bad on these five stages. You would think to yourself, I want to go from the startup to mature as fast as possible, but you can be in the startup phase, making plenty of money, accomplishing what you want to accomplish and very happy, and you can stay that way forever.
The mature stage, basically, it’s made up of more second generation type construction firms. They’re big and they own their market share. So that’s the mindset as we go through the stages. What were your thoughts on these stages? And do you think we ought to go through one at a time to talk about the stages?
[00:02:38] Wade Carpenter: Yeah, I think we do. And as I read the article, it made a lot of sense to me, because I see contractors at various different stages. I guess we both do. And a lot of these things really hit home. There’s things that I’ve sort of come to realize that, after 35 years of doing this, that, I recognize these things and never really thought about it in this particular context. So I think that’d be great. Can we start off with that startup stage?
[00:03:04] Stephen Brown: Okay.
[00:03:05] Wade Carpenter: I’ll lend my comments to it too.
[00:03:07] Stephen Brown: All right. And I want to do Schleifer justice on this. So if I miss any of his points, bring them up. But I’m just telling you my gut impressions of the article that I read.
The Startup Stage
[00:03:20] Stephen Brown: The startup stage is the one person, contractor slash entrepreneur, that is bidding the work, that is selling the work, that is financing with working capital from their own personal funds the work. And managing every aspect of it.
It’s a one person show as a startup. And inevitably, as you make your profit margins, you realize that you’re tired and you want to replicate your formula. And you say to yourself, how do I figure out how to replicate this formula that I seem to be doing my myself into the next stage?
So the startup stage is just getting your construction company started. You got the fire in the belly to go. It’s your company, your name’s on it. You own it. And you want it to be the very best it can be, right? So what are your thoughts about the pros and the cons of the startup contractor stage?
I’ve seen it often, and your comment about people staying in the startup stage with a one man band. I see people make a career of doing that.
[00:04:29] Stephen Brown: I’ve had lots of customers stay in the startup contractor, and they’re perfectly happy there. Now their spouses may not be. Because they may be workaholics. But nevertheless, they are.
[00:04:42] Wade Carpenter: I do see that, but I also do see exactly where you’re going. They become burnt out on this. And, some of them can make really good money, and the ones that keep their overhead low, they may or may not have anything to sell at the end of the day. I’ve taught valuation classes and people say well, it’s all based on what’s in my brain.
[00:05:01] Stephen Brown: That’s right.
[00:05:02] Wade Carpenter: Again, maybe these startup stage people may not have as much to sell because it is all in their brain. There’s nothing wrong with it, as you said. But, I know what you said about the spouses and, a lot of times they’re not taking home money consistently sometimes, and that’s where some of the Profit First stuff comes in.
But it does lead to financial challenges at home sometimes as well.
[00:05:23] Stephen Brown: Absolutely. I’m old enough in this business that, I was dealing with a lot of startup contractors, sole proprietors, that pretty much ran the show their way of the highway until they died. And a lot of those people were driven by starting off poor, growing up, or their parents growing up in the depression era, where to survive, it was just a matter of hoarding your cash, hoarding your resources. And to not let your foot off the pedal.
And times are changed. People don’t think that way anymore. A lot of younger people don’t.
The Survival Stage
[00:06:00] Stephen Brown: So you want to go into the next stage, the survival stage, that might be the same. You can still just have one person running the show and be in the survival stage.
The survival stage just simply means you stepped up and you’ve shown that you can complete projects. And as a result of that, you have a track record, but here’s the thing, you’re able to start getting credit. And you need credit. You need it in the survival stage because you’ve got to finance the next stage of your business.
It’s inevitable. You might say well, I’ll stay in the startup mode and hoard cash and never be in the survival mode. All that means is the survival mode, the next mode is you have a track record. Your company is starting to develop a reputation.
[00:06:48] Wade Carpenter: I see that too. And, again, they get in the survival stage and as you were saying they need additional cash and they want to get bigger, but a lot of times they get in the cycle of, where, they started off maybe taking jobs too cheap and they’re taking all the wrong jobs. And they’re still trying to do everything themselves, maybe trying to start hiring a project manager, estimator, or somebody to take some of the load off of them.
But it does take more capital. And if they’ve never learned to bid their jobs properly and get the margins that they need, they can stay in this survival stage for a while. And a lot of them don’t come out of that as well. It can be really tough and it can be easy to try to grow yourself into bankruptcy at that stage.
[00:07:36] Stephen Brown: Yeah, it makes sense. And even in the survival stage where you’re trying to share the responsibility, whoever is trying to help you, who you’re trying to give responsibility to, to help manage things, they’re still taking their instructions directly from you, that one person.
So to me, that was the mindset from the startup to survival. It’s still a one person show.
The Success Stage
[00:08:01] Stephen Brown: The next stage is the success stage. And you could say to yourself, that’s the stage I want to be in, but not necessarily. I guess that’s the neat point of it.
What did you get, Wade, from the success stage when you read this article?
[00:08:16] Wade Carpenter: Basically they’re talking about more modest growth, getting stable in their market. Growing, but not growing a lot, but it is generating positive cash flow. And part of where people start seeing the success, they want to get to some of the next levels too fast is what I see.
And sometimes they can, I don’t, I think you may have mentioned this, but I think people can bounce up and down. This level, these stages
[00:08:42] Stephen Brown: Yeah, you can be in one stage and you can be driven back into another stage by things that you can’t control. But what they’re talking about in the success stage, and he keeps emphasizing 15 percent revenue growth stage. And you might say you don’t understand that, that literally project size has doubled in the last five years. That’s what kind of numbers we’re seeing.
The same thing applies if you take the economic factors into job growth, I get that. Construction companies just don’t, you never see them just grow steadily unless they have a niche that is absolutely tied down to being able to track, to make those profit margins.
And you could say in the real world, that’s an impossibility. But at the same time, when you’re moving from survival stage to success stage, it’s driven by growth, by cashflow, by you keeping some money in your company. It’s everything we’ve preached on our podcast since we started. Right, Wade?
[00:09:44] Wade Carpenter: Yeah, and a lot of people don’t realize that, that as you grow, your receivables are going to grow. So more money has got to be out of pocket to be able to fund that. And these bigger jobs take more money to fund. Things happen, I still think back to the story of, the E Myth by Michael Gerber, where, maybe you hired somebody and that person became your manager and did everything for you.
And all of a sudden they quit or something, and then you’re back to square one. And, there’s a lot of things that can bounce us up and down these stages. But, it is sometimes tough to move forward when you are trying to grow and don’t have the cash flow.
[00:10:22] Stephen Brown: And you got to realize too, that just like you said, key things change. That’s one thing about construction. You always have change. There’s always change. And when you see what growth stage you’re in and you sense that change coming, you can measure it. And based on thousands of other construction companies, say to yourself, okay, traditionally, these are the things that I need to be concerned with at this certain growth stage.
I thought it was a great topic of just making people aware of this. How are you going to know this unless you majored in construction management and you are exposed to this?
And I think the one comment that he makes in here about the success stage is that the owner’s time and energy demands vary from the organization. Employees may have difficulty advancing during this stage because the organization is leveled off. They’re stable with modest growth and profits are made by maintaining business as usual. So even in the success mode, there’s certain things that may be happening behind the scenes that you need to be aware of.
[00:11:31] Wade Carpenter: Right.
The Growth Stage
[00:11:32] Stephen Brown: Next stage to me is something that I see so often is going from the success mode to the growth stage. How do you, how does he define the growth stage, Wade, and what are your thoughts on that?
[00:11:47] Wade Carpenter: I think they were talking about 15 percent or more, in annual revenue, year over year increases. And, again, it becomes a major issue to finance, when you’re in this growth stage,
[00:12:00] Stephen Brown: Yeah. Cash is an issue.
[00:12:01] Wade Carpenter: And I particularly think of contractors under 500, 000 in revenue to under a million. And then this two to 5 million is a tough barrier to go through. But five to 10 gets a little easier, but I’ve said it a couple of times. I love the, you get to the next level, you find a new devil.
And this growth stage is one of those that, you want to get through and you want to keep increasing, but it’s tough. It really is tough.
[00:12:28] Stephen Brown: Yeah. And I guess when a bond underwriters look at these stages they know what stage you’re in, whether you do or not. That’s job of a bond underwriter to determine what stage you’re in. And they will tell you that growth stage that you’re in takes cash out of your company that you’ve always had that supported bonds. It takes working capital to grow. You either fund it internally or you take on debt.
And I would just say in this growth stage, you might want to think if interest rates are reasonable, and you can finance that growth somehow over an extended period of time. So you’re not cutting the cash. The reason you need the cash is because it’s not if something’s going to happen on a job, it’s when it’s going to happen. You just have to be ready to weather that storm.
And we talk about that over and over again. But the growth stage is fundamentally something that is going to happen at some point in time in the life cycle of most construction companies. It’s wonderful, it’s exciting, it’s challenging. But it’s also costly.
[00:13:33] Wade Carpenter: He mentioned in there, and I think it’s probably understated, but you’re getting at a level where you need help. And the owner can’t, sometimes they’re trying to be Superman, Superwoman. But delegating authority at that stage, it’s very critical, too. To really getting to the next level and starting to trust people to do it right and building the systems, I think is key to getting through it.
[00:13:58] Stephen Brown: And it’s also a time that you are starting to think, in order to survive in what I’m doing and to continue to enjoy what I’m doing as the owner of this company, I need to start thinking about how to promote and help other people take some ownership of this company. And I have to divest myself from that. And that’s growth for you as the owner entrepreneur, huge growth for you to figure that out. But it’s also has its growing pains on the company.
So as you’re in that growth stage, you have to be more present in that construction company than you’ve ever been before. You may not like that. You may just say, I’m going to ramp this back a little bit so I can stay in the success stage and just management and slow things down, but inevitably you can’t always slow things down the way you want to.
You can always get out of business or go back down the most simple form, but I think most people want to help people grow in the business. Most folks, I would want to think, want their key employees to feel challenged, needed, and to be able to support their families. However you define that.
[00:15:12] Wade Carpenter: I see that as well. And again, just getting that support and turning loose of that control, I think is a big key to moving forward on that. But a lot of times. It is a time where you do need to start developing these systems, as I said, and you’re already probably running 18 hours a day or something like that. And then you’ve got to carve out time to, as going back to the e myth, he talks about working on your business versus in it. That’s when you need to be working on it so that you can move to these next stages, assuming you wanted to go on to the maturity stage and getting through this growth stage.
[00:15:48] Stephen Brown: Yeah, we’ve often stressed your systems that would allow you to be able to take a vacation, and things are still operating and smoothly. That’s the goal. That’s something that you can replicate. That’s something you can sell. If you want to sell your company, you can retire. But those systems. And it’s not just about growth of your employees, but it’s growth of your entire systems, right?
[00:16:17] Wade Carpenter: Yeah, you got to have the things in place to actually move to that maturity stage. The way you do change orders, the way you estimate your jobs, all that stuff needs to be standard. And when you can get there and everybody’s on the same page, you’re doing it the same way, that to me marks sort of the start of that maturity stage that we were going to go into.
The Maturity Stage
[00:16:39] Stephen Brown: Okay. The maturity stage next is defined by the bigger, more established construction companies that are usually second or third generation. They own their market share. They’re at a point where they are considered the best. And you would think a mature stage is great.
You’ve handed on the company to others, and the company is in that stage of maturity. But what parts of the mature stage do you have to be aware that could knock you back into other stages?
[00:17:13] Wade Carpenter: Again, sometimes people do still take on things that they shouldn’t, but hopefully when you’re at this maturity stage, you are at a point where, I think they talk in the article about, you’ve got modest debt. And you’re planning strategically and making smart decisions, hopefully.
And things can always happen in the economy where your market segment, whatever you do, all of a sudden could fall out of favor. But the challenge is controlling the future without losing the company, I suppose.
[00:17:41] Stephen Brown: yeah, that leads right in, you know, what Schleifer is saying here in the mature stage, the biggest challenge in this particular stage, it’s just making sure that everyone is still excited about what you’re doing and vibrant. We talk all the time about certain key employees getting burnout for any number of reasons.
They’re burnt out because they’re bored doing the same thing over and over again, especially In the growth stage, that can take a toll on certain people saying, I’m not willing to be out on the job all the time and away from my family. So you’re dealing with that. You’re challenging everyone to be just as excited in that mature stage as you were when you were in the startup contractor stage, when you had that drive in your belly, when you were go, go, go.
How do you develop that into the mature stage? And when I talk about second and third generation, this is an interesting topic because you don’t want t any of your family members or any generational employees to come in unless they’re excited and they have their fire in the belly to take that company to the next level.
And if they don’t, and that doesn’t exist, then just figure out what stage you’re comfortable in and try to stay there. I would say if there’s no going into generational growth in the mature stage, then that might be a point where you say, okay, Wade, we need to start talking about how to position my company to be sold.
Because as always, when you retire, you can do it two ways. You can sell off all your equipment in a fire sale, cash it out, and close the doors, right?
[00:19:26] Wade Carpenter: Yeah.
[00:19:26] Stephen Brown: That’s an option. So I guess my point in all these stages that I like is that you can bounce from stage to stage, and each stage is normal, and it’s been measured by so many construction companies over the years that it’s an established thing that you need to be aware of what stage you’re in and where you want to go, where you want to be.
This is what I always say. It’s always wonderful to have a board of directors to bounce things off of. They don’t have to be in the construction business. They can be other people that you admire and respect, that when you have a board meeting with them, you’re showing them the financial statement. You’re talking about the things confidentially you’re worried about, not worried about, and you’re just getting someone else’s opinion to help you through that stage.
[00:20:15] Wade Carpenter: Yeah. And I’m glad you brought up the generational thing, too. Because I have seen some second generation take over and do well, but a lot of times that next generation is not as dedicated as you mentioned. And that’s a good point because I have seen the second generation or the third generation completely wreck a company. And that’s good advice. I think just thinking hey, if I’m going to leave them something, maybe I should sell this.
[00:20:42] Stephen Brown: You’re thinking you’re helping them by providing for their financial future, but you’re literally shooting them in the leg by saying, you’re going to go into my business, whether you’re suited for it or not. It’s what you have to do and it’s what I want. It’s what I want most for you is to take over this company.
That’s the worst thing you can say to someone coming in, either an employee or a family member, your son or daughter. You’re saying to them, you love me, you want to continue this company, because I love this company. And you know how hard I work for it. Well, I did it all for you. No.
And I can tell you another thing, taking on multiple family members in a company is always considered the kiss of death. I see sometimes that you have siblings that can partner well together cause they’re so different and they know each other so well, and they’re watching each other’s back. That’s a wonderful scenario.
But as a general rule, anybody would tell you in any business to not divest yourself into having too many people coming in. That’s as far as family’s concerned. As far as employee’s concerned, you have to have the systems to replicate where every employee is valued. Every employee is getting what they want. You may think you know what they want, but you don’t until you spend time with them.
[00:22:03] Wade Carpenter: Absolutely. And you keep hitting nerves here, but I keep thinking of some of my past and current clients. They try to take care of everybody in the family, and they don’t need to be in those roles. And they’re costing them a lot of money, and ultimately holding your company back. So it’s not to say family can’t work, and I have seen it work, but when you’re trying to take on everybody–
[00:22:24] Stephen Brown: Yeah. All you can do is expose them to what you do for a living and let them know that they’re welcome if this is something they may be interested in. My mother, for example, my grandfather was a big time realtor, real estate agent, commercial and residential here, back in the 30s, 40s, 50s. And she had his personality, and she loved what he did, and she adored him. And she naturally would have been perfect to go into the business.
But she, I’ll tell you, it was back in the fifties and that was not an option that he even remotely thought about as letting me into the business. And it really hurt me. And I told her when she told me that story, I said, you would have been awesome. You would have been incredible. And she said, yeah, and you’d probably be in real estate too right now, because I think you would have been good for it. And I said I know it would have been fun. It would have been a fun ride.
And you always want your employees and your family members that you love to benefit from your experience. And I get that. Do you think this will make sense to our listeners? I hope so.
[00:23:31] Wade Carpenter: I think so and I didn’t know if you wanted to talk real briefly about some of the other things you’ve talked about, the market factors, which we’ve peppered into this whole thing.
How market factors affect your company’s growth stage
[00:23:39] Stephen Brown: Yeah, I think we should wrap up with that. What does he say about the market factors, Wade?
[00:23:44] Wade Carpenter: In my mind, he was talking about, the economic conditions. And they really can affect each different stage differently. You know, If you’re in the startup phase or a survival phase, that may be something that you may not survive.
So, I think you talked about if you’re trying to do rapid growth in the startup phase or the mature phase, it plays in differently. If you’re a mature company, maybe you can survive something like that a little better. That’s what I took from it.
You have thoughts on that?
[00:24:12] Stephen Brown: No, the market phase is a continually changing thing that affects each stage that you’re into. I think Schleifer’s comments on that, are pretty interesting because it says, why some contractors need to work 15 hours a day to keep their businesses operating while others rely heavily on planning and systems for their success.
Long range planning is essential to a company in maturity. But it’s a distinction and a waste of time in the startup stage, where the contractor’s living day to day and operating on instincts. If time is consumed in planning meetings, there’ll be no business to plan for.
Don’t try to push a stage into being where you think it ought to be, if you’re not naturally there is what I got out of the market conditions, what he’s saying there.
[00:25:00] Wade Carpenter: I think those are all great points. Any final conclusions we can draw from all these stages or?
[00:25:06] Stephen Brown: No, I think just simply the fact that, it’s a normal part of the evolution cycle of all construction companies. You need to be aware of what stage you’re in. You need to be aware of how that stage is going to affect your current situation and the future. And what you want.
These are all things that are as natural as growing up. It’s just part of life and it’s part of the growth cycle of a construction company.
[00:25:34] Wade Carpenter: This has been great, Stephen. I appreciate you bringing this up today. And if you, our listeners got any thoughts or feedback on today’s discussion, we’re always happy to answer your questions or hear your thoughts on topics you’d like us to cover. Drop them in the comments below.
We’d love to hear from you. For more information, visit Contractorsuccessforum. com or check out the Carpenter CPA’s YouTube channel. If you enjoyed this episode, please share and subscribe, and follow us every week as we post a new episode.
We look forward to seeing you on our next show.
