Need to Know

• Many restoration business owners pursue growth through adding additional services. But each service should be viewed as its own business with its own unique needs — including trained staff, production systems, equipment and more.
• Restoration business owners have four options when they identify an opportunity to expand their service offerings: build, buy, partner, or don't do it.
• If an owner decides to expand the company's service offerings, it's important to remember that the goal of vertical integration isn't to offer the most services but rather to offer the right services.

Maybe you should. But maybe you shouldn't.

Adding a service to a restoration company can be one of the best growth decisions an owner makes. It can increase revenue per loss, strengthen referral relationships, improve the client experience, differentiate the company and create entirely new profit centers.

It can also consume cash, distract your management, create operational problems and turn an otherwise profitable company into a more complicated business that isn't necessarily more profitable.

The first question shouldn't be, “What equipment do I need?” The first question should be, “Does this service belong in my business?”

Follow the Loss

Fire restoration provides a perfect example.

Think about everything that can happen following a significant residential or commercial fire. The structure may require emergency services, demolition, decontamination, deodorization, and restoration. Hard contents may need to be inventoried, packed, transported, decontaminated, restored, and stored. Clothing and other soft contents may require specialized textile restoration. Electronics, artwork, and specialty items may require additional expertise. Contents may remain in storage for months. Eventually, somebody has to reconstruct the building.

Each one of those activities represents revenue. More importantly, each one can potentially be a business by itself.

There are successful companies specializing almost exclusively in contents. Others specialize in textiles. Some primarily perform structure restoration. Some build substantial storage operations. Others focus heavily on reconstruction. The full-service restoration company may perform several — or all — of these services internally.

Neither model is automatically better. The question is which model makes sense for your company, your market and the losses you're already receiving.

One of the exercises I encourage restoration owners to perform is what I call following the loss. Take your last 20 or 30 significant fire losses and look at where the money went. How much structure restoration did you perform? How much reconstruction? Who handled the hard contents? Who restored the textiles? Who stored the contents? What specialty work was referred elsewhere?

Then ask a very interesting question: How much revenue passed through the losses we already had but went to somebody else's company?

You may discover that your next growth opportunity isn't finding more losses. It may be capturing more of the appropriate work from the losses you already have.

More Revenue doesn't Automatically Mean More Profit

This is where owners have to be careful. Finding $500,000 of potential revenue doesn't necessarily mean you should build a department to capture it.

Revenue is only the beginning of the calculation. Suppose you discover a substantial amount of soft-contents work is leaving your company every year. It can be tempting to look at that revenue and decide to purchase equipment immediately.

But what does it actually take to deliver that service? Equipment is only one component. You may need facility space, utilities, vehicles, inventory systems, additional insurance, technicians, management, technical training, sales training, estimating knowledge, SOPs, quality-control procedures, and working capital.

And then there is utilization. A piece of equipment producing revenue five days a week looks very different financially from the same equipment operating twice a month.

That's why the question shouldn't be, “Can we afford the equipment?” It should be, “How much volume must this service produce before it becomes a profitable business unit?” That's a Business Builder question.

Think of Every Service as its Own Business

This is one of the biggest mindset changes I would encourage owners to make. Don't treat a new service as simply another item on your website. Treat it as a business within your business.

If you were starting a stand-alone contents restoration company, what would you need? You'd need clients. You'd need trained staff. You'd need production systems. You'd need equipment. You'd need estimating and billing procedures. You'd need quality standards. You'd need marketing. You'd need management. And you'd need enough volume to pay for all of it and still generate a profit.

Why should adding contents to an existing restoration company require any less thought? The same applies to reconstruction, textile restoration, storage or structure decontamination.

Every service should have its own basic business model. What is the potential annual revenue? What is the realistic capture rate? What gross margin should the service produce? What is the initial investment? What are the ongoing overhead expenses? How much working capital will it require? How long will it take to get paid? How many jobs per month are required to break even? Who will manage it? And perhaps most importantly: Where will the work come from?

If you can't answer those questions, you're probably not ready to buy the equipment.

Structure Restoration: The Logical First Step?

For some restoration companies, expanding their fire structure capabilities may be one of the most natural opportunities. Companies already performing water mitigation may own some of the equipment required: HEPA-filtered air devices, HEPA vacuums, extraction equipment, containment materials, PPE and various application and agitation tools.

But owning equipment doesn't make a company competent in fire restoration. Fire introduces different residues, materials, chemistry, odor challenges, potential contaminants, and documentation requirements.

The larger investment may not be the equipment at all. It may be the knowledge. Technical training, chemistry, procedures, testing, documentation, estimating, and understanding what you're attempting to accomplish can be far more important than buying another machine.

Hard Contents: A Business Hiding Inside The Loss

Contents restoration can represent a substantial opportunity because contents are present on nearly every residential fire loss. But contents quickly become an operational business.

Now you're dealing with documentation, inventory, packing, transportation, processing, specialty items, storage, and eventually returning those belongings to the client. You may need vehicles, carts, shelving, packing materials, processing stations, inventory technology, HEPA equipment, drying equipment, ultrasonic equipment, or other specialized systems depending on your process.

You also need space. And once you take possession of someone's belongings, you take on an entirely different level of responsibility.

Contents can be an outstanding business. It can also become chaos without strong systems in place.

Soft Contents: Don't let the Machine make the Decision

Textile and soft-contents restoration can be another attractive addition. But this is an area where owners can easily fall into the equipment trap. The machine is not the business.

Before making a major investment, determine how much textile work is actually available from the losses you're receiving. Then determine how much of it you could realistically capture.

If the volume supports bringing the service in-house, the economics may be compelling. If it doesn't, partnering with a strong specialty provider may produce a better financial result with substantially less risk.

A six-figure capability sitting idle isn't an asset. It's an expensive reminder that capacity and demand are not the same thing.

Don't Forget Storage

Storage may be one of the least glamorous parts of contents restoration, but it deserves serious consideration. Once contents leave the property, they have to go somewhere.

Depending on the operation, that can mean warehouse space, vaults or racking, security, climate considerations, inventory controls, insurance, and additional handling. Storage can also create recurring revenue while the structure is being restored or reconstructed.

But poor warehouse management can destroy those margins quickly. Lost items, unnecessary handling, excessive warehouse space, weak inventory controls and inefficient movement of contents can turn what appears to be easy revenue into an operational headache.

Again, storage should be treated as a business unit - not just a place to put boxes.

And then there's Reconstruction

Reconstruction may appear to be the ultimate vertical integration strategy. You're already at the loss. You already have the relationship with the property owner. You understand the damage. Why hand the rebuild to someone else?

For the right company, that logic makes tremendous sense. But reconstruction can fundamentally change the organization.

Now you're managing subcontractors, scheduling, materials, permits, estimating, supplements, warranties, project management, cash flow and potentially much longer project cycles.

The question isn't whether reconstruction can generate revenue. Of course it can. The question is whether your organization has — or can develop — the management capability required to execute it profitably without damaging the rest of the company.

Build it, Buy it, Partner for it — or don't do it

When you identify an opportunity, I believe there are four legitimate choices.

BUILD IT: 

• Develop the people, equipment, knowledge, processes and capacity internally.

BUY IT:

• Acquire the equipment, talent, existing operation or perhaps even a company that already possesses the capability.

PARTNER FOR IT:

• Develop a relationship with a qualified specialist who can provide the service while allowing your company to remain focused on what it does best.

DON'T DO IT:

• Sometimes this is the smartest option.

Business owners tend to view growth as continually adding more: more services, more equipment, more employees, more trucks, more locations. But sophistication in business is also knowing what not to do.

Specialization Versus Vertical Integration

There are two powerful business models available to restoration contractors. One is specialization. Become extraordinarily good at one part of the loss. Build your systems, reputation, marketing and training around that specialty and become the obvious choice in your market.

The other is vertical integration. Capture more of the services associated with each loss and increase the total revenue and gross profit generated from each opportunity.

Both can work. A company doesn't necessarily need twice as many losses to double its revenue. In some situations, it may be able to grow significantly by capturing more appropriate services from the losses it already receives.

But that doesn't mean you should try to capture everything. The goal isn't to offer the most services. The goal is to offer the right services.

Before You Write the Check

Before adding your next service, go back through your existing losses. Follow the money.

Determine what work you're currently referring elsewhere. Measure the actual opportunity. Calculate the realistic capture rate. Determine the investment. Calculate the required volume and gross profit. Identify who will manage the operation.

Then decide whether you should build it, buy it, partner for it — or leave it alone. Only after you've answered those questions should you start shopping for equipment.

Because buying equipment is easy. Building a profitable business around that equipment is the hard part.

Coming Next in The Business Builder

Part 2: What Does It Really Cost To Add A Fire Restoration Service?

We'll break down structure restoration, hard contents, soft contents, contents storage, and reconstruction and look at the equipment, training, facility requirements, staffing, working capital and investment considerations involved in building each service into a profitable business unit.