Real Issues. Real Answers. Expand or not?

Real Issues. Real Answers. Expand or not

In business, every time we make a decision, we take a risk. One of the biggest decisions a business owner can make is whether or not to add locations. On one hand, the economy is strong in most markets, so now may be an ideal time to greenfield a new location or buy an existing company. On the other hand, as one reader wrote, “I’ve seen many once-solid companies ‘expand themselves’ right out of business.” With consolidations and company expansions redefining our industry’s landscape, the timing is perfect for this month’s question.

This month’s question came from a dealer in Missouri who’s wrestling with the challenge of the best way to grow his business. He wrote: “We’re trying to decide whether to expand or not. Do we take the leap and buy out some of our competition, and expand into neighboring markets, or do we just keep doing what our family has done for the past 80 years and focus on having the best lumberyard in the area? If we do move forward with expansion, we’d appreciate any lessons from those who’ve taken this step.”

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As we do each month, we built a very brief (in this case, just two questions) survey around that question, and sent it to readers who’ve opted in to receive our email communications. A big thank you to the 150-plus readers who took time from this busy market to weigh in and share their thoughts.

If you’d like to receive our emails, so you can participate in our surveys, drop me a note and we’ll get you signed up. Also, the reader who suggests the Real Issue for that month wins an LBM Journal Prize Pack (polo shirt, mug, pen, cap, books, and more).

The question: Expand or not?

How would you advise this dealer? “We’re trying to decide whether to expand or not. Do we take the leap and buy out some of our competition, and expand into neighboring markets, or do we just keep doing what our family has done for the past 80 years and focus on having the best lumberyard in the area? If we do move forward with expansion, we’d appreciate any lessons from those who’ve taken this step.”

Readers’ responses

“The key question to answer is why expand? Growth and change is critical to all organizations, but you could certainly grow in your current market. While we are a serial acquirer, we do so to increase shareholder value and have a process which is well developed from all the mistakes (and successes) we have had. On the other hand, if you have a team which wants and needs to grow, and you have your own market tapped out, looking to grow geographically makes sense. Our experience has led us to buy (join forces with) good, solid companies with a strong management team and then help them grow. Fixer-uppers can be rewarding, but they are a lot of work and turning around a firm with a poor reputation is tough and takes time.”

“Those are not binary choices. My suggestion is to take the steps to expand into a new area and meanwhile, continue being the best lumberyard in your current area. Having done this ourselves, we are realizing many positive benefits from expansion that flow to the entire organization. Go for it!”

“Buy out the competition.”

“We’ve never expanded, so this is not a question for us. Plus, too many variables: what can you borrow at, interest-rate wise? If you did borrow to expand, can you weather a recession (current stock is riding a 10-year wave, and is very long in the tooth.) How ‘together’ are your family, managers and employees?”

“We have looked at this same issue in rural settings. In most cases, we need to buy the yard at a deep discount to the asking price. There are a lot of unknowns even if it is a community 50 miles away. A friend of mine who owned a multiple-location distribution company suggested that you answer the question: ‘Am I going to be good at running multiple locations?’ Part of the answer is, that it isn’t for everyone.”

“Ask yourself these questions: Does the new location offer any benefits that your current location could capitalize on? Do members of your family have the desire and ability to operate a larger business? How do the two markets compare as far as growth? Is one falling and one growing? Are you willing to take on the stress of an expansion?”

“Expand. Reduce risk by doing a lease/ purchase option on the property and work on owner financing. Depends on whether you have the right people in place to split your time to another location.”

“If the expansion store can support itself with enough business without taking revenues from the original store, I would say ‘go for it!’ But if the area or store cannot be self-supportive, I would not do it.”

“If you have the capital, strong leadership and a great manager to run it, go for it.”

“We too face a similar issue. Our competition and us have both been in business for more than 100 years. They are floundering and we are growing. We made the decision not to purchase them because their time is limited. We are focused on growing in outside markets (50-mile radius or so) and maintaining our service levels and quality. Managed growth is the term we use often.”

“This question has many core questions that first need to be asked, researched and debated before it can be answered. Does the company have the financial wherewithal, without taking on expensive debt or risking cash flow? Does the company currently have the management structure and support team in place to expand without adding corporate expenses? Does the company management team currently have the talent/expertise in adding locations/entering new markets? Has the new market been thoroughly researched? Is it a match to your core business model and customer demographics? Is this a financial or strategic decision? Is the logic sound? Is this a satellite location or stand-alone operation? Will this new location be an acquisition or a greenfield? How will the new market react to your brand? Will you be perceived as an outsider or a valued addition?”

“I would keep doing what you have been doing for the past 80 years and focus on continuing to be the best in the area.”

“It is easier to do a good job from a single location, management-wise, but you can split inventory and not have to buy so very much with multiple locations.”

“As an observer for a major manufacturer and a start-up manufacturer for over 50 years and having customers throughout the U.S. and Canada, the one important success was the quality of people in the company. If the former owner cared for his employees, you are buying a great asset. They will be just as hard-working for you as they were for the former owner. It isn’t just bottom line results. When hard times come, you need the best people on your team.”

“It’s not an either/or question. You never, ever stop focusing on being the best lumberyard in your area. So, if you have the capital or the availability of capital, if you have an ownership and management team with the energy and will to expand the business, and you have today an operating plan that is already generating high levels of operating profit, here are a few do’s and don’ts.
Never buy a ‘dog’ in order to plant your company flag in a new neighborhood, a new city or a new area. I define a dog as a company that is performing poorly and/or has flaws that cannot be fixed. Things like poor access, poor visibility, poor locality, too small. Stay close enough to use existing logistics—trucking, purchasing, sales force, etc. Stay close enough where many of the customers already know you. It is better to buy your competitor than to go into what you think might be an under-served area.
If you are a pro-oriented company, stay in your lane. If you buy an existing company, do assume that you will get a bell curve of employees from the seller—some good ones, some mediocre ones and some underwhelming ones. If you are going to greenfield, scour the marketplace for the best new lumberyard facilities built in the last 5-10 years and go see them. You don’t have to re-invent the wheel. Good luck.”

“We have a great economy. I would go for it.”

“Buy or start another location.”

“If you decide to expand, be sure to know your new market. Having a great location is the key to successful expansion.”

“Stay the course. It’s worked for 80 years. You would be spreading your key employees out, along with your other resources.”

“Keep doing what you have done since 1922. We bought one other business years ago to buy out competition and shut them down. After a few years, we realized there was not enough available business to operate two locations in the same area. Currently we operate two stores 15 miles apart. We try to operate our business in a way that does not leave any opportunity for another operation to try to compete. Worked so far.”

“Is there a trusted person to run the second yard?”

“Expand to other locations. I prefer to establish our own location and build on our reputation, unless there is a real good reason(s) to purchase an existing dealer and there is a deal to be had.”

“In our market in south Louisiana, I would say no to expansion. We have bought several competitors over the last 15 years and have completed in late 2018 a consolidation into two units. This has allowed us to focus on being the best we can be and focus on growing our current customer base.”

“Keep doing what works.”

“If you’re going to do it, make your move while the economy is strong.”

“I would ‘greenfield’, since acquiring another company might be too pricey right now. It can also be difficult to change the culture from their company to yours. Expand and pick off the people you want.”

“Expand, but be sure to only acquire somebody with a culture similar to yours and who is doing as well or better than you are.”

“Is your point-of-sale software capable of operating two locations? Are accounts payable and payroll going to be done at one or two locations? Who will manage the second operation? Are all of your operating procedures, employee manuals, etc. up to date and legal? Would both locations be in the same state? Different states would require different laws, taxes, etc. Even different cities often have different rules and regulations. How is purchasing going to be handled? One set of buyers at one location, or buyers at both locations? What dealer affiliations would need to be changed? Is the staff at the new location going to buy into using your co-op or buying group?
Our first expansion was 30 miles away, that was too close. Our third and fourth expansions were further away and worked a lot better. How close is too close for your operation? Or you could just hire some commission-based sales people in different markets and service them from your current location? Increased sales with no additional overhead.”

“Buying the competition is one smart way of expanding, as long as the quality of the sales and physical operation are such that you are not spending more than what your expected return is. For example, you can buy the competition, but if they have a poor quality of sales (low margins, old receivables), then what are you really buying? Same holds for manufacturing, if I buy the competitor and the physical operation needs significant improvements to increase capacity/ efficiency, then I might be better off expanding my existing operation and running it very efficiently/lean.”

“If the capital is available, then expand. The best and most logical way is to buy out a competitor (if the price is right). This allows you to harness a ready-made staff who are familiar with the operation, know the customer base, are familiar with the product mix, and can continue the day-to-day flow of the operation. You can weed out the borderline mix at a later date as you become familiar with each employee.”

“First, make sure your information management system (sales, inventory, purchasing, A/R, P&L, balance sheet, etc.) are fully integrated with the new location. Make sure your new location’s staff follows your rules, not theirs. We made these mistakes, and it literally killed our company. If you cannot in advance prove that a new location/ acquisition can exponentially grow sales and profits through market access and leveraging operational synergies, then don’t do it. Make sure common sense overrules ego!”

“Expand if you can find the people.”

“Consolidation is happening everywhere and is necessary for survival. Make sure that those that you acquire are already the best in their area—or be prepared to make them the best.”

“Obviously if the economy continues to grow and one could find employees to help run yards, I would certainly recommend looking at more established yards that have been profitable during the years. While this will not guarantee success, a customer base from the competition along with added customers should help the process run smoothly.”

“I was taught early in my career that success is not guaranteed. Here are two of 10 ‘Commandments’ that will give you a better chance. #3, Seek changes in business, don’t just accept it. #10, Develop a vision of what’s to come in this world. That’s your ultimate insurance of success.”

“Make no mistake about it, with present economic conditions within our country, the time for expansion is now. However, with 50 years of experience in our business, I issue that statement with a warning. Make sure that you

can handily manage the expansion of your business without endangering your relationships, and service to your existing account base. Needless to say, I’ve seen many once-solid companies ‘expand themselves’ right out of the business. If you honestly feel that your expansion plans will not affect your current clients, then go for it. However, make sure that your plans are ‘fail-safe’ before you wander into the uncertain world of expansion. Of course, you and I both know that problems that were originally beyond your wildest

imagination will surface. Learn to expect the unexpected. Have overly cautious systems in place before you open to enable you to not lose a client due to your ‘giant leap’ into the world of growth and expansion.”

“Expand, because you will max out in the same area you’re in.”

“Slow and steady wins the race. Keep debt down and only grow what your team can manage and pay for over a five-year period.”

“Don’t be greedy. If you enjoy what you are doing, are making a good living and saving some for retirement, focus on improving what you already have. My motto is, ‘we make the best a little better.” We have two stores, and we strive to be the best in our area. You can get spread too thin and lose control. Is what you are doing a job, or do you truly enjoy getting up and going to work? We beat the big box stores in price and service and are successful. Do not want any more stores.”

“We are not a lumberyard, but we have struggled with this question for years. If your competition isn’t great,  they will go out of business all on their own, no need to buy them. The question comes down to how big do you want to be? If you are happy, your customers are happy, and your employees are happy, everyone is making a paycheck, then why expand? If you want more of everything—more employees, more customers, more of the everyday headaches, then go bigger.”

“If the value and synergies are there, and you can afford it, then do it.”

“Take the leap and buy your well-run, good competition. You still need to focus on what has made your family business so good for over 80 years, but you also need to grow beyond your current market. Our industry continues to consolidate, and you either need to be one of the companies buying companies and consolidate, or you will likely be purchased and consolidated with another organization.”

“Look at buying someone in the market you want, rather than trying to greenfield a location. Even if the company you buy is not doing well, you can get a facility and inventory on the cheap. Just remember to change their business operation. They were failing for a reason.”

Hundreds of readers share their insights for this every-issue feature. Have a Real Issue? Contact Rick@LBMJournal.com.

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