A builder-customer wants to partner with you on some luxury spec homes, sharing the risk and reward. What would you do?
After holding your breath for the past decade, you can finally exhale. Homebuilding in your market is back, in a big way. Though your company anchors a small market, your proximity to a major metro area is working out well. Not only are your local builders busier than they’ve been in years, you’re also picking up some business from homes being built on the outskirts of the metro, at the very edge of your delivery area. Plus, remodeling is back, with homeowners finally pulling the trigger on long-overdue improvements to their homes.
Your team is stretched to its limit, with people in all departments putting in extra time just to get the job done. You’re happy with how things are going— how could you not be?—but even in the best of times, running an LBM business requires making tough decisions. Your current challenge emerged this morning. And you’re not sure what to do. Here’s the story:
George Gamblin, of Gamblin Ramblers, has been a customer of yours for years. He and his crew build upper bracket, custom ranch-style homes, and he’s got a reputation for doing top-shelf work. The thing about George is that he only builds high-end homes. When the market crashed, his refusal to consider other business (like starter homes, light construction, remodeling) meant some very lean years for his business. Now that business is back, and back with a vengeance, he wants to go all in. And he wants to go all in with you.
“We need to strike while the iron is hot, and this is about as hot as it gets!” George said excitedly. “I build the best homes in the market—you know its true—and I sell them as fast as I build them. The only thing holding me back from really doing this big is financing. That’s where you come in. If you buy a couple of prime lots and provide the materials, my team will design and build some of my signature Gamblin Ramblers, then we split the profits and do it again! There’s no downside,” he insists.
But you know that there are downsides, and they come in many forms. The market could turn. Big employers that are growing fast could stop growing, move, or go out of business. Or, the market could continue chugging along, but for whatever reason, the homes don’t sell for asking—leaving you and George (mainly you) to foot the bill until they do sell, hopefully at a profit.
“George, there’s no question that you do great work, and I appreciate you approaching me with this opportunity, but I really need to think this through,” you replied.
“Okay, but don’t wait too long,” George countered. “That other supplier who’s been after my business is ready to pull the trigger. He thinks it’s a great idea. I’ve bought my materials from you for so long, that I wanted to give you first shot.”
Clearly, if you pass and George’s instincts are right, then you’ll have lost the business of one of your largest clients, who happens to buy lots of high margin millwork. But, if you bite, and things don’t work out as planned, then the financial hit would be severe. Any cushion you’ve built up as the market has accelerated could be gone. What would you do?
|1. BACK BURNER. Don’t make a decision until you absolutely have to. George may get so busy that he forgets. If that’s the case, life goes on, and all is good.
2. ROLL THE DICE. Selling LBM is a low-margin business. Here’s an opportunity to earn some healthy profits. Yes, there’s risk. But this is a risk worth taking.
3. THANKS, BUT NO. You’ve worked too hard, for too long, to risk so much on something you have little control over. Better safe than sorry.
4. MAKE IT WORK. Tell George you’re tempted, but can’t take that much risk. Negotiate to minimize the risk to your business, while still offering some upside. Then do it.
If you’d take a different plan of attack, email your suggested solution to Rick@LBMJournal.com
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