Don't be a cowboy

Jim Huston

Ten years ago, a partner from a large irrigation company in New England approached me during a break at an irrigation seminar that I was conducting. I was emphasizing the need for irrigation companies to build their service division. The partner mentioned that their CPA had them almost convinced to get rid of their service work and focus on installation jobs. My counsel was to get rid of the CPA. Today this company has service revenue exceeding $5 million annually.

John Newlin, president of Quality Sprinkling Systems near Cleveland has reaped the benefits of building a company focused on repetitive revenue streams. His irrigation service, lawn care and invisible dog fencing divisions have paid big dividends during the current economic slump.

He’s actually gained market share in these areas as other companies have gone out of business. They’ve maximized repetitive revenue streams while reducing costs at Quality Sprinkling Systems, Inc.

The lesson for irrigation companies: Don’t be a one trick pony, and here’s how to avoid being one.

Building it right. Two psychological issues face the irrigation entrepreneur who wants to grow his company. First, it is a mature contractor who realizes the importance of building a service division. Most young irrigation contractors start their company installing residential systems. They sell and install the system in just one to two days. They get their money and it’s on to the next job. It’s a big adrenaline rush combined with big bucks ($3,000 to $5,000 for the average residential install system) and no long-term commitment. These guys just don’t see the value of slow-paced, low-dollar and long-term commitment service work. I call them “cowboys.” They get the money and run to the next job.

Second, approximately 75 percent of all landscape and irrigation contractors will never realize sales more than $500,000 per year. Psychologically, they’re stuck in the mindset of that of a technician. They need to learn to think like an entrepreneur – think outside of their self-imposed box. A person can only supervise three to four people in a business setting.

If you are supervising three to four laborers, each generating roughly $100,000 of work revenue per year, your sales will be in the $350,000 to $450,000 range. If you are supervising three to four foremen, each supervising three to four laborers, your sales will quadruple and be in the range of $900,000 to $1,600,000. But you manage laborers, foremen and managers differently. It is a learned skill set. Most contractors never to learn to think beyond supervising laborers. That’s why they get stuck below $500,000 in annual sales.

Weathering the storm. So, you realize that if you do not build your irrigation service base to supplement your installation work, your company is at risk in an economic downturn. What do you do?

First, I’d recommend that you see your business as a means to grow your service division. If you are installing one hundred systems per year, you should be adding one hundred service customers to your service base each year. Strive to have your service revenue eventually equal your install revenue.

Second, benchmark and set goals for your service technicians. Here are some benchmarks to consider. It takes approximately 350 residential customers to generate enough work to keep a service technician busy all season. A full-time service technician should generate at least $100,000 of revenue (including parts) per year.

In 90 percent of the locations in the U.S., a service technician will bill out at $60 per man-hour. If a service technician works an eight hour day, he/she should generate $480 per day (not including parts). If you’re charging less than $60 per man-hour, you’re probably too cheap. Many companies are charging $75, $85 or even $95 per man-hour.

Mark up your parts to a minimum of list price. Working an eight month season, eight hours per day at $60 per man-hour, a service technician should generate $84,480 per year (8 hours per day x $60 per man-hour x 8 months x 22 days per month) = $84,480. Add parts revenue to this and you have more than $100,000 per year, per technician.

The good stuff. There are four primary benefits for an irrigation company to expand and grow its service division. First are the excellent margins normally enjoyed by service work.

The benchmark for service work gross profit margins ranges from 45-55 percent. Second is the repetitive streams of cash flow from year to year. Third is the influx of revenue from seasonal service contracts in either late fall or winter when additional funds are always appreciated. And finally is the contribution to an owner’s exit strategy made by service work upon the sale of the company.

The “blue-sky” or “good will” benchmark value of a service division (apart from any assets such as equipment, inventory or real estate) is 50 percent of one year of annual revenue – $0.50 on the sales dollar. Compare this to the benchmark for installation work, which is almost zero, and you see why service work revenue is so critical to building a viable exit strategy.