How to Build a Solid Foundation for Your New Construction Company

Starting a construction business? Wanting to get off on the right foot? Getting the foundation right from the start can spell the difference between success and failure. Let’s talk about how to successfully plan, launch, manage, and grow a new construction business.

Topics we cover in this episode include:

  • Starting a business with the right mindset
  • Be careful about business costs and debt when you’re getting started
  • Establish your financial board of directors
  • Avoid these common mistakes contractors make when launching a company
  • Naming your new construction business
  • Know how to manage your business once it’s launched
  • Sales and growing your business

LINKS
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Wade Carpenter, CPA, CGMA | CarpenterCPAs.com
Stephen Brown, Bonding Expert | SuretyAnswers.com

TRANSCRIPT

[00:00:06] Wade Carpenter: Starting a construction business? Wanting to get off on the right foot? Getting the foundation right from the start can spell the difference between success and failure.

Come on in, let’s talk about it. This is the Contractor Success Forum. If you’re new here, I’m Wade Carpenter with Carpenter & Company CPAs. With me is my co host Stephen Brown with McDaniel Whitley Bonding and Insurance. Stephen, you wanted to tackle this topic today.

Any initial thoughts to start us off?

[00:00:27] Stephen Brown: Sure. To start off, let’s just picture a what a cornerstone is. How you put a foundation in the building. Okay, our listeners know so much more about the nuts and bolts of getting that done. But I remember reading back in biblical times, if you are a contractor and you built a building that fell down and someone was hurt or injured, you paid the same price. If someone died in one of your buildings, you died. It was like, wow.

But the foundation is the part of the building that makes sure that everything is true, everything is stable. Everything moves and shifts and sinks. And there’s so much to putting in a good foundation. We’re talking a little bit about from the business side.

You’re thinking about starting a new, construction company and you want to start it off right because there’s nothing worse than not having a good foundation, right? It’s the same with starting your construction business. Does that makes sense?

[00:01:22] Wade Carpenter: Absolutely, and I’ve never told you this, but I don’t know if you’ve ever really looked at my logo. My logo is a pyramid, and it’s actually, if you look at it, it is the most stable foundation that you can have for any building, is what I understand. And so we use that because we try to help contractors put stable foundations in their business.

I don’t think I’ve ever told you that, but I figured it was fitting here. That’s why we chose a

[00:01:44] Stephen Brown: pyramid.

Promise you, I did not know that, but that’s wonderful. Thanks.

Putting a good foundation in your business. You’re helping them do it from an accounting standpoint. But both of us have years and years of experience dealing with contractors. In my business, in your business, we see things that are successful and things that fail.

So basically what I did with this idea, I took the SBA, Small Business Administration, SBA.gov website, with tons of advice on getting started in a new business. And it didn’t really apply specifically to contractors. With contractors, there’s so many extra moving parts. But the SBA program is broken up into four categories: plan, launch, manage, and grow, plan, launch, manage, and grow. So I thought maybe it would be a good idea for our listeners if we just talked about getting your business started.

I want to go out on my own. I want to start my own business. What are the things that I need to do? Well, first of all, and I think we can both agree on what the SBA says, we need to plan. And part of planning is to decide, how am I going to support myself? What is this business? What do I want it to accomplish? What’s going to make it different from my competitors? How do I put together a business plan?

What’s a business plan? Well, SBA has sample type business plans. But a business plan is just putting your thoughts down in writing like a blueprint. You have a blueprint when you’re going to build a new building.

A business plan is just something that helps you focus on where you want to go. And then you can fill in all the parts. So you got to start somewhere, right? And, planning and having a business plan is like a blueprint. So that would be excellent advice.

Do you have any argument there?

[00:03:25] Wade Carpenter: Absolutely not. You definitely need a foundation.

And too often I see, I don’t know if you ever read the book, The E Myth by Michael Gerber. But he talks about how most businesses are started and he refers to it as an entrepreneurial seizure.

It may just happen like you get pissed off at your boss. You’ve been in the business for a long time. You know your way around, you know some people in the business, you got a pickup truck, you got a little bit of tools. Hey, I can go do this on my own. So you get pissed off at the boss. And then, you go say, hey, I’m out on my own. Sometimes we put a little bit of thought to it, but most people just jump straight into business.

[00:03:58] Stephen Brown: And they’re working and they’re doing good work. Their life depends on it. And of course, they’re going to get more referrals and then they’re going to need more help. And then they’re going to need more employees. And that’s when you start saying, I got to start my own business. You

[00:04:11] Wade Carpenter: you have people around you telling you, you should start a business. You’re pretty good at this or whatever. And–

[00:04:16] Stephen Brown: need that confidence.

[00:04:17] Wade Carpenter: You do, but when you do it without you, you leap and don’t look first, then a lot of people fall into this cycle of, I’ve heard people refer to it as this craftsman cycle and you take whatever comes along to begin with, and you take it at a lower price.

And you can find that you can do all kind of work at lower price and get work all day, but it ends up in a cycle where you’re never profitable. And we’re always talking about Profit First on this channel. A lot of times we never figure out how to pay ourselves, how to find profit so we can take something home at the end of the day.

[00:04:52] Stephen Brown: Okay. You’re exactly right. And if you want to know more about Profit First, we have so many podcasts about it, but.

Starting a business with the right mindset

[00:04:58] Stephen Brown: That whole mentality that you have to have before you get started to build that foundation is how are you going to do it? What’s your mindset?

One thing to avoid that you just mentioned. is so important, and that is, you start taking on employees, they’re depending on you, you don’t want to lose them to someone else, and so you’re taking on more work to meet more expenses, but you don’t know what all those expenses are. So you’re just digging yourself a hole, and you’re killing yourself.

And that’s not the way to plan to start a business properly. Psychologically having that mindset is everything.

Be careful about business costs and debt when you’re getting started

[00:05:32] Stephen Brown: Wade, I think, as you’re planning, you have to calculate what your business costs are going to be just to start. And then you’ve got to establish some kind of business credit. And that’s the scary part. Because you think I’ll just borrow money to make this work, but then you’re a servant to paying that money back. It is a real sword hanging over your head that you have to deal with.

You were mentioning when you started your CPA firm, that you had to take on a lot of debt to get it going. What would you have done differently if you could have?

[00:06:03] Wade Carpenter: If I had known about Profit First then, I would have implemented that more in my personal life and put money aside.

And to your point about finding credit when you’re starting, I won’t lie to you, it’s really tough to get any kind of bank loan unless you’ve got collateral for a business for the first three years.

And you can go out there on the internet and people talk about these angel investors or somebody will give you some money. You laugh, but I think you’ve probably seen the same thing. We hear this all the time, but It’s not really out there, and, you–

[00:06:34] Stephen Brown: Oh, no, it is. It’s so easy. All I have to do is start a business and people will give me $50,000. I mean, that’s the minimum. Okay. Up to 5 million.

[00:06:43] Wade Carpenter: And I’ve got a great idea, who wouldn’t jump on this, right? Anybody ever watch Shark Tank or something like that?

[00:06:48] Stephen Brown: Please, listeners, don’t fall for that. Just please don’t fall for that. There’s always something in it that’s going to cost you. Somebody is trying to make money off of you. And remember when you’re in debt to someone, you are indebted to them. They’re the people you have to serve first, not your family, not your employees.

So let’s talk about planning a little bit. How much money do you need to get started? And for what, Wade?

[00:07:14] Wade Carpenter: There’s a lot of different rules of thumb, and I could throw out some, but it would be nice to be able to have three months living expenses in the bank. A lot of people can’t do that.

That’s just a thought, but even if you think you’ve got some work lined up and you jump out and you probably need to at least have a month’s worth of salary in the bank because you do that job, you may take a little bit of time to get paid and you may have to buy some materials and those kinds of things.

So having something to start with.

[00:07:40] Stephen Brown: Implement the Profit First mindset personally before you start your business. And then set aside three months, I would say minimum three months, worth of living expenses personally, to take care of your personal needs. And then as far as getting started, you think how much money do I need to get started?

You do have some expenses getting started. Odds are you’re going to start off working from your home until you have more employees and then you need an office.

Next thing you do, you have to get license, permits. You have to buy insurance. There are some tangible costs involved to getting your business started, but there’s not that much.

You may think in my particular business, it’s really heavy on equipment. I need a lot of equipment. Can you bid that job with rental equipment to get started? Can you bid and get that job with rental equipment? If you can’t do it, then you got to think about getting some used equipment to get you through.

So that’s something to think about, right?

[00:08:36] Wade Carpenter: Absolutely, and personally, as an accountant, I hate budgets, but at least going through the exercise of saying, this is what I need to cover in the first month or first three months. And it’s going to be wrong. It’s okay. And I would tell an entrepreneur, don’t put that off just because you’re still obsessing over whether you’ve got the right number on one office supply line or something like that. But going through that exercise of saying, what is it actually going to cost me to get through that first month?

[00:09:03] Stephen Brown: You’re right, budget is something that you need to be mature about. You can’t put in a category like diet and taxes and other unsavory things. Budget is not designed to constrict you, but it’s designed for you as part of your blueprint for your foundation of success of seeing what kind of expenses am I going to have?

Or let’s just start with one. Gas, truck, miscellaneous tools to do your job. Credit to buy materials that you need until you get paid. These are just the most basic parts. And it grows from there, doesn’t it, Wade?

[00:09:35] Wade Carpenter: Absolutely. Sometimes, you may be thinking about credit cards or, some of those things can’t be used, but they’re just one tool.

[00:09:41] Stephen Brown: Okay.

[00:09:42] Wade Carpenter: What are some of the other things on your list? Because I know there’s a lot of things that I think about in planning.

[00:09:46] Stephen Brown: There’s so much to planning that I just wanted to move into the next category because we can talk about planning and we, and listeners, if you want, we can have more podcasts on the planning stage. But do you think we’ve hit kind of the fundamentals of the planning part so far?

[00:10:02] Wade Carpenter: Think we hit some of the most important ones. Absolutely.

[00:10:05] Stephen Brown: Okay. So the next thing, launching your business, I’m going to start. Okay, so I’ve got my ducks in a row. That means I have got my planning, I’ve got a kind of a business plan. I have personal money to take care of my family. I have little bit of money to get started in the business. I have a little bit of resources to get started in business. I have a partner with the same mindset, and that partner and I could build this business together.

Establish your financial board of directors

[00:10:32] Stephen Brown: There’s so much involved with the planning and as you’re planning and you get ready to launch your business. This is the most important thing that I wanted to throw out is beside the nuts and bolts of getting licensed and getting your permits and so forth, we call it your financial board of directors. You need to get them established.

And that may be too fancy of a word for your new business, but again, the Financial Board of Directors are a construction oriented CPA, like Wade, that understands the nuts and bolts and nuances of the construction industry. Believe me, it’s a specialty.

Same with your attorney. You’re going to be signing contracts, and you’re going to be issuing contracts to people you do business with eventually. So you’ve got to learn a little bit about contract law. You have to learn how to read contracts, because as a business owner, you’ve got to know what you’re obligating yourself to do when you sign that contract.

And as you grow, the ability to do work without a contract does not exist. If you want to grow, you want to give your customers a contract that makes them comfortable that what you say you’re going to do, you’re going to do.

And if you can’t understand that concept, then let’s move on to, the third. We have your construction accountant. We have your attorney. We have your banker. Okay. We had a great podcast. on building your relationship with your financial board of directors. How to secure your banking and bonding relationship. These are fundamental things. These are things that you can accomplish.

Construction attorney, banker, your insurance agent, and your bonding agent. You may not need a bonding agent to start it off, but if you’re going to do work for a municipal, the city that you work in, federal contracting, you’re gonna need bonds. That’s what I do for a living.

Insurance, you’ve got to start off– in the state of Tennessee, every contractor, whether you have employees or not, has to have workers comp. They got tired of saying one to five employees. You say, I got 1099 employees. I’m going to do this. You’ve got to research that and a good insurance agent can help you get that foundation set up right. Your good accountant can help you set up that foundation right.

An attorney that cares enough to help you understand how to learn a little bit about the law and contracts is worth their weight in gold. As a banker that understands there’s certain situations where you have everything in front of that banker is going in the right direction, but you’ve got a cash flow crunch.

That’s what they’re for. That is exactly what they’re for. So your financial board of directors, what else do you need to launch?

[00:12:57] Wade Carpenter: And there’s so much in what you just said. From my standpoint as a CPA, there’s two big things that I see people that, maybe they don’t start with enough money to be able to go see a construction CPA or attorney. I’ll tell you, Stephen would be glad to talk to you for nothing, he’d be glad to start developing that relationship, and a lot of times I’ll do that, too.

Avoid these common mistakes contractors make when launching a company

[00:13:15] Wade Carpenter: But the two big mistakes from my side is setting up the right form of entity. Don’t just go doing an LLC just because your friend did or somebody, you read something on the internet. number two is, a lot of people don’t think about their accounting system and job costing and all that stuff. And you figure, hey, I can just wing it for a little bit and do things on spreadsheets. And before you know it, you’ve got a mess. And years down the road, you’re ending up with that same mess and you never got it straight.

Those are two big things that, there are like, for the choice of entity, you go set up that LLC, you’ve got 75 days if, say, you wanted to make an election on that. So talk to somebody first and don’t just, I hate to say this, I know this is going out on podcasts and on YouTube or whatever, but don’t just pay attention to what people on YouTube say. And so I guess I’m shooting myself in the foot there, but–

[00:14:03] Stephen Brown: No, I think people understand what you’re saying. Common sense should ring true with our listeners if they want to start their own construction company and that’s all we’re trying to do here.

Naming your new construction business

[00:14:12] Stephen Brown: The most fundamental thing about launching your business is naming your business, forming an entity.

I have all kind of theories on naming your business, but, here’s one thing I wanted to throw out. At McDaniel Whitley, we have customers with every letter of the alphabet, C and M, C and D. If you have two partners, it’s their first name, and then you argue it’s like Wade and Stephen. Well, you know, S comes before W in the alphabet, Wade. Let’s just do it that way, for Stephen and Wade.

You want a business name that you can sell eventually. There’s that to think about. If I’m going to sell this company down the road, and it’s Stephen Brown Construction Company, and I’m no longer in the picture, then what does that mean to people?

That might help getting started. It might make me feel good, Brown Construction. This is me. This is my family. This is my business. But if I’m going to sell it someday, maybe another name would be appropriate. I don’t know. But what are your thoughts on naming your company?

[00:15:12] Wade Carpenter: One I hear all the time is I actually have the perfect last name for a construction oriented CPA firm in the carpenter. I hear that all the time. So it wasn’t by design, but–

[00:15:24] Stephen Brown: Unless you’re a plumbing company. If you’re a plumber carpenter and company may not be the best name, but you’re right. You do have the perfect name for it.

So think about what you want to name it. I had a customer that did rebar installation and, the name of it was Gnouhy, G-N-O-U-H- Y. And I was asking the guy, I said, just out of curiosity, where did you come up with this name? Oh, I was just playing around with letters for the alphabet and it sounded fun. You certainly didn’t forget that name.

[00:15:53] Wade Carpenter: No.

[00:15:54] Stephen Brown: But it didn’t tie you into anything else that you could relate to. Naming your company is a big deal. Give it some thought, because, that’s part of your foundation that will help you succeed.

Cover that. Forming what kind of entity, getting your federal ID tax number. Your construction accountant can help you with this advice, right? There’s a lot we’ve had podcasts on. There’s a lot of moving parts toward what kind of entity you want to establish.

Whether you want to be a proprietorship, a partnership, an LLC. A C Corporation, Incorporated. These things, each one of them have different pros and cons that you have to consider. And all I can say is try to do it over the internet, try to do it on YouTube like you said, Wade, and you’re going to get some bad advice.

Just take the time to get a good CPA before you start your business. And I can tell you, if you let them know that you have your act together and you sell them on your business plan, then you’re going to have a great advisor on your hands. So.

[00:16:54] Wade Carpenter: Absolutely. And there is a lot to that name as well. And just like mine, we get calls for, people want us to build walls in their she sheds and, as well as a lot of non English speaking people getting on the internet and applying for a job to work concrete.

[00:17:08] Stephen Brown: It would be very refreshing if there was a Carpenter and Company in Memphis that I could call and say, come build that wall in my he shed. I don’t have a she shed. I’m not married. But it would be very refreshing. I need someone who to, oh, the Carpenter and Company. They’re carpenters.

Okay. Got it. But nevertheless we’ll–

[00:17:28] Wade Carpenter: That’s a true story, by the way. We did get a call for somebody that wanted us to build out their she shed. So that’s a funny joke around here.

[00:17:34] Stephen Brown: And McDaniel Whitley Insurance is Mike McDaniel and Richard Whitley who started it. And, it’s nice to have their names because they’re my best friends and they have great reputations. I am very proud to be a partner of theirs. But, at some time, they want to sell the business and they want it to be bigger than them.

And many times they’ve said, we wished we had called it something else. And then you say the good names are taken. All the dot coms are taken.

Naming your business, launching your business.

Know how to manage your business once it’s launched

[00:18:03] Stephen Brown: The next category, managing your business. That’s taking on employees. That’s taking on taxes, insurance.

I don’t want to do that. I’m going to let my wife handle all that. Or the wife, I’m going to let my husband handle all that. That’s fine, but do they know what they’re doing? Have they done it before? And if so, are they buying into learning what they have to learn to help you? Because there’s nothing wrong with your spouse helping you manage your business, if that’s what they want to do, if that’s what they’re good at doing, if that’s what they like to do.

But, let’s just go ahead and say it. I hate to say it, but you got to manage your business or it’s going to manage you.

You hear that over and over again, but we’ve already got the right foundations in place, Wade. That managing is going to be easy, right? And the first two, we’ve already covered it. The management is a piece of cake, right?

[00:18:50] Wade Carpenter: You keep saying things that trigger me, but, hiring the spouse, that’s another thing, especially they always think they can do the accounting. And money can be one of the biggest factors in divorce, but, a lot of times the spouse or the significant other or your girlfriend, maybe it’s your boyfriend. I don’t know.

If that’s not the way they’re wired, they’re not going to keep it up, if they don’t understand it. And too often I see these failures will eventually get to a point where people are fighting and maybe sometimes that is something you should outsource or hire for.

[00:19:21] Stephen Brown: I would say you can always bring your spouse or significant other in later when you have something specific they can do. There’s a lot of logic saying nobody’s going to watch and manage our money than my significant other, my partner in life.

[00:19:35] Wade Carpenter: Yeah.

[00:19:35] Stephen Brown: There’s a lot of common sense in that.

But you can also put the right systems in place where you don’t have to do that. And I’ve seen lots of divorces over this and I’ve seen spouses get burnt out. They feel taken for granted by the their contractor spouse who’s out doing all the work. So I’m sorry, that’s just a, that’s a fact. And Wade and I have both seen it over the last 40 years.

Anyway, managing your business means learning things that you don’t know. You don’t have to be an expert on every, everything, but you have to learn a little bit about different items. And if you have the right financial board of directors, then how to manage your company is right there available to you.

It’s just a phone call away. Hey. Real quick Wade, I need to do this. Who do I need to call? Who do you recommend? It’s worth its weight in gold because you are establishing that foundation on a rock solid pyramid, stone basis. It’s not going anywhere. It’s not moving, it’s not shifting, and you may need to switch up and change your financial board of directors based on their ability to help.

But remember, financial advisors advise people who take their advice and pay their bills on time. That you take their advice. If I’m going to ask you an accounting question, and you give me the answer, and I say, yeah, okay, Wade, I hear what you’re saying, but I’m not going to do that. You do that enough, you’re going to lose that advisor.

Okay? Do you know more than Wade Carpenter? Do you? Huh? Have you? Do you really? And I would say, no, I don’t think so. Is there a problem communicating with Wade Carpenter? Maybe it is. Maybe it’s Wade’s part. Maybe it’s your part. But either way, you gotta take advice, and you gotta take good advice, and it makes things go so much smoother.

Sales and growing your business

[00:21:17] Stephen Brown: Okay, next thing, growing your business. You think that’s everything. Sales. Believe me, if these other three items are in place, the sales come. Yes, you have to worry about it. You have to worry about keeping enough work on the books to make everything work. Yes, you do.

But, I would venture to say if you set things up right, you’re going to be able to weather the storms. And how you weather the storms by having, by keeping extra cash in your company during good times to prepare for lean times, your systems, your processes, your ability to change your overhead cost based on what your sales are.

We talk about this over and over again. And a lot of our listeners might say Stephen and Wade, y’all are too geeky. You’re talking over my head. So that’s why I wanted to do this podcast. Let’s just get these fundamentals straight so we can move forward. That’s it.

[00:22:09] Wade Carpenter: Okay. I think we hit a lot of things, and I think there’s a whole lot more we could have hit on this one, but I think it’s great advice, Stephen. Too often we see people that, they don’t want to spend a little extra money when they’re starting, and, sometimes that can be some of the best spent money.

If you figure out some of the things that, get to the point where I wish I had done this or that, and you find out later, sometimes it can be fixed and sometimes it can’t, or it costs you a lot more money to fix it later.

[00:22:33] Stephen Brown: Yeah. And sometimes you just need people rooting for you, and that’s what we like to do. That’s why we have the podcast. We are rooting for you to succeed. We want you to succeed in every possible way. So feel free to bounce things off of us and use us and, we appreciate you listening to us.

[00:22:50] Wade Carpenter: Very well said, Stephen. I appreciate it.

Thank you all for listening to the Contractor Success Forum.

Check out the show notes at contractorsuccessforum.com or on the Carpenter CPA’s YouTube channel for more information. We would appreciate it if you consider subscribing and follow us on every weekly episode as we post a new show, and we will look forward to seeing you next week.

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