Do Niches Bring Riches? Strategic Insights for Contractors

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ℹ ABOUT THIS EPISODE

Join Wade and Stephen as they delve into whether it's better to expand your reach or narrow your focus to boost profits. They discuss the pros and cons of both strategies, using compelling analogies and real-world examples. 

Learn how to assess your own business, understand market shifts, and decide whether to specialize or diversify. This episode is perfect for contractors looking to enhance their business strategy and find sustainable success.

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⌚️ In this episode:

• 00:39 Initial Reactions: Narrowing Down vs. Branching Out
• 01:53 The Power of Specialization: Pros and Cons
• 02:34 Strategic Paths: Niche Down or Branch Out?
• 02:47 Real-World Examples and Analogies
• 04:42 Balancing Risks and Rewards
• 06:52 Economic Shifts and Market Adaptation
• 18:08 Hybrid Models and Smart Growth

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

Transcript

Wade Carpenter: Is your profit where you want it to be? If not, what's the next move? Widen your reach or narrow your focus. Should you chase more types of work or get laser specific on what you do best? Today, we're going to explore that question so you can figure out for yourself what is best for you . This is the Contractor Success Forum.

I'm Wade Carpenter with Carpenter Company CPAs, joined by my co-host Stephen Brown with McDaniel Whitley, Bonding and Insurance. Stephen, I know you work with all kinds of contractors from very focused specialists to maybe a full service general contractor. What's your gut reaction on what we're talking about today?

Stephen Brown: My first reaction is narrow down, be perfect at what you do before you branch out. All right? That was my first reaction, and then my second reaction was really just talking about, as a bonding agent and as a construction accountant, we see so many of our [00:01:00] customers and we see the home run projects.

The homers, the Grand Slams, where you just crank it out of the ballpark, right? You make more money than you thought you could make. You do it ahead of time, you provide a perfect project, the owner's happy, you're paid. It's a win-win, and you wanna replicate it over and over again.

And one thing that you probably don't see as a contractor, you may have, a half a dozen or less home run projects that as soon as I mentioned that it pops into your head, oh man, that job was a home run.

But you can replicate that and a lot of times you wanna replicate that by either pulling in or branching out. And so I think this is a great topic, Wade. 

Wade Carpenter: Yeah, there's pros and cons to both approaches. This, like me, I've gone very narrow in my focus with contractors. Very few CPA firms actually will just stick to one niche like that. 

Stephen Brown: We're [00:02:00] the same way at McDaniel Whitley. We are totally focused on contractors bonding and insurance. And we've just found as we step out of that box, we're not as effective and we're not as good at what we do.

Wade Carpenter: I think we both know that having some specialization gives you a lot more insight into steering like a contractor along the way. I think we both agree on that. And there are definitely some quirks to construction we talk about all the time.

Stephen Brown: You mentioned two strategic paths to try to figure this out. Niche down, and branch out. What do you mean by those two comments?

Wade Carpenter: Let me start this off by telling you a little story.

You walk into a restaurant. They hand you a menu the size of a phone book. You remember phone books?

Stephen Brown: Yeah.

Wade Carpenter: The place sells burgers, sushi, tacos, pizza, and Thai food.

It's all there.

And [00:03:00] now you ask yourself, Do you trust 'em to do any of that?

Versus maybe you go into this barbecue restaurant. Barbecue joint was six things on the menu. It's okay, brisket, ribs, pulled pork, two sides. No fluff. They smoked that meat for 12 hours and they do it better than anybody in town.

I know you'll start talking about Memphis Barbecue here.

You know, The same thing happens in construction. The more stuff that you slap on your service list, the less people are gonna believe that you've mastered any of it. 

Stephen Brown: It makes sense and also makes sense that you mentioned Memphis Barbecue. 'cause you're right Wade. It is the best.

Hey, you're right Wade. This is a great analogy. You get a menu that's like a phone book. And you wanna be the best at everything. But the whole key to running a proper restaurant is to replicate what you do best over and over again.

Anybody will tell you that owns or runs a restaurant. The key to success is when you've got something that works, you replicate it [00:04:00] perfectly and you do it better than anyone else.

But you get to a point where you fall into a rut there. You wanna do something else, or your employees are crying out for a little more variety.

Wade Carpenter: Yeah, and I guess that's leads to my next point in the story. Like, you know, definitely some benefit to specialization, but what if say in our restaurant, the market shifts and everybody gets away from barbecue, you go too narrow. Basically you're stuck with a smoker and nobody ordering ribs. So where is that sweet spot? Do you niche and dominate one thing or do you branch out and stay flexible?

Do you got any initial thoughts on that?

Stephen Brown: I see the pros and cons of both of these issues. The niche thing is what brought you to the dance, right? Something you do better than anyone else. even as a general Contractor, you started off as a niche and you got certain things that you can do in your sleep.

Then you [00:05:00] eventually branched out to be an expert at other things. And it's the same with the barbecue analogy. Everyone could argue successfully, for example, that in Texas they cook beef brisket better than they would in Memphis. 'cause hey, we cook pork, right?

And there's an art form to making beautiful tender brisket. And anyone that barbecues knows that. So in Memphis, about half of us would defer that beef brisket is not something that you should branch out into if you're a barbecue restaurant.

I'll take my friends from Texas when they're in town, and of course they wanna order the beef brisket 'cause that's the only barbecue's it's worth eating as far as they're concerned. And then they criticize it.

So you're right. there's a lot to it. And there's a lot of different conditions that you need to think about, in either pulling in or branching out.

Wade Carpenter: Let's talk about what it means to niche down a little bit. We could niche down [00:06:00] on a trade . I've seen people like, okay, we're doing HVAC, we're also doing electrical and plumbing.

Or it could be a sector. This is where I've seen some contractors do really well. Okay, we're specialized in medical or retail or gas stations, or whatever it is.

It could be a specific size or scope, or specialized type work. And a lot of times when you do have that extra specialized knowledge, you can get a lot higher on it. Either you know how to get in and out, you avoid some of the mistakes that somebody would not necessarily know doesn't do this every day.

Any other thoughts on that? 

Stephen Brown: Yeah, what, what if that market dries up on you for economic reasons?

Wade Carpenter: And I totally get that too. And that also takes me back to what I was doing, 25 years ago when I first started my firm. I chased contractors. But when I first started, I was taking what I had in front of me [00:07:00] and I had some clients in different sectors or whatever.

Then I did go back to this construction niche that I knew well, and I got to like the 80, 90%. construction niche. And then 2008 hit. We were so heavy into doing audits and reviews for civil highway, you know, the guys with heavy yellow equipment those guys did not survive. So that's where a niche specialization can be a little scary.

I didn't realize this as I was putting this together, that's what I did is after 2008 I had to go a little wider again. I had to branch back out. 

Stephen Brown: Both of us Wade can, it's the same sort of thing. You had to branch out because you really could see that you had to branch out. And I could always tell you or your bond agent anywhere you are listening to this podcast, could tell you some generic stories without being specific of different customers of how they were able to branch out and how they [00:08:00] were able to adapt successfully.

What went well, what went wrong?

Wade Carpenter: Yeah. And for me , some of the market came back . Some of that stuff took years to recover in the bond. And I love construction, so my story is I kept doing audits and reviews and that kind of stuff until but I, after the 2008 recession, we noticed it was a huge hole in the market where there are people that are not trained in construction and you don't learn construction accounting in a classroom. And that's where we found our niche. And then we did go back very narrow.

I get where a contractor or anybody is you niche down your fear of missing out. Okay, so I'm gonna do construction and also manufacturing and retail. But you put that on your website and you just like, okay, I'm gonna turn away everybody. You really don't.

You know when you can get to the point where you say, [00:09:00] this is what we do and this is all we do, which is what it led us, is like that's all we will take. And then that's when, things took off for us. And we found that sweet spot for our contractors that we can provide a huge value for.

But I did have to branch out. I see contractors like, okay, we got plenty of work, but I also see I'm a general contractor, but I could also some drywall work, or this one I was just talking to this week. Okay, I'm a mechanical contractor, I'd also like to start doing some heavy highway. That type of work.

He has no experience in that. I've seen contractors do that all the time.

So it, I get that. It's okay, I'm afraid something's gonna dry up. So we do this as a hedge, are you chasing something?

And just like the first restaurant I was talking about are you trying to do everything and like, Okay, I [00:10:00] don't trust that these people can make, this. this is definitely not fresh fish or whatever they're, cooking in this restaurant.

Stephen Brown: Yeah. I totally get that. And that's such a good analogy. I think about general contractors that wanna tweak a little bit more margin by doing the work themselves. They think that sub has a little bit too much fat on their estimate, even though they use their numbers in the bid.

They're gonna go back and tweak that down a little bit. Is that the right thing to do for you? That's your decision. So it's not just branching out, but it's also how you wanna branch out and who you wanna branch out with. So it's always easier if you are a general contractor and you're not niching and you're branching out to rely on a tried and true, trusted sub. You have to rely on that.

That's the sales pitch that we give to the bonding company when we're trying to sell a job that general contractor may not have done much of before. This is an old sub. They [00:11:00] do this all the time. This is a huge part of it. I have to give them a breakdown exactly what's going on before the job bids in order to sell it.

And it's the same, I think, Wade with what you were saying about pulling in or branching out. You can niche too far and you can branch too wide.

Wade Carpenter: Yeah, exactly. There are points where ditching can go too far and as I already said, what if you were doing tenant improvement work for offices during Covid? But everybody started going home, so nobody's expanding out into, you know, that kind of stuff.

You get to these Baltimore market shifts and I don't wanna go into 'em right now because Google shuts us down every time we talk about some of this stuff, there have been some shifts in the projects, the federal projects that are out there right now. What if you're niching down, you're a subcontractor and 90% of your business is with one general contractor?

That's a lot of [00:12:00] risk in that.

Stephen Brown: Absolutely.

Wade Carpenter: Did you build a one-legged stool? It basically works until it doesn't work. That one leg falls out from under you.

Stephen Brown: Yeah. Not to lead that into a depressing thought, while you're really thinking long and hard about what you do in the future of it being sustainable. But I'd add that you know what you can do better than anyone else, and you need to own it. And is what you're doing now scalable? Is it scalable and what does that mean?

Wade Carpenter: I think scalable has to come from the specialization. The risk of going the other way, like when you're branching out, it creates chaos. Maybe you're, when we say branching out, there are could different forms, like, okay, we're gonna go into another territory.

So you spread your resources, your crew's too thin. You don't have enough equipment, those kind of things.

Stephen Brown: It really is something, as you're branching, you have to ask yourself. Not only is [00:13:00] my niche sustainable in the future and is it scalable?

Wade Carpenter: Yeah, and like I said, if you're trying to go too wide, you also have the risk of okay, is the quality slipping?

Does your name get tarnished because you got more callbacks? 'cause maybe you don't have enough job site supervision and things get done wrong or whatever.

Stephen Brown: Yeah.

Wade Carpenter: Trying to do everything for everybody, you don't necessarily know how to estimate a project as well as like, when you really know the niche. You're pivoting from plumbing to electrical work, so SOPs are not the same. So you don't have, the standard way we do it.

Stephen Brown: Yeah. Just absolutely brings to mind how many contractors are so confident in how they start a project. What if you get a project up and running that's new to you, and then you think the battle's won, and then you got more variables that come in that cause more [00:14:00] risk?

Wade Carpenter: Trying to be too flexible, just like that restaurant, you got all these workflows and maybe just you start like frankensteining your business models together, and sometimes the parts fall off when you duct take them together.

Stephen Brown: Yeah. No, that's a good analogy. I love that. Because I duct tape everything. I think when we're talking about your expansion ideas of moving to another market share there is always some type of adjacent service, and that's your term, that you can be performing. And perform well.

And I would add to that you figure out what that adjacent service is based on the profit that you've made in the past. So you think, I can make x amount of profit in the future, but there's always something adjacent to some work that you've already done that you've made a huge profit on.

And it always comes in the form of maybe a change order or something we should [00:15:00] name our podcast instead of Contractor Success Form Change Order Success Form because everybody would listen to it. But seriously, you look back and you know what you made money on and it's exciting.

You're like, whoa, we made a killing on that. We can do more of it. I guess there's some things you have to wa-- I'm not trying to rain on anybody's parade, but there's some things you have to think about there too, aren't there Wade?

Wade Carpenter: You just nailed where I was going with this next, actually, because if you're trying to figure out what is a good strategic fit for yourself? I would say what makes you the most real profit?

And going back to my book, like after job expenses or job X as I call it in cash. We look at what do you make cash profit all the, expenses are paid for the job? Are you doing more for those kind of things?

Probably should ask like, where's the market going? Is your niche growing, is it shrinking? We already have [00:16:00] clients that us as an expert in that? And would I've seen, certain companies will take a Contractor all over the country to build out stuff for

Stephen Brown: Mm-hmm. Yeah. It's funny and in my line of work now, more and more CPAs that are putting together year end financial statements leave the project description off. They don't want their bankers knowing where they made huge profits. It's none of their business. And we as bond underwriters, have to go in and try to match up that job number with the job and then input the information and tie it into our bond numbers.

But anyway it, it tickles me. You're right. This is proprietary information.

Wade Carpenter: Yeah. Again, just thinking through that, do you have the staff and the system to support expanding in one way or another. And sometimes it's just a question of you don't really necessarily need to sell more services. You [00:17:00] need more strategy around what you already do.

Stephen Brown: Strategery.

Wade Carpenter: There you go.

Stephen Brown: Uhhuh.

Wade Carpenter: We could also talk about some hybrid models. Where like maybe you're niching vertically. Like what I think Rob's family did. Getting the lumber and you probably know better than I do, but these things that go along with a niche where building veterinary clinics or whatever.

Stephen Brown: Yeah, and everything from controlling each unit cost that was going into one of their homes they were building, but also a Trus manufacturing spinoff. 

Wade Carpenter: Again, I know we're talking about a lot of different things, but maybe it's a hybrid approach, whether it's horizontal expansion or staying within a specific geographic area. But smart growth doesn't really have to look like spaghetti thrown in a wall, I guess I would

Stephen Brown: Mm-hmm.

Wade Carpenter: know, It needs to look like, you've got Legos and you're fitting these pieces together so-- 

Stephen Brown: And also, have you got [00:18:00] enough working capital in your company to support your bond program, and do you have a little bit extra to take risk with? That's the reason you keep a little extra money in your company. So you can systematically decide on how you're gonna expand your market or improve your market.

Wade Carpenter: Again, I would also go back to we topics we talked about, like segmenting, finding out where you're actually making your money. You know what I talk about the job expenses in my book, like, okay, what is actually netting you cash? And taking the time to really dig down on what's your real revenue from each type of job. Does it bring in fast cash or does it delay collections by 90 days? Those kind of things to, I don't know, maybe looking at labor costs, material, those kind of things. What are the inputs that are going into this?

Is the labor pool gonna dry up? Or, can you find help in that particular niche? Some of these things should be asking yourself.

Stephen Brown: [00:19:00] No, that's a great question of what you need to ask yourself. the market you wanna expand to, do you consider it more glamorous than what you're doing now? Who actually makes more money, Ford or Maserati. There's a bigger market share for Ford products than luxury sports cars.

I'm just saying, who knows. Ford may have bought Maserati. I don't know.

Wade Carpenter: I think there's definitely something to say about hey, doing something you're passionate about. And I think that can go a long way to your profitability. But there's also using your analogy with a Ford or just taking it to retail. Okay, you're taking the Walmart approach, you're trying to, do it be the cheapest thing for everybody.

We've talked many times about how you could chase revenue. And I think I said in the book like, okay, we need a bigger boat and then we end up with this thing that we keep chasing more and we keep getting [00:20:00] deeper and deeper in debt.

Stephen Brown: Amen to that.

Wade Carpenter: My only point to that part of it was like, numbers don't lie. If you will sit down and actually take some time to look at where you're making-- you know if your cash flow is bleeding, it could be your pricing, it could be your mix of jobs, those kind of things.

Do you have any thoughts on what's better? Obviously you've gotta balance the risk versus reward. 

Stephen Brown: I think personally, if you're thinking about expansion and you don't have a good system in place, like Profit First that you are totally comfortable and is working for you, then maybe it's better to get that going first before you consider expansion.

But no matter what you're doing, remember that you wouldn't be in business if you didn't do something better than someone else. And you can always say, someone else can do something better than me. And you have to work and live that way every day, that someone else is gonna do something better than [00:21:00] you.

But a lot of times your perception, especially in the construction industry, is that so and so is doing better than me. And you don't know.

You don't know whether they're making money or losing money. But you're chasing that image that they projected for themselves that you admire. Think back and hold your cards close to your vest. And manage what you've got first, and then strategically figure how you are gonna absolutely take advantage of what you're gonna do next.

Wade Carpenter: Yep. If nothing else, I hope we've made our listeners think about what they're doing in their business. Niching down might bring the riches, only if that niche is deep and a durable niche that you can sustain, but also branching out can protect you, but only if your teams and your systems can really handle the weight of doing that.

What I would challenge our listeners to do is just go out, look at your last 10 jobs or the jobs you had over the last year or something like [00:22:00] that. Where are you making your money? Then think about where the economy's going or where the markets are going and then maybe make some choices for yourself.

Stephen Brown: Absolutely.

Wade Carpenter: With that said, again, hopefully this made you think about what you're doing and leads you to some of those riches down the road here. But we appreciate you listening to us. We do this every single week. If you got any thoughts or comments, one way or another, right or wrong questions, we'd love to hear 'em.

Put 'em in the comments below. We love hearing from you. So with that said, we do this every week and appreciate it if you like, share, subscribe, it always helps us out and we will see you on the next show.