BOW Home Services Incorporated Business Plan

Table of Contents

Table of Figures Executive Summary With population growth in Saskatoon of 4.2% in the last year and expected growth of 2.5% going forward (City of Saskatoon 2012) there is a growing market for trades. As most large established companies are moving into new builds and projects there has become a large demand for companies in the renovation sector. Property managers and home owners are in need of established companies that can take on large projects for them since the rise of new neighbourhoods has set the bar higher for quality when renting or selling living space. BOW Home Services Incorporated plans to capitalize on this growth and, with increasing economies of scale, take hold of this renovation market so that we can still see growth during new build slowdowns.

BOW Home Services offers home and property improvement services to owners and managers in areas such as painting, carpentry, flooring, and minor plumbing and electrical work. BOW operates primarily in Saskatoon and the surrounding area and. We work with homeowners and commercial managers to help improve and increase the value of their property.

The company will hold a very low amount of debt that can be paid off within the first 6 months of operation. Capital costs will be low with equipment being bought as needed. After the first set of jobs are complete the company will be financed entirely by cash flows.

Based on projections, we see the company being profitable immediately and by year 5 it is expected to be worth $1.5 million. With majority of expenses being variable, the company can trim or grow when needed to either reduce operating expense or capture new opportunities.

Cash will continue to be reinvested in the company in order to grow with dividends being paid out as net cash exceeds $100,000. Given the current and forecasted market, BOW Home Services will expect to see continuous growth over the next 5 years and excess cash will be put towards working capital in order to keep up with this growth. Business Plan

Introduction BOW Home Services is a property improvement company that uses services such as painting, carpentry, wallpapering, flooring, and drywall to increase the value of residential and commercial buildings. BOW operates primarily in the Saskatoon area but will take on projects outside of the city when it is convenient. The company will specialize in painting and use this service as a means of getting to know property managers in Saskatoon. The company will utilize its first summer as a means of generating working capital for the winter projects. From painting, BOW will branch off into offering other services, upon request, as the company transitions into apartment suite turnarounds. These suite turnarounds will be a way to ensure consistent work for BOW employees in between large summer projects and during the winter season. By utilizing the consistency of suite turnarounds and the scale of large projects BOW will be able to retain team members and keep cash flows consistent.

Industry Saskatoon and the surrounding area is an ideal market for companies in the trades. Preliminary reports show that new home builds have increased 29.0% from the beginning of 2013 to 2014. Additionally, non-residential building permits, which includes commercial permits, have increased 28.6% from the end of 2012 to 2013. (SREDA 2014) Although BOW Home Services does not plan on targeting new builders at this moment it essentially means that this market will have many openings for established companies in Saskatoon such as Aspen Interiors and All Surface Finishes. The movement of the labour force into the new build market will leave a void in the renovation side that BOW can take advantage of. In terms of existing residential projects, from end of 2013 to beginning of 2014 there has been a 33.4% increase in new listings. This coupled with the fact that population in the past year has risen 4.2%, with expected growth of at least 2.5% in following years, indicates that although people are selling homes they may not be leaving. (City of Saskatoon 2012) These factors all indicate that there will be an abundance of new construction work and renovation work as well. With the aging workforce in Saskatoon, due to the baby boomers, we are also seeing only a 4.8% increase in the labour force from 2013 to 2014. (SREDA 2014) This indicates even more opportunity for BOW since it is evident that the labour force has yet to catch up with the construction increases. As stated previously though, BOW will not focus on new builds but instead capitalize on the open renovation market. Although data is not available to confirm this, one could conclude increasing new builds will push apartment owners and managers to constantly improve their property so that they remain competitive in the rental market. These conclusions have been confirmed by conversations with property managers from Turanich Developments and Avenue Living. Outlook is very good for BOW’s target market, and by focusing on renovations BOW can ensure that they will not run out of work when new builds slow down.

Operations Plan

Summary Execution of BOW’s operation will be simple. The acquiring and completion of projects can be broken down into 2 phases. The first phase involving the acquiring of the job and the second involving the completion and invoicing of the job.

The target client will be reached either by phone or in person. As will be discussed in the marketing plan, these reaches will be very specific as we will want to deal with the person directly in charge of renovation projects. When this person is met with and introduces the project to BOW, whether it be a large project or a suite turnaround, BOW will evaluate the project and submit a quote for it. This quote will be sent to the current facilities manager as well as any other managers needed for approval. After the quote is received negotiations will begin on the quote until a point of agreement is met.

Once pricing has been approved, execution of the project will commerce. Typically projects will take anywhere from one to four weeks for completion. After completion and walkthrough, unless progressive payments are specified, the final invoice with any adjustments will be submitted and then paid out on the decided terms. Depending on the company, payment may be immediate or have a hold of up to 60 days. This will be factored in when determining how much working capital is needed in the beginning. As per BOW’s model, after the current project is completed it would be expected that introduction of the next project will begin immediately. These verbal agreements of continuous work will be key for BOW to have consistent cash flows and keep giving employees consistent hours.

For residential work, which will be taken on but not necessarily seek out, the operations model will be very similar. It will be more likely that a home owner will reach out to BOW through a referral for example and from there meeting and job evaluation will begin. There will typically be less negotiations for residential work since homeowners likely don’t have a reference point for pricing unless they look for more quotes. Projects will begin immediately and typically last two days to one week. Payment will be received immediately upon completion. No deposits on projects will be taken in either situation.

BOW will focus on property managers for over 90% of production but will be open to residential work as well. Creating a mix of consistent commercial work while incorporating different projects will be a part of BOW’s mission to keep the workplace from becoming tedious.

Organization

Figure 1

BOW’s organizational structure will be broken down into sides with both sides being managed by the owner. The full-time year round crews and the seasonal summer painting crews. This chart represents the first summer of operation for BOW Home Services. Not all painters will be hired at once but it is expected that with the acquiring of larger projects that this capacity will be reached within 2 months. This workforce will largely be comprised of seasonal workers with the goal that 2 or 3 painters will stay for fulltime work. Each team will be assigned to a specific project at any given time. These projects, as outlined previously, will aim to be commercial and last 1 to 4 weeks with residential work sprinkled in. Painting project leaders will be expected to have at least 3 years of experience and will be paid $18-20 per hour starting. All other painters will not require experience, although it will be preferred, and will be paid $14-15 per hour. The exact number of employees during the summer will be flexible and this model represents the goal for team sizes.

Figure 2

The figure above represents the year round crew that will handle apartment suite turnarounds and smaller interior painting work. This side of the organization will be used to develop careers with BOW and give summer workers the opportunity to work throughout the year if they choose. This crew will develop near the end of the outdoor painting season. Wages for workers at the bottom of this chart will start at $17 per hour and project leaders will start at $22 per hour. All employees in this model would be required to have experience in their respective area and the project leader would be required to have handyman work abilities.

The purpose of these 2 sides to BOW is so that we can guarantee cash flows for the company and work for employees at all times. In the start-up summer the first painting crews will be utilized to get our foot in the door with managers so that we can move into the turnarounds in the winter. This two-step strategy will have the results realized in the second summer when both sides are operating in full. By having suite turnarounds running in the second summer of operation we can mitigate the chance that bad weather will cause us to lose money. Crews can temporarily float between jobs when needed so that deadlines are met and employees get steady paychecks. By combining the consistency of turnarounds with the higher profits of seasonal work BOW can continue to grow throughout the entire year.

Revenue Model Revenue will be generated from commercial and residential projects that the company takes on. Pricing for these projects will vary anywhere from $800-$20,000 but on average will be $6400. Since prices vary by project the metric to be used will be a mark-up of 50% from estimated labour and supplies cost. Assuming full capacity for the starting crew of 4 employees, first week’s revenue would be roughly $4000 accounting for longer time to finish due to training. After this week revenue will be expected to be around $4700 each week from employees. By the end of the first month there would be roughly $18,000 of revenue from employees. This is a conservative estimate of company revenue considering that while managing in the first month there would be time for the owner to work as well and generate revenue for the company. For our conservative model we will exclude this and allow the entire month for management, training, and job acquiring. This revenue model also assumes that the company will acquire projects that pay within two weeks of completion.

Capital Budget Wages Manager Salary Equipment Supplies Insurance Lease Total Week One 0 0 6000 1000 2000 0 9000 Week Two 5198 0 0 0 0 0 5198 Week Three 0 0 0 1000 0 0 1000 Week Four 5198 2500 0 0 0 2000 9698 Total 10396 2500 6000 2000 2000 2000 24896

Figure 3

The table above shows how much cash is needed at the end of each week in the first month of operation. As stated in the revenue model, the company would expect to bring in roughly $18,000 within the first month of operation. Under the assumption that the first project taken on is finished and paid within the first month this would create a required equity investment of about $15,000 to cover all expenses in the first 4 weeks. If payment on the first job exceeded a month required capital would be around $25,000 as shown above. In extreme situations capital may be needed to cover more than one month if receivables is 60 days. However, it would be assumed that the company would not need to rely completely on this types of agreements when starting up. This could however be the situation when moving into the suite turnarounds. Marketing

Product BOW Home services will be offering a variety of home improvement services that will all center on painting. As will be shown in the financials report, painting will be the core service offered at each project and other services will stem from it. Carpentry, drywall, flooring, and plumbing will be services that complement each job but are not directly sought out. In moving into suite turnarounds these other services will become a critical factor in completing projects and more emphasis will be put on them. Essentially every job will be guaranteed to have painting work done, with extra services added in when needed.

Place BOW will be operating primarily inside of the City of Saskatoon given the market favorability stated above. Work will also be done outside of the city when the situation arises but this will be likely be pursued only if there is a lag in projects or if the crew wants to work somewhere different. Most work will be done on the middle income neighbourhoods in the city as they are more likely to have property in need of renovation and are willing to spend the money on it.

Price Pricing will be different for each project taken on. The average price per project is estimated to be $6400.00, indicated by a company in the industry, but can fluctuate from $1000 to $20,000. The metric used for pricing will be a 50% markup from the labour and supplies cost. In most cases labour would represent 40-45% and supplies would be 20-25%. The remaining 35% of profit would be used to cover overheads such as lease and management expense with additional funds going back into the company. In cases where work is more consistent such as turnarounds, profit margins may land in the 25%-30% range but there would be greatly reduced management costs due to the repetition of the project. Below is a figure showing BOW’s pricing model in comparison to other substitutes. Larger bubbles indicate how represented this substitute is. As seen here, BOW’s closest comparisons are from Aspen and In House Teams in terms of pricing and value added. Aspen is mostly in new builds so they are not direct competition. However, in house teams will be the biggest area of competition to BOW. Essentially the company needs to be chosen over the hired contractors that the property managers already have, but likely at a higher cost. Reasons for choosing BOW could be that quality is lagging in the in house team, the company wants to get more projects done, or that they simply want a new set of people taking on projects so that other options may be seen.

Promotion Promotion will be kept fairly minimal since our consumers will be extremely targeted. The only strategies that will be utilized will be advertising and branding on business cards, shirts, and company vehicles. This will simply be to bring in calls from individuals that we meet or people that see our vehicle. Marketing budget each year will be kept very low if there ever is one. Outlets such as radio and website will be considered if there is ever felt to be a need but as it stands we would expect the initial marketing budget for the year to remain under $1000.

Target Market Anyone with a home, office space, or apartment will want to do work with us but ultimately we will be targeting property managers as they have a variety of service needs and a near unlimited source of work. BOW will position itself as a one stop shop when it comes to our painting and turnaround projects. If a building needs work done from one of our other services we will combine it into the project. Consolidating all services is why managers will choose us as it leads to less work for them and less time finding additional companies. By researching property managers in the city and making phone calls we will determine who the facilities managers are for each building and reach out to them in order to work together. This targeted marketing strategy will be very cost effective as it is estimated through a basic search on Google that there would be around 50 locations to contact. For the proposed model, BOW would need to secure only 2 or 3 of these and have repeat work from them to keep crews busy.

Competition As stated previously, the market is currently very favourable for companies in the trades in Saskatoon. As a result, competition is not as intense and price wars are not as much of a concern in the renovation and repaint market. The main area of competition will be against the apartments own in house team and this is where BOW needs to come up with a point of differentiation. Since price is very likely going to be higher, BOW will distinguish itself by embracing the one stop shop when approaching painting and turnaround projects. By servicing all aspects of a project BOW can offset the higher price tag given that management costs for the company will decrease dramatically in terms of managing their own staff or in finding other companies to do certain services. BOW will strive to provide a professional experience throughout the process in ways such as follow-ups which is an area that many builders claim is a problem when dealing with individual contractors.

Product Mix Based on projections, we would estimate the breakdown of revenue to come from the following areas in the first year of operation.

Figure 4

As seen here painting will be the main revenue driver during the first year of operation. It is likely that this will not change very much as the year’s progress since summer painting will become a very large division of BOW. It is important to note that this breakdown shows painting in apartment suites to be included in the painting piece. All other work in suites such as carpentry, flooring, and others are represented in the 25%. The additional 5% of other represents revenue brought in from other services when doing a painting job. This can include but would not be limited to, fence replacement, deck repair, brick repair, or drywall work done when on a painting job. This product mix is by no means set in stone but it would dictate how we would advertise the company. Since painting is our largest operation we would likely introduce BOW as a painting company when speaking with someone. However, if suite turnarounds picks up then this mix could be adjusted to reflect it.

Financials

Revenue Schedule

Figure 5

The revenue schedule shown above incorporates revenue gained from both the summer and winter season. The average projects per month is an average over the entire year. The reason for a large jump into the second year is that in the second summer both sides of BOW will be in operation, with the suites once again continuing into the winter, and the jobs per month is an average throughout the year. Growth in operation of the turnaround crew is not seen until the third year but if the opportunity arises this could be adjusted to include a new team member.

Variable Cost Since pricing is made based on a factor of labour cost, we can use the yearly wage of an employee to determine how many workers are needed to sustain the proposed growth. The benefit to this approach is that if more projects are acquired we can easily see how many additional employees are needed to keep up with them. Likewise, we see a slowdown in projects then we will be able to determine how many employees to lay off during this slow time. There will become a critical point however, that we estimate to be around 3 full time employees that if the company falls below this then production will become too slow to take on the projects we would like.

Number of Employees: Manager (full time) 1 1 1 1 1 Full time staff 4 6 7 9 9 Part time staff 100,000 0.61 0.30 0.75 0.13 0.83

Figure 6

Based on an estimated average hourly rate of $20 per hour across all employees we can see that the average full time employee can generate $100,000 of revenue for the company. Combining this with the proposed growth in the revenue schedule we now know how many full time staff are needed each year to keep up. This is low in the first year but immediately jumps up as BOW gets in full swing of its 2 sides. Wages for employees can always be adjusted but with the pricing model if an employee getting a raise it will not harm profit margins since we price based on labour costs. It would be assumed that a $30 per hour employee can generate twice as much revenue as a $15 per hour employee would. Once again to clarify, the management role would be taken on by the owner, myself, and I would only be taking a $30,000 salary in each year. Income Statement Income Statement For the year ended 2015 2016 2017 2018 2019

Sales 460,800 629,758 774,603 913,063 982,684 COGS 104,832 143,270 176,222 207,722 223,561 Gross Profit 355,968 486,488 598,381 705,341 759,124 77% 77% 77% 77% 77% Operating Expenses Accounting and Legal - - - - - Advertizing (Marketing) 3,000 3,075 3,152 3,231 3,311 General Supplies 1,000 1,025 1,051 1,077 1,104 Insurance 1,500 1,538 1,576 1,615 1,656 Property Taxes - - - - - Telephone 2,400 2,460 2,522 2,585 2,649 Utilities 1,200 1,230 1,261 1,292 1,325 Repair and Maintenance 4,000 4,100 4,203 4,308 4,415 Wages 204,675 280,798 342,854 416,370 449,372 Employee Benefits 28,573 39,199 47,862 58,125 62,732 Misc Variable Costs % Sales 4,608 6,298 7,746 9,131 9,827 Capital Cost Allowance 1,280 1,037 842 685 559 Debt Interest - - - - - Total Operating Expenses 252,236 340,759 413,067 498,418 536,951

Taxable Income 103,732 145,729 185,314 206,923 222,173 Income Taxes 13,485 18,945 24,091 26,900 28,882 Net Income 150,314 90,247 126,785 161,223 180,023 193,290

Figure 7

As stated, the variable supplies cost will average to be about 23% of each job. Employee wages on average represents 45% when incorporating promotions throughout the year. This income statement is very telling of the operations of BOW as it shows that 95% of operating costs incurred are variable. This lowers the risk involves because of the low amount of fixed cost each month. Certain items such as marketing budget will be embraced when there has been money accumulated throughout the year but would not be considered until at least 6 months into operation. Overall retained earnings represents nearly 20% after taxes and after management salary is paid out. Dividends will be paid out whenever net cash exceeds $100,000. The reason for keeping this large of an amount is that we foresee in the future when working with larger clients that the projects will become bigger and therefore more working capital will be needed at any given time. Although there is flexibility given that most operating expenses are variable, we still need to keep in mind how many jobs are needed to keep the base crew going. Since price of each job will always vary, the number of projects acquired each month will be the critical variable in determining if the operation can run as proposed. Figure 8

This sensitivity analysis serves as a break even analysis for BOW. Since variable costs go up as we hire more employees or take on more projects a break even chart over 5 years is not as valuable since we would simply not grow if we saw a lack of projects. As seen, as low as 4 projects per month is enough to keep BOW profitable, although it is not ideal. Once we start seeing our projected number of 6 projects per month we can see that the business is very profitable quick. This serves as a risk analysis as well, given that we have so much room below our projections we know that even in slow months the company can still turn a profit.

Risk Analysis Overall the investment into BOW Home Services yields low amounts of risk with high returns. The company does however have some critical points and assumptions that, if false, could hurt the company.

Lower than expected projects or average project size:

 This risk is mitigated by the fact that BOW runs 95% on variable cost. What this means is that layoffs may occur to keep the company from losing money. However, if staff ever dipped below 3 it would be an indicator that it may be time to pull out as only 2 members likely could not take on the projects that BOW would be accustomed to.

Slow-down in the economy and in new builds:  By positioning ourselves in the renovation and repaint market we protect ourselves from an economic slowdown. However, if the prevalent companies in the new market start moving into the renovation side we would be heavily reliant on our relationships with property managers to keep our work. This could result in a pricing war and we could ultimately see profit margins fall a bit if the market became saturated.

Problems in retaining clients resulting in less consistent work:

 Given that our industry is already project based it is common for employees to work more hours near the end of a project and have a day off in between the next job. If this ever became substantial and employees were averaging less than 40 hours each week then it would be a sign to either layoff staff or exit the industry.

These risk factors are key for the success of BOW but even if they fail it does not necessarily dictate the failure of the investor/owner. Assets are in equipment so losses would be minimized here as the equipment could be resold. Overall the low risk combined with the high returns make this a very feasible and pursuable business venture.

Return Net Cash Flow 110,525 119,760 33,893 118,551 12,141 Dividends - 10,525 130,285 64,177 182,729 Terminal Value 779,478 Total Cash Flow to Equity Investors 110,525 130,285 164,177 182,729 974,348

Figure 9

Overall BOW is very profitable within its first year of operation. As seen, on top of my manager salary, dividends begin to pay out by year 2. Dividends are paid out when cash on hand exceeds $100,000 which is a very conservative amount to pay out at. It is important to note that terminal value will depend on the value of the contracts, if there are any, which the company holds. Excluding terminal value we can still see a cash flow to equity investors of over $100,000 each year. The net payback including the terminal value exceeds $1.5 million by year 5 indicating that even if the company needed an initial investment triple the amount budgeted that it would still be very profitable. The current model does not include any debt financing but even if the company was financed fully by debt we would not see any drastic changes in net cash flows or net payback. Given that the equity invested is so low we will not point out the internal rate of return, but it can be noted that it is quite high.

Conclusion This has proven to be a very profitable business model with very few risks involved. Marketability is showing to be quite easy given the economic conditions in Saskatoon and expenses to get this moving are very low. From a management perspective my biggest challenges will be finding jobs and finding and keeping good workers to do them. Flexibility in the model can allow me to enter different service industries with very little capital or efforts making this a very adaptable business. Financially the company relies on variable factors to run and has low cost to enter. This puts even more emphasis on the need to build strong relations with clients and employees in order to embrace growth in the company. I look forward to seeing how it will play out.

Sources Government of Saskatchewan 2014. http://www.saskatoon.ca/DEPARTMENTS/COMMUNITY %20SERVICES/PLANNINGDEVELOPMENT/FUTUREGROWTH/DEMOGRAPHICANDHOUSINGDATA/Pages/P opulationEstimateProjection.aspx

SREDA 2013. http://www.sreda.com/saskatoon-region-economic-report-2013-quarter-4/

SREDA 2014 http://www.sreda.com/research/infodata-centre-publications-reports-on-the-economy/

*All other estimates and projections are done based on reports of BOW Home Services throughout the past year.*