New construction and service businesses

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July 13, 2022

by a searcher from United States Naval Academy in Denver, CO, USA

SF Team,

I am interested in any and all thoughts about service businesses who model their offense around new construction. I can see how there is money to be made in many emerging markets. Similarly, with the right network of builders having a service business that primarily serves as a subcontractor for new builds could be profitable but also a good chance it is not enduring.

Does anyone have experience having enduring success in an offense like that? If not, can you take the bones of that business and pivot it to a true residential/commercial service business?

Thanks!

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Reply by a searcher
from Michigan State University in Los Angeles, CA, USA
There’s a lot of money to be made but aside from the risks mentioned above and from ^redacted‌, new construction adds a new layer of complexity around materials management, estimating, budgeting, and cash flow. You’re locked into contracts that have to be completed by certain dates. Recent high volatility in material prices and supply have put many new construction companies at risk of going underwater on projects due to estimates in their bids not accounting for these price and supply challenges. often a percent of materials are bought upfront and can introduce additional exposure. I’ve seen 30 year old businesses and executives struggle to navigate through these challenges. All that said, lots of opportunities if you can navigate it.
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Reply by a searcher
from Stanford University in San Clemente, CA, USA
Collin, the obvious challenge of serving new construction is the cyclicality. At some point in every market, new construction will slow down. Another challenge that can be overlooked is that it takes a long time for subs to get paid. Cyclicality + long cash conversion cycle. I really like AJ Wasserstein's article on managing working capital (below). He does a great job articulating how a long cash conversion cycle can make it challenging to grow with internally generated cash. https://yale.app.box.com/s/eof88twpf8fpfwlrnzgndhcwq1kdxo8p
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