Building Basics - BodyShop Business

Building Basics

Should you build a new facility? Before donning a hard hat and diving into construction, put on your thinking cap to determine if building new is for you.

Growth is good. No doubt about it. A business that stagnates or begins to shrink is usually headed for extinction. Still, growth isn’t without its own set of problems. Growth in your body shop leads to the need for more employees, more frequent trips to the bank for financing and more day-to-day headaches. And if you keep growing, it’ll eventually lead to the need for more space.

If you’ve ever built a new shop or expanded your existing facility, then you know the building/renovation process initially creates more questions than answers. New construction is expensive, so it’s important to build the right size facility in the right location with the right layout for the right cost. Right? But how do you do that? If that were an easy question to answer, everyone would be doing it correctly.

Donnie Jones, owner of Jones Body Shop in Greensboro, N.C., knows what it’s like to contemplate the need for additional space. He’s been in the industry for more than 20 years, and for the first several years, he operated out of a 1,000-square-foot facility with no room for expansion. After growing tired of storing most of his equipment off site and bringing it to his shop when it was needed for a job, he decided to move. “We’d been turning away work,” says Jones. “We just didn’t have enough space. As car technology increased, the equipment needed to fix them became more sophisticated and larger. It got to the point that we just had to move.”

Jones started out renting an existing building a few blocks away, but found the decades-old building offered more problems than solutions. And since the existing owner was asking too much for the building, Jones decided to build his own shop. A year and a half later, he had a new shop location but had also learned — the hard way — the dos and don’ts of building a new body shop.

Should you follow Jones’ lead and build your own shop? Should you consider renovating the one you have? What should you do? For starters, keep reading.

Why Build or Add On?
Before you undertake the arduous process of building or renovating, you’d better make sure your reason for doing so is well-founded. You can probably think of many reasons to justify new construction, but you need to be sure the time and money you’ll sink into such a project will be worth it.

If you build it, will they come?

Of course, the primary reason to build or add on is to increase your customer base. The formula is as follows:

More Space = More Jobs = More Revenues = More Profits = More Sleep at Night for You.

In many cases, this formula holds true. But not always. How do you know this formula will work for you? Let’s consider some of the viable reasons to build or add on:

1. Poor Location — If your location is inaccessible for direct consumer business and you aren’t getting your fair share, then a move to a new shop in a new location might be just the ticket for increasing sales.

2. Turning Away Business — Jones was turning away nearly as much business as he was taking.

3. No Room to Expand — Your existing location might be fine in terms of accessibility, but if you have no extra land to allow you to expand, this could be a problem. If you’ve had good revenue growth in recent years and are beginning to reach full capacity, it might be time to build a new shop. If you don’t, you may soon find yourself turning away profitable business.

4. Competitive Environment — If your shop is in a metropolitan area, you may face fierce competition in your existing location. A move of even a few miles to a less competitive environment might open up a whole new sector of direct consumer business.

5. Ownership — Owning rather than renting can also be a viable reason for building a new shop. If you have some cash equity to put into a new building, you may find the debt payment for owning your own building isn’t much more than your rent payment.

While these five questions work well for someone who already owns a shop, they don’t work well for someone who doesn’t. So what if you’ve never owned a shop before but want to? Should you build, buy an existing building or lease? Consider Genie and Ross Evers, who wanted to become body shop owners and did extensive research before settling on Lady Lake, Fla., for the shop location. They decided to build a new shop for two key reasons: the investment benefit of owning rather than renting and the opportunity to create a distinctly different image than the competition.

“We felt that investing in a building would have a better return on our investment vs. leasing an existing building,” says Evers. “And the option to buy an older existing building didn’t fit into the autobody shop image we wanted to promote. Most of the shops in this area are still operated with the ‘Billy Bob’ mentality. We saw the opportunity to make an image change to the repair industry.”

Where Should You Build?
When it comes to real estate of any kind, location is vital. So, if you’ve decided more space is needed, the next question to consider is “where?”

Even if you already own your shop and have room to expand, you still might want to consider the option of building a completely new location. If you think a new location would allow you to attract more direct consumer business or to improve your competitive position, a move might be in order.

If you’ve decided to pursue an entirely new location, consider these key points when selecting one:

• How many competitive shops are located nearby?

• Are there other automotive-related businesses that might allow you to share customers?

• How much will the land cost?

• Is the surrounding area growing?

• Will zoning be a problem?

• Will you have room to expand in the future?

• What sign ordinances will you have to adhere to?

• Is it a marketable area in case you ever decide to sell the real estate?

• Is access to the property a problem?

Jones chose a location that was about two miles from his existing shop. Although the land fronted a major multi-lane thoroughfare in a vibrant business community, the land cost was reasonable and there weren’t any problems with signage.

Like Jones, the Evers did a lot of research before deciding on a site. They contacted a Lake County Real Estate organization and found out the number of counties in the state, the total number of building permits issued in the two previous years and the fastest growing counties.

“After identifying the fastest growing county in the area in which we were interested, we contacted the county real estate office and two major automobile insurance companies,” says Evers. “We set up interviews with the agencies to discuss the number of insurance claims and home sales for each section of the county. We contacted the local police departments and identified the number of reported vehicle accidents by month for a 12-month period.”

Evers says their research enabled them to find the area that represented the greatest need for a shop. In Lady Lake, for example, the Evers discovered a new home rate of 140 permanent homes per month. So, with two realtors working for them, the Evers finally found a .84-acre tract and constructed Lake County Collision, Inc.

While most shop owners may not have the luxury of starting from scratch as the Evers did, a couple of important lessons can be learned from their location selection process. First, they were willing to consider different options. While you might lose too many existing relationships moving to a new city or county, you certainly should consider alternative sites in your community before settling on one.

Second, they tapped into many different resources. Like the Evers, before settling on a location for your new shop, you should contact your local police department and insurance companies (both those you currently deal with and those you’d like to work with), as well as real estate organizations.

What Can You Afford?
You’ll need to consider two key factors when estimating how much you can spend on building or renovating: your shop’s historical cash flow generated and the projected increase that might result from a new or bigger location.

Computing your historical cash flow is easy and can be accomplished by a simple formula:

Gross Cash Flow Available for Debt Service = Net Income After Taxes + Interest + Depreciation.

Let’s consider an example. If your shop has generated a net income of $30,000 the past couple of years, with $20,000 per year in interest expense and $20,000 of depreciation, the gross cash flow available for debt service is $70,000. If you already have debt service associated with your equipment of $40,000 per year (monthly payments x 12), your net cash flow after debt service is $30,000.

As a formula, this looks like:

Net Income After Taxes $30,000
+ Interest $20,000
+ Depreciation $20,000
= Gross Cash Flow $70,000
Gross Cash Flow $70,000
– Existing Debt Service $40,000
= Net Cash Flow $30,000

So far, so good. This tells you your shop currently is generating sufficient cash flow to re-pay your debt obligations. But what about your plans to build or add on? Let’s say your new facility will cost you $500,000. You have $100,000 in excess cash to invest in the facility and will borrow $400,000. If you borrow the money at 8.5 percent and finance the borrowed funds over 15 years, the monthly debt service will be $4,014, or $48,168 per year. Does your historical cash flow support your expansion plans?

Let’s calculate it and see:

Net Income After Taxes $30,000
+ Interest $20,000
+ Depreciation $20,000
= Gross Cash Flow $70,000
Gross Cash Flow $70,000
– Existing Debt Service $40,000
-Projected Debt Service $48,168
= Net Cash Flow -$18,168

The answer is “no.” The historical cash flow doesn’t support the projected debt service for the new building.

If your scenario is similar to this one, you have to decide if the expansion will create sufficient cash flow to cover the increase in debt service. If you don’t think it will, then you aren’t ready to build or expand.

Trying to compute what might happen in the future isn’t an exact science, but there are some tangible factors to consider. If you’ve been keeping track of the amount of business you’ve been turning away, then you should be able to compute the lost profit on this business. Also, if you’re adding new equipment you didn’t previously have, your insurance company contacts can provide estimates of additional business you can expect to receive.

Jones says his sales increased 30 percent the year he built his new shop. “We knew from the amount of business we’d been turning away that our sales would go up,” says Jones. “But we didn’t know they’d go up that much. The income from the higher sales volume provided more than enough profit to pay back our loan for the new shop.”

The Cost
For any new body shop construction or renovation, you’ll have three major areas of cost: land, building and equipment. You should be able to obtain good estimates on equipment costs from your vendors, but the cost for land and building will vary greatly.

If you already own your land, then you won’t have to worry about this cost. But if you’re seeking a new location and need land, then this will be a key component of what you’ll spend.

You should focus on lots of at least an acre. You may not use it all for your initial construction, but this will leave room to expand in the future.

As for cost, the price per acre of commercially zoned land will vary greatly depending on location. An acre in or around Atlanta will cost far more than an acre in Abilene, Kan. Even in the same city, per-acre cost can vary significantly, depending on the location. At the low end, you might find land for $10,000 an acre. On the high end, you might spend $500,000 or more.

Seek some input from a trusted real estate broker in deciding what land to acquire. Also, talk to other body shop owners and entrepreneurs for guidance on reasonable cost for land.

As for the building, if you’ll be constructing a new facility, you should focus on something basic. Expect to pay about $35 per square foot for a metal building. If you decide to go with brick and mortar, your cost should run in the $50-per-square-foot range.

No matter what your cost estimates are, always include a cost contingency of about 10 percent for overruns. Jones spent a year fine-tuning his cost estimates for the building he constructed, but he still cautions that no matter how much planning and estimating you do on the costs, plan on it costing more.

Finding a Good Contractor
Finding the right contractor to construct your new building or to upfit your existing facility might be the most important component of all. Just ask the Evers. While they were satisfied with the quality of work done, the project-cost overruns nearly wiped them out before they even got started.

“Through previous experience we knew the contractor we chose did excellent work,” says Evers. “And he did live up to his reputation of excellent workmanship. However, his estimating skills were absolutely the sorriest estimating skills we ever experienced.”

The overruns caused by the contractor resulted in the Evers having to seek additional financing halfway through the project. They contemplated a lawsuit against the contractor, but since that would have brought the project to a screeching halt, they decided to pursue additional bank financing to cover the unexpected costs.

“The unidentified expenses left out by the contractor were astronomical,” says Evers, who wound up spending 20 percent more than she’d planned. “The only way I’d ever use this contractor again is if he were a subcontractor.”

What should the Evers have done differently? Two key things. First, they didn’t ask for a fixed-cost contract. Second, they took the lowest bid.

Many different types of contracts can be signed between a contractor and a business owner, but a fixed-cost contract is, by far, the most desirable for the business owner. With a fixed-cost contract, the contractor must adhere to the costs submitted unless a change order (a deviation from the original contract) is approved by you. Most fixed-cost contracts will include some allowance for contingencies (up to 10 percent), but this is normal.

Taking the lowest bid also can lead to problems. The lowest bid often means one of two things: The contractor will try to cut corners where they shouldn’t be cut, or he’s purposely underbid and plans to increase the job with change orders later.

Jones obtained 14 bids from contractors once he decided to build new. The bid he took wasn’t the lowest, but the contractor had good references for quality and accuracy of job bidding.

Unsure how to handle it? Here are several suggestions for choosing a contractor:

• Before making up a bid list, talk with others to find out which contractors do good work. Talk with body shop owners and other entrepreneurs.

• Look at other buildings that have been constructed by the different contractors on your bid list.

• Call the references given. Try to find out if there are any other clients for whom the contractors have constructed buildings not provided in their reference lists. They might have been omitted for a reason.

• Find out if the contractors you’re considering finish jobs on time.

• Obtain bids from as many contractors as possible.

• Don’t go with the cheapest bid unless all the other factors check out.

• Once you decide on a contractor, negotiate the price. Just because he’s given you a bid doesn’t mean he might not come down on the price.

• Get a fixed-cost contract.

• Consider requiring that the job be bonded if you’re unsure of the contractor’s staying power.

Another key responsibility of the general contractor is the permits needed for new construction or renovation. If you’ve never been involved in a commercial construction job, then you’ll be amazed at the number of permits required. During construction, you’ll witness a parade of mostly local inspectors coming to your site on a regular basis to make sure your building is code compliant before issuing the all-important final Certificate of Occupancy permit that’s needed for you to move into your new shop.

Clearly specify with the contractor two things regarding permits:

1. The contractor will take care of obtaining all the necessary permits.

2. The contractor will take care of the cost associated with the permits.

Evers says they did neither.

“We had trouble getting our permits,” says Evers. “The contractor called me to obtain 75 percent of the permits we needed because he couldn’t get the appropriate agencies to act upon his requests and follow through.”

And then there was the cost. “Our contractor budgeted $500 for permits and impact fees for our building,” says Evers. “Ha! The road-impact fee alone was $11,000!”

If you find a contractor with the right local agency contacts, you shouldn’t have the trouble the Evers did with permits. The key is to make sure your contractor guarantees he’ll obtain all the permits needed and that the costs are clearly spelled out in the contract.

And remember, the contracting business isn’t for the faint of heart. It’s a nearly impossible challenge to estimate as far as a year ahead the exact cost of a construction project. For that reason, the best you can do is find a contractor with a reputation for quality and a history of minimizing overruns and delays.

When the Bill Arrives
Here’s the $64,000 question (actually, it’s more like the $640,000 question for most shop owners considering building): How will you line up the funds needed for the project?

The funding generally will come from one or more of the following sources:

• Excess Cash in the Business — If your shop’s been profitable in recent years, you’ve probably built up a cash cushion. In some cases, this cash cushion might be sizable — $100,000 or more. If you’re planning a minor renovation, you might be able to fund the cost out of your bank account. In most cases, however, your shop’s excess cash will be sufficient only to provide some or all of the down payment.

• Personal Funds — If you’ve taken out most of the excess profits in your shop in recent years and invested them personally, as many shop owners have, the funds for expansion may partially come from this resource.

• Outside Equity — If your shop is fairly young (less than five years old) or has been in a rapid growth mode, then you might not have any excess cash in the business or personally. This could be a problem when you go to the bank and ask for 100 percent financing of the proposed project. If this is the case, you might want to consider bringing in an outside investor to help fund the construction. If you take this route, minimize the percentage of ownership given up and specify a plan to take the investor back out once the cash flow of the shop stabilizes in the new location.

• Outside Financing — The vast majority of new construction and renovation projects involve some component of outside bank financing.

Getting Outside Financing
Most new construction or renovation projects involve outside financing. Depending on the location and size of the building, some new shops may cost $500,000 or more, and most shop owners don’t have anywhere near that kind of money sitting in their checking accounts — which means a trip to the bank for financing.

If your shop has been losing money, you’re not likely to have your loan approved. Even if your shop’s been profitable, if the historical cash flow hasn’t been sufficient to support the increased debt that will result from the new building, be prepared to explain why you believe you can increase your cash flow.

When putting together your financing request, include the following:

• A narrative business plan if your shop is a start-up.

• At least three years of historical financial statements on the company.

• Future profit-and-loss projections for three years.

• Résumés on key managers and owners.

• A detailed project-cost breakdown prepared by your contractor.

• A listing of any equipment that will be added.

• Personal financial statements and two years of tax returns on all owners.

• A proposed collateral structure.

If you already have a well-established relationship with one banker, you may want to go straight to his bank with the request. However, you should still consider talking with at least two or three different banks to see what the market has to offer. Some banks will offer only a conventional bank-loan option, while others will also offer government-guaranteed loan alternatives.

In most cases, you’ll be expected to invest 10-25 percent (the industry standard is 20 percent) in cash equity into the project. You may be allowed to substitute additional collateral for all or part of the cash equity requirement if you’ve built up equity in your home or existing shop location or if you have other assets to pledge (stocks, bonds, etc.) that you don’t want to liquidate.

For a conventional construction/permanent bank loan, expect to pay interest only during the construction period. Once the construction is completed, your loan will be termed out with an amortization of 15-20 years.

There’s a strong market for fixed-rate financing on real estate loans right now, with fixed rates running anywhere from 7 percent or less to 9 percent or higher. The rate offered will depend on the market conditions, the financial strength of your shop and the length of the fixed rate. Most banks will include a “balloon” or “call” option with a fixed rate of five, seven or 10 years to allow the rate to be re-negotiated before the loan pays out. The longer the balloon period, the higher the fixed rate.

A number of government-guaranteed loan programs exist, including Small Business Administration 7(a) and 504 loans and USDA rural economic-development program loans (for companies in areas with 40,000 or fewer residents). If your shop is only a few years old, has been growing rapidly or has recently had “off years” financially, a government-guaranteed loan may be the difference between approval and denial of your request. Because the government guarantees a portion of the loan, banks generally are willing to accept more risk. And, in most cases, the government-guaranteed loans offer longer re-payment terms.

Both Jones and Evers utilized SBA-guaranteed loan programs to help finance their construction. Jones obtained a paperwork intensive SBA 504 loan. “I probably couldn’t have built the shop I wanted without the 504 loan,” says Jones. “But it took about a year from the time we started the application to the time we closed.”

Evers obtained a 7(a) guaranteed loan. But, she says, she could’ve expedited her approval process by finding an SBA-friendly bank earlier on.

“If you’re going through the federal Small Business Administration, you’ll save months of time by searching out a financial establishment that has on staff a loan officer with experience in dealing with the SBA,” says Evers.

Your bank should be able to provide more information on government-guaranteed loan programs, or you can contact your local SBA or USDA office.

Hang In There
Whether you’re considering new construction or the renovation of your existing shop, you’re in for a major project that will take up a lot of time — and a lot of money. So make sure the sacrifice will reap a just reward, and then prepare yourself for a challenge.

For the Evers, perseverance, a hands-on attitude and hard work were necessities during the 18 months it took for them to get their shop built. They also drew encouragement from a man who knew a little something about getting things done right.

“My gift to those who are contemplating the challenge of building or renovating a new collision repair facility is this,” says Evers. “It’s a quote by Abraham Lincoln: ‘Things may come to those who wait, but only things left by those who hustled.’ ”

Writer J. Tol Broome Jr. is a financial expert who’s been in the lending business for 15 years. He’s also a contributing editor to BodyShop Business.

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