Wednesday, May 26, 2021

16 Steps to Successfully Opening a New Modular Factory in This Post-COVID-19 World

Modular housing factories are still being planned for all across the US. S2A, the most ambitious of those, is planning on adding more than 20 modular factories while dozens of others are planning to open one or two before the year ends.

"New to Modular" investors are pouring millions of dollars into financing many of these new factories and are pushing to get them opened quickly even in this post-COVID-19 world.

Many are taking shortcuts to open their factories including not hiring knowledgeable modular industry consultants or doing adequate research into what the market is currently demanding.

Others are entering the modular business when shortages of labor and material and rapidly rising LBM prices are crippling existing modular factories thinking they have the 'secret sauce' all those old school factories don't.

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Having seen many factories fail over the past decade due to the housing recession, poor management, or poor financial planning, here is a list of 16 steps to be taken to ensure that if you are really thinking of opening a new factory, at least you will have a playbook.

  1. Determine the type of factory you want to be in. Sounds simple, doesn’t it? It isn’t. Will it be a direct to builder factory; one that sells to builders and retail customers; a factory that only sells to the builders that invested in it or maybe a factory that specializes in a certain type of building envelope.
  2. Develop a Break-Even analysis to determine if your factory can actually make money. Many people jump into a new business with hopes and dreams only to find out that neither of these actually puts money in the bank. Preparing a break-even analysis costs very little and could mean the difference between long-term success and short-term failure.
  3. Prepare a Business Plan. No matter how many times you hear me say it, this is the most important part of any startup. In fact, it is the most important part of any modular business. If you can’t write down what you are going to do in an organized fashion with measurable benchmarks along the way, you are simply going to be on a fast track to ruin.
  4. Find a source of funds. Unless you and/or your fellow investors are putting all the money needed to open and maintain the factory until it becomes profitable, you will need to find someone with money that wants to invest in your dream. Investors want to see a Business Plan and a Break-Even Analysis. Go back and reread steps 2 and 3.
  5. Develop a  Marketing Plan. Who is going to buy your homes? What is your target market? How far will you deliver your homes? Where will you advertise? Don’t wait till the last minute to get started on this. This is how you begin growing your business.
  6. Decide on a legal structure for your factory. Sole proprietor, limited partnership, LLC, or some other type. Each offers investors and owners different degrees of liability. Choosing the wrong type could end up costing you a lot of extra taxes and if your factory fails, it could mean personal ruin. “Choose wisely, you must.”
  7. Choosing your business name. Sounds simple but isn’t. It has to be a name that reflects what you are doing. Calling it “Cheap Modular Homes” is bad but “Affordable Homes of Tucson” sounds better. You have to live with the name forever, so again “Choose wisely, you must.”
  8. Register your factory’s name. Don’t overlook this important step. Not only do you have to register it with the Federal and State governments, you need to copyright the name, establish social media pages with the name and register your website URL. Simply getting a Fed Tax ID number is not enough in today’s social media world.
  9. Prepare your organizational paperwork. It is very important to have all the legal stuff organized and for everyone to understand the different tax and liability the different forms take. Are you a partnership, an LLC, a C Corporation or an S Corp?
  10. Determine what you are going to need. Identifying what you need to start a factory is of the utmost importance. What type of equipment for both the office and production lines and how much will it cost? You may think you know but the actual cost of the overhead crane but the cost of an installed one with the required safety training could double what you first thought. Carriers are not cheap and neither is putting in a production line.
  11. Find a location. Do you want to build a new building or use an existing building? Is it located near major highways that will make it convenient to deliver your homes? Is there a workforce available and will they need extensive training? Are there tax advantages? This list could go on and on. Finding a home for your factory is more than just pushing a tack into a map.
  12. Examine your lease agreement carefully. If leasing is the way you decide to go, make sure you read the fine print. Is it a net lease, a net-net lease? If it is in an industrial park, will you have to pay an association fee? Is there a close in the lease requiring you to remove all your equipment upon vacating? READ THE fine print!
  13. Obtain your licenses, permits, and state approvals. Opening a modular home factory is not a walk in the park. You will be inspected by the state you are in before you can open and possibly have to show your factory to code officials from neighboring states as well. You will have to prepare for a third-party inspector to come in and sign off on your factory and plans. This is not like opening a retail toy store. This is a heavily regulated industry with regulations that not only vary from state to state but local town code enforcement within each state. You will be checked out harder than when you met your girlfriend’s parents for the first time.
  14. Get your insurance needs in place. Simply calling your local Geico agent is not enough. You will need commercial insurance, a home warranty provider, fleet insurance, healthcare insurance, liability insurance, and God knows what else. This will be a major drain on funds and unless you have it adequately addressed it in the Business Plan and Break-Even Analysis, you could find yourself insurance poor with a failed factory.
  15. A good bookkeeping system is a must. Find yourself a good business CPA and have them set up your bookkeeping. It will not be inexpensive but it will be worth every penny. I don’t know any factory that hasn’t had problems with their system and is not continually updating it. It is a fact of life. Today’s money problem is tomorrow’s bookkeeping nightmare. And with all the problems facing you in post-COVID-19, this is one of the most parts of your startup.
  16. Finding the right people. You will need office personnel, skilled production workers, equipment operators, engineers and CAD people, a sales staff as well as a GM and various sundry middle managers. Finding the right people is tough.

Gary Fleisher
is the Managing Director and contributor to the Modcoach Network and its affiliated blogs.

1 comment:

Bill Hart said...

Right on AGAIN Gary! If any of the aspiring mod plant builders you mention plan marketing their product be it, East of the Rockies and North on South Carolina..that's my "own ...back yard-market"; So Gary, just suggest they call me. I'd enjoy helping them detail the demographic...Bill