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Over-expansion: A Cautionary Tale

July 26, 2011

by Derek Christian
Owner, My Maid Service

I was reading the local paper this weekend and one of the articles was on home owners in a very high end neighborhood here in Cincinnati that have not been paying their property taxes for more than a year.

Right there in the article was someone I used to do business with.  For the sake of this article, we will call him Dave.Dave owned a large, if not the largest window cleaning company in Cincinnati.  I used to send Dave a lot window cleaning business and he would send us the occasional maid service lead. His dad started the company 20 years ago, and in 2008 they were doing $750,000 a year in revenue. But here was Dave in the article being described as one of the biggest dead beats in the county.

It turns out Dave’s business went under in 2010 which is why he had not paid the taxes on his beautiful house.  In 2008 he was getting very frustrated.  He was having a hard time growing the business past $750,000 a year and he was looking for ways to grow his business.  This lead to two disastrous business decisions.

First in 2008, Dave decided to get into decorative concrete stamping.  Dave had been cleaning windows for a lot of high end clients and these same people also had a lot of interest in home improvements and he figured he could add his concrete business to direct mail and get twice the response for the same money.  The home improvement boom was in full force and Dave thought he could dominate this new industry.  Dave also decided around the same time to get into the residential cleaning business.  After all, we were always sending clients back and forth so it was clear to him there was a lot of cross over.

The end came pretty quickly from there.  First, Dave added not one but two new industries to his business at once.  This required a great deal of his time.   This took Dave’s attention away from his base business right as the economy started to tank.  His cash cow window cleaning business turned bad fast as people decided to skip cleaning the windows for a year to save money but Dave was so wrapped up in his new businesses that he did not react as fast as he should.  Dave had also invested a lot of money in concrete stamping equipment so he also had no cash on hand to help him ride out the recession.  Finally, by getting into the residential cleaning business he caused all of us that used to send him referrals to cut him off, further reducing his sales in his main business.

Dave had gone into debt to buy concrete stamping business.  Dave was quickly discovering that running a residential cleaning business is a lot harder and more time consuming than it looks.  The recession hit hard and both the new concrete stamping and window cleaning business had a huge drop in sales.   With no cash on hand, and the owner too distracted to react quickly, the business began to bleed cash.  Key employees saw the end coming before he did and jumped ship before the ship went down making the down fall even faster.  Within 18 months a very profitable business that had been around for 20 years was gone.

I hear companies all the time talking about getting into new businesses to grow.  I have fallen for the same siren call by adding commercial cleaning and carpet cleaning.  However, as Dave’s story shows, jumping into a new business can be extremely dangerous.  You have to be honest with yourself on what the worst case scenario could be to make sure you will not risk your base business.

In my case, carpet cleaning has been a rather big disaster but we planned well enough that it did not take down the whole company.  In retrospect I wished I had kept to residential cleaning.  It is always easiest to grow the business you already know.

Originally published by ARCSI.org: Over-expansion: A Cautionary Tale

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