Lunch With: Is Bigger Really Better?
Homebuilder Chris McLaren can’t decide whether to scale his business up or to stay small and specialize
Lunch with … is a column for Alberta Venture. Every month, we ask a young executive to pick a person with whom he or she would like to talk business. The senior executive, if willing to act as mentor for an hour or so, gets to pick the place to eat. If you would like to participate, email Michael
by Michael Ganley
YOUNG EXEC: Chris McLaren, owner of Fine Line Homes and EnerSmart Building Systems
HISTORY: McLaren started Fine Line two years ago but didn’t quit his IT job to devote his full-time attention to the company until last June. He added a share of EnerSmart later in the summer
NUMBER OF EMPLOYEES: He’s on his own at Fine Line, while he has a partner and four employees at EnerSmart
LUNCH: Spinach salad, Combo Italiano (chicken parmigiana, cannelloni and fettuccine alfredo), water
SENIOR EXEC: Wayne Chiu, owner of Trico Homes
HISTORY: Chiu graduated from the University of Manitoba with an engineering degree in 1980, returned to his native Hong Kong for a couple of years to work with a developer, and then settled in Calgary in 1982. He worked in the construction industry before launching Trico in 1989
NUMBER OF EMPLOYEES: 120
LUNCH: Dry Tuscan ribs, minestrone soup, water
It’s clear that Chris McLaren and Wayne Chiu have met before. As they settle in for lunch at Fiore Cantina Italiana on Calgary’s 17th Avenue, McLaren asks Chiu about his kids. “Oh, they’re fine,” Chiu says. One has just finished his commerce degree and joined a small start-up, while the other two are working their ways through high school. “And yours,” Chiu asks, referring to McLaren’s four kids.
“They’re keeping us busy,” McLaren says. “Growing fast.”
The conversation quickly turns to market conditions, and Chiu, who primarily develops starter homes in and around Calgary, is encouraged by strong in-migration figures. McLaren agrees that the buyers are out there, but says he’s finding the market for infill properties – the one he operates in – to be really tight. Most properties coming on the market aren’t suitable for a new build. McLaren then gets to the heart of the matter when it comes to homebuilders: how many units did Trico put up this year?
“About 520,” Chiu says. “And you?”
“This year I have six starts for sure,” McLaren says. “That’s up from one in my first year.”
“That’s amazing,” Wayne says, encouragingly.
The two got to know each other a couple of years ago. At the time, McLaren was working in IT but wanted to start a home-building business. He applied to the Canadian Youth Business Foundation for funding to help him get started. Chiu was on the board of directors at CYBF at the time, and started passing on some of his wisdom to the younger entrepreneur. “He gave me some great tips in our first conversations,” McLaren says. “A lot of it came down to finding solutions for cash flow issues, and around governance and structure and leadership.”
McLaren explains that he has grown Fine Line to the point that he felt comfortable quitting his salaried job in June. He’s trying to differentiate Fine Line from the competition with a focus on energy efficiency. He prefers to build high-efficiency building envelopes and encourages homeowners to install solar power right from the outset. He works hard to educate people on the long-term advantages, and mostly they go along with his advice. He estimates that the homes he’s building now would retail in the $600,000 to $1.2 million range.
McLaren says he’s at a crossroads. Should he try to grow the company, with all the attendant challenges that come with scaling a business up, or stay about the same size and focus on a niche market? He worries about the debt he would have to take on to grow, about managing human resources and about increased demands on his time. “That’s an inner struggle I’m having right now,” he says. “I can’t take on any more without expanding, or should I focus on taking on the jobs I really want?”
As it is, his six projects are spread across the region, including two in the city, two in Rocky View County and two in the Municipal District of Foothills south of Calgary. “I’m driving all over the place,” he says. If he decides to go the expansion route, he says, his first hire will be a site superintendent so he can spend less time driving around and more time with clients and performing other tasks more central to operations of the business.
McLaren’s decision is influenced by another he made last summer: to start a manufacturing company in Claresholm. EnerSmart Building Systems builds insulated wall panels (essentially two sheets of plywood around a Styrofoam core). The company can build floors, walls and roofs in the plant and ship them out for easy assembly. It can feed his homebuilding business, and is already developing a wider clientele. “There is tons of work coming in from Saskatchewan and Alberta,” McLaren says. Again, energy efficiency is the selling point: the panels are considerably more airtight than traditional stick-built homes. But for now, cost is a sore point. “In the next couple of years we hope to come in really close to the same prices as stick frame,” McLaren says.
“To start a company is easy,” Chiu says. “To scale it up is difficult.” He, too, started with one home his first year, in 1989. But now Trico, in contrast to Fine Line, is a tract developer focusing on starter homes. The company does big, multi-home developments in the suburbs, and this year will build around 560 units. “That’s why we’re not competitors,” Chiu says. Then he asks more about Fine Line’s model. “When we last talked you were doing some sweat equity stuff. Are you still doing that?”
“I might do a few touch-ups before final inspections,” McLaren says, “but hardly anything anymore.”
“Do you own the land you build on?”
McLaren says the land he’s building on is always pre-sold, meaning the homeowner owns it or finances it. McLaren does a lot of up-front planning with the homeowner and gives an estimated cost to build the house, adds his fee, and the homeowner is responsible for the financing.
Chiu says a homebuilder has to have two pools of money, one to build houses and one to invest in land deals. He says McLaren has to figure out how to squeeze enough out of his cash flow to start buying land. “It’s difficult and takes time,” he says, “but you’ll make more money because you can create a total profit centre for yourself, instead of depending on a customer to pay you for your service.”
“I totally agree,” McLaren says.
To make that happen, McLaren will have to have a good relationship with his banker and a solid plan. Has he done a business plan lately? McLaren last did one two years ago. Chiu says he does one every year, looking at changes in the marketplace, what his competitors are doing, how his human resources situation stands and more. “As soon as I decide which direction I’m going, I’ll update it,” McLaren says.
Chiu says there is another business model McLaren might want to look at. It’s for infill projects, and the idea is that McLaren approach people that own lots big enough to be subdivided. “You suggest that they tear down the old house and build two on the lot,” Chiu says. “One for the original landowner and one that can be sold and the profits shared.” As it happens, McLaren is seeing it done in the downtown neighbourhoods he works in. “Some of the communities are completely changing,” he says.
Chiu says he’ll have to leave McLaren to make his own decision on the direction he takes his business, but that he should give that infill idea a hard look. “You’re not a fly-by-night guy,” Chiu says. “You can go talk to the existing owner of the old house. Propose to them to build them a new house, then they have a new house to live in and you share the profit.”