Are You Prepared to Build a Modular Factory?

Over the last couple of years, a lot of new modular home factories have either opened their doors and are taking orders or are in the process of opening.

It’s inevitable that many businesses fail in the first 3–5 years for a myriad of reasons, mostly from being under-financed and/or poorly managed, so some of these new modular factories will be no exception.

But that doesn’t have to happen, especially if you’re well prepared and know the basic points needed to at least have a fighting chance of success.

Here is a list of 17 points you need to add to your company’s playbook. There are probably more, but these should get you started on the right path.

1. Determine the type of factory you want to be. 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 such as affordable housing or hotels?
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 in all the money needed to open and maintain the factory until it becomes profitable, you will need to find someone with money who wants to invest in your dream. Investors want to see a Business Plan and a Break-Even Analysis. Go back and re-read 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. Choose 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 Colorado” 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 and 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 clause 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 and possibly 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 you 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 in the Business Plan and Break-Even Analysis, you could find yourself insurance poor with a failed factory.
15. Implement a good bookkeeping system. 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.
16. Find 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.
17. Hire the right consultants. They have experience in modular construction and can be an important part of your success. If you are entering the modular home industry without a working knowledge of it, be prepared to run into problems from day one. Consultants are available for every aspect of the modular process. Management, marketing, engineering, and production consultants, even though they are not inexpensive, are a must have in the beginning and possibly for longer.

So, these are my top 17. Now, get going and good luck!

Gary Fleisher is a housing veteran, editor/writer of the ModularNews blog and Modular Construction Industry Observer and Information Gatherer. Contact modcoach@gmail.com.