An In-Depth Look at Benchmarking
Rockheads Executive Director Rich Katzmann Demystifies the Benchmarking Process
by Peter J. Marcucci
Photos Courtesy Rockheads Group
By the time this story goes to press, the Rockheads Group will be 113 members strong, and no wonder. It’s been a growth machine since 2014, offering its members huge assets that include deep discounts with top-tier vendors, best practices and networking between members, and a very cool feature called Benchmarking. A general overview of these features was presented in the October 2023 issue of the Slippery Rock Gazette. However, it’s the Benchmarking process that’s the gist of this story, as explained by Rockheads Executive Director, Rich Katzmann.
“We survey our membership all the time to align what we’re offering with what they feel is valuable. What we do, once a year, is reach out to our members and request very confidential financial and operational information, so we can compile an analysis of the group as a whole, as well as how they individually compare to the rest of the Rockheads. It’s sent out as a fill-in-the-blanks spreadsheet that matches and mimics their financial statements. A small shop owner can easily do it themselves or a bigger shop can send it to their finance person, who can go into their profits and losses and in their balance sheet. In most cases, within a couple of hours, a member can fill out the 60 to 70 pieces of information that we are asking for.”
The Nuts and Bolts of Compiling
Once the data is obtained, its elements are divided into usable parts, with gross revenues being the key ingredient. For example: shops are divided into categories such as from $3 to $5 million, $5 to $10 million, and $10 to $20 million per year and so on, continued Katzmann. “It doesn’t do any good to compare the metrics of a 3 million dollar shop to a 10 million dollar shop, or a rural shop to a suburban or big city shop. That would be like comparing apples to oranges. We want to make sure that each shop is looking at a comparable shop, and how they compare against them. We’ll take and calculate everything you can think of such as SG&A (sales, general and administrative costs) and what you are selling your products for, and to whom. Is it to a walk-in, a dealer or an architect? How about a commercial customer or a big box? What are they paying for your product? So we’re compiling these things at the highest level, and keep peeling away the onion, so to speak, asking what are you paying for your materials or your direct labor for templating, programming, fabrication and installations per square foot. How much for advertising, direct and non-direct payroll, benefits and healthcare. So it’s total costs from beginning to end, so our member shops can look at what they’re paying versus the industry or comparable shops. This is not just about dollars and cents. It’s also about improving efficiency at every level and helping everyone to see the big picture.”
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Jon Kaplan and Rich Katzmann present a benchmarking review at the recent Oklahoma City Rockheads conference. Benefits of benchmarking include Valuing and a built-in early warning system of market fluctuation. |
Valuing, a Huge Advantage of Benchmarking
Katzmann went on to explain, that after all these metrics are compiled, big numbers such as net profits and EBITDA (earnings before interest, taxes, depreciation and amortization) shows how each shop compares relative to the rest of the Rockheads and the importance of valuing. “If any of our shop owners are thinking about valuing their business, whether they are going to give it to their son or daughter, sell the business or for tax purposes, EBITDA is the number one factor in determining how much money the business is generating and what the business is worth. So we provide that EBITDA and net profit information. Additionally, at one of our live events, we had a few Rockheads members who regularly purchased companies describe how they translate EBITDA to purchase price and what the companies can do to raise their value. This really helped everyone to figure out what these businesses are worth at the end of the day, because that’s what an acquiring company wants to know.”
Put in a simpler way: if a company’s current revenue is $5 million per year, and is currently making a million dollars per year in profit, multiples (other factors) will be applied to these numbers, offering clarity and a final dollar amount for an owner or investor to value that business. This is a huge advantage for a buyer or seller, but there’s another important factor called Top Heavy, Katzmann explained. “Say all of your business comes from just one big box store or just one or two major customers. Well, that’s pretty darn scary for someone looking at buying your company, and that’s going to push your multiple down, because if even just one of those customers goes elsewhere, you’ve just lost a huge portion of your revenue, because so much of your business is tied-up in just a few companies. Conversely, if you’re diversified, and only 15 to 20% of your revenue is lost, let’s say from a big box customer, that’s a great opportunity to make up the difference from another area, such as builders, remodelers or homeowners. We ask all the right questions, and because of this we can explain who our members are selling to and at what percentage. So there’s a whole bunch of different factors that Rockheads can supply that can be used and implemented by shops to drive those multiples up. We capture all the breakdowns including material types, and share them back to each member.”
Growing Pains Eased Through Benchmarking?
Another major consideration in using benchmarking is growth; Should I stay, or should I grow? Do I have enough growth capitol, and is the timing and market ready? These questions and more are enough to keep even the most savvy shop owners up at night. But not to fear, the Rockheads are here, continued Katzmann. “Let’s say a shop wants to get to $10 million in sales per year. They have a 3 year plan, and then want to get to $20 million. What we can show them is this: you are currently a $5 million dollar company, and here’s how you compare against your peers across the metrics. You’re a pretty good shop at $5 million, but if you want to get to $10, holy cow! You better change this number by 25%, because a specific metric is more expensive when you get to $10 million than it is at $5. So we can show them the financial path of how to get from 5 to 10 to 20, and that’s a huge benefit. When I hear back from our membership, this is one of the things that they bring up, and a clear path forward that they can see.”
An Early Warning System
There’s one more big benefit to benchmarking, explained Katzmann, called early warning detection. “In July of 2022, we were already hearing that tract building was slowing down and getting indications of what the industry was going to look like in 2023. So if you own a company and you know where you’re sitting, you now know what you need to do during your strategic planning and budgeting, thinking, ‘Hmm, I’m too heavy into tract building. Maybe I need to hire a new sales person whose strong points are working with designers or multifamily construction.’ Our members can definitely use benchmarking for planning, and to match their business with what the environment is going to look like next year.”
Safety and Confidentiality
Katzmann finished our conversation by stressing that any and all supplied information by Rockheads members is privileged for his eyes only. “This data is so confidential for these businesses, and rightly so. We deem this data classified, and it should not and never will get out to anybody. We’ve got firewalls and barriers set up, and I am the only one who sees their data with their names associated to it, and all kept locally by me. So even if there is a cyber attack, I am the only one who can put one and one together.”
In closing, the Rockheads’ benchmarking process has always been the cornerstone of what they offer, and certainly will continue to be in the future. For more information visit www.rockheadsusa.com or call Rich Katzmann at 815-210-1006.