Table of Contents
1.0 Executive Summary…………………………………………………………………….
2.0 About Second Home……………………………………………………………………
2.1 About the Entrepreneur
2.2 Our Mission
2.3 Our Goals and Objectives
3.0 What is a Second Home...………………………………………………………………
4.0 Operations Plan…………………………………………………………………………
4.1 Organizational Structure
4.2 Site Map
4.3 Building Layout
4.4 General Sales Process
4.5 Production Process
4.6 Business Cycle
4.6.1 Typical day
4.6.2 Typical week
4.6.3 Typical month
4.7 Supply Management
4.8 Capital Budget
5.0 Human Resources Plan…………………………………………………………………
5.1 Organizational Chart
5.2 Job Descriptions
5.3 Training
5.4 Compensation System
6.0 Marketing Plan…………………………………………………………………………
6.1 Market Overview
6.2 Market Competition and Analyses
6.2.1 Four “P”s of Marketing
6.2.2 PEST Analysis
6.2.3 SWOT Analysis
6.2.4 Porters Five Forces
7.0 Financial Plan…………………………………………………………………………..
7.1 Debt and Equity Financing
7.2 Dividend Policy
7.2.1 Cash Flow to Investors
7.3 Economic Forecasts
7.4 Ratio Analysis
7.5 Financial Feasibility
7.6 Break Even Analysis
8.0 Business Plan Summary………………………………………………………………..
9.0 Future Considerations………………………………………………………………….
10.0
References………………………………………………………………………….
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1.0 Executive Summary
Second Home is a nine thousand square foot facility that manufactures miniature ready to move
homes. Second Home markets, manufactures and sells direct to consumers their product which
are homes that range in size between four hundred fifty and seven hundred square feet. Second
Home will be located ten minutes north of Saskatoon.
Second Home products are designed to fit on the same lot as the primary home. They are a great
way to provide an independent living space to caregivers, grandparents, children, renters or
guests. These products can also be manufactured and modified to become lifestyle cabins. They
will be advertised focusing on middle aged home owners who may need a separate living space
for whatever they desire. Targeting marketing will be towards homeowners who have
grandparents or who would like to rent (or both). Direct selling will be towards property
developers to try to secure long term contracts.
There will be fifteen employees once Second Home reaches its full capacity. There will be one
home moved out per week, as the production facility can build four houses and the teams rotate
to accommodate moving the homes out regularly. Each home will be made to order, however the
frame will be strongly favored from our selection of pre-drafted designs. Over the course of the
project approximately two hundred homes must be sold. Maximum over the five years is two
hundred and fifty. Minimum is one hundred and sixty one homes (economic break even, thirty
percent required return).
Saskatoon, the primary market, is experiencing rapid growth and a housing shortage which has
especially affected the poor and the University of Saskatchewan’s student population. Second
Home intends to provide the low cost, small homes that students and the poor need to rent.
However, due to the initial upfront cost a home owner needs to buy into the idea, which is where
our marketing is targeted.
We require one million dollars of external financing, of which half will be debt financing and
half will be equity financing. The project, based on the conservative estimates, will return a sixty
point eight percent (60.8%) return. Dividend payments start in the second year of the project and
cap at around five hundred thousand per year until the end of the business.
We feel Second Home Inc. is a profitable business in a growing industry. Due to the strength of
the business plan and the conservative nature of the estimates we feel that this business should
proceed to the next step of development.
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2.0 About Second Home
2.1 About the Entrepreneur
Ryan Smith is in his fourth and final year at the University of Saskatchewan. He is enrolled in
the Edwards School of Business (ESB) and is currently studying to receive his management
major degree with the entrepreneurship and small business option. He also studied in Chemical
Engineering at the University of Saskatchewan for nearly two years before deciding to switch to
the ESB.
Ryan grew up in Meadow Lake Saskatchewan where he lived on his family’s ranch. The family
had constructed two homes for personal use and is considering building a “second home”. The
idea to turn this into a business was suggested by Brian and Rita Smith, Ryan’s parents.
The home building experience has motivated Ryan to refine and focus the original idea into a
workable and viable business idea. Second Home Inc. is a workable plan that generates solid
returns based on conservative estimates.
2.2 Our Mission
Second Home Inc. wishes to be the premier ready-to-move second home builder in
Saskatchewan by making the second home buying experience quick, affordable and hassle-free.
2.3 Our Goals and Objectives
Second Home Inc. is targeted at entrepreneurial and caring homeowners who want to provide an
affordable and comfortable living space for grandparents and renters alike.
The goal and objective of this business plan is to demonstrate the viability and opportunity of a
second home manufacturer in Saskatoon Saskatchewan. This business plan details the operations,
human resources, marketing and financial plans in order to show that this business is viable and
profitable.
3.0 What is a Second Home?
A Second Home, or Granny Flat, is a small four hundred to seven hundred square foot house.
These homes provide most or all of the needed comforts of a regularly sized home but are
designed to be installed next to an existing home. They can be a standalone unit or simply a bed
and kitchen unit depending on size and need. These second homes fit on the same lot as the
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primary home but offer a degree of safety, security and independence unique to the detached
home.
Second Home also manufactures “lifestyle cabins” which are exactly the same principle but can
stand alone on a lot to act as a cabin during the summer months. Some modification is needed for
the outside and can vary depending on if it needs to be winterized (will they live there in the
winter).
4.0 Operations Plan
4.1 Organizational Structure
Second Home will be an incorporated entity. The controlling shareholder will be Ryan Smith
with the remaining stock of the company spit between other investors.
The organizational structure of Second Home will be quite extensive. There will be
approximately 15 employees when the plant is operating at full capacity including many skilled
laborers. Early on the structure will be relatively simple with most of the duties being carried out
by several key employees. These duties will then be delegated to new employees as the company
grows. Following is a sample of the proposed organizational chart when at full capacity:
Figure 4.1.1.1
Ryan Smith
CEO
Lead Purchaser
Construction Foreman
Journeyman – 5+ yrs
Secretary/ Administration/
Payroll
Drywall/Painter/
Flooring Foreman
Framer/Roofer
Foreman
Carpenter/Finisher
Foreman
Two Assistants
(journeyman or
not)
Two (2) Assistants
(One journeyman,
one not)
Two (2)
Journeyman
Sales/Marketing
Manager
Sales Person
Level I
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As seen above Ryan Smith will be CEO with duties ranging from selling and marketing to
administration and purchasing. As the business grows the duties of the CEO will be delegated to
the supporting positions of sales manager, the lead purchaser and the administration assistant. As
this occurs the CEO will be responsible for only larger contract bidding and working on the
homes with direction from the Construction Foreman.
The Construction Foreman will be any Journeyman who has foreman experience in excess of
five years. Each of the trade foreman’s and their respective assistants will be journeyman in their
respective areas but are expected to know, or learn, the duties of other work teams. As
production increases there is room for several more employees in any of the work teams that
need it. This is done to prevent all forms of bottlenecks from forming. As duties are finished,
each team is expected to help other teams catch up to their required levels before the work day
ends.
4.2 Site Map
Figure 4.2.1.1
As seen in the figure above, the site plan includes the main production area, a small warehouse
and office and storage space. The location will be about 5 minutes north of Saskatoon in the
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Warmen industrial lots. There are four work stations, which will be built to allow trucks to back
into the building. When the trucks move into position the building is lowered via jacks onto the
truck bed. The unit is then tied down and the truck proceeds to leave.
There are several methods of delivery including various home movers (expensive) or lift-trucks/
crane trucks that could be brought in on contract. There is also the possibility of buying one of
these trucks specifically for the companies use and contracting it out when not in use. This is not
explored in this business plan any further than mentioning its possibility and indicating that these
houses can be moved.
4.3 Building Layout
As seen in the figure 4.82.1 there is a small warehouse, which contains all the necessary building
materials for one and a quarter second homes. This is done to prevent a buildup of inventory and
to make sure all the necessary building materials are available in case the builders finish their
project early. The offices allow meeting space, space for customers, offices for business use,
locker rooms and showers for the production crew and a lunch/meeting room for breaks.
4.4 General Sales Process
The figure below shows in graphic form the different general production processes that must be
gone through for a person to buy and receive their second home. Our sales people (sales person,
sales manager or CEO) meet with them and discuss the plan they wish to have. A contract is
agreed to and signed and down payment is received. The Foreman is informed about the new
building and any special requirements. The lead purchaser (or CEO) orders needed supplies that
are not on hand already. Construction is started and the needed items are received as needed.
When completed the truck is ordered, the house is shipped, and then a walk-through and final
payment is received from the new Second Home owner.
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Figure 4.4.1.1
4.5 Production Process
Production is split between three work teams. Each of these teams is expected to complete their
own duties within the expected amount of time. This time limit is decreased every quarter
(realistic goals). These three teams are framers and roofers, drywall and flooring, carpenters and
finishers. Each will work on their duties and are assigned work as per the Construction
Foreman’s discretion when work is completed. They work in a revolving environment where
they work on their duties on the first home and once completed, move to do their duties on the
second home. This is why it’s important each work team finishes their own duties on time.
The figure to follow illustrates the expected time that it would take three employees to finish
each of the job duties listed. The employees are not expected to work on weekends, which are
visually included on the chart to show the total time it would take. The production process takes
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just over one month (four weeks and one day). According to my sources two properly equipped
journeyman and one helper with all the equipment on hand should be able to complete each of
the task listed in the time required. It is not an easy timeline, but it should be possible.
Figure 4.5.1.1
As seen above framing and roofing take approximately one third of the time. Heating and
cooling rough in will be contracted out. Drywall and insulation, painting, subfloor and flooring
take another one third. Cabinets, trim, counter tops, painting, appliance installation etc. take up
the remaining time. Each work teams has approximately twelve work days to finish all of their
required duties. The schedule will be changed and work team assignments will be adjusted
according to difficulty and time constraints as needed.
The build time is approximately two months in the first year of operation. The employees will
work to lower that time to just over one full month. The company’s ability to finish these
building quickly is a top priority and workers will be added as needed. The production facilities
max capacity is exactly one month build time on each house. This means that a second home will
leave the production facility once a week.
4.6 Business Cycle
In this section we will explore the average day/week/month for the employees of Second Home
Inc. This is to show exactly what must be done each day. I will illustrate both the first year
(where much of the duties are carried out by the CEO) and a typical year once production is in
full swing.
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4.6.1 Typical Day
On a typical day the CEO and the production foreman come in early, typically around 7a.m. to
do a walkthrough of the grounds to make sure that everything was properly cleaned. They then
meet in their office for a quick run through of the day’s duties and a discussion about employees
concerns and issues. At 8 am every other employee comes to start work and may begin as soon
as they arrive. At 8:30am a group meeting discussing any concerns and outlining the plan for the
day.
At 8:30am the sales manager comes to work and start his/her day. At 9:00am the salesperson
comes for work and the CEO meets with the sales team to discuss any new orders and discuss the
plans today.
At 10:00am a break is taken for all production employees. At this time the foreman and the sales
team meet to talk about new orders and the approximate amount of time it will take to get them
done. These estimates are then used by the sales team to get back to people asking for quotes and
expected production times.
At noon the entire facility shuts down for lunch.
At 1:00pm production starts again and each team works on the production items outlined in the
morning meeting. If they manage to finish earlier than expected they will start on the next stage
and be given permission to leave slightly early with pay.
At 3:00pm another break occurs and a manager meeting (CEO, sales manager, production
foreman and lead purchaser) is set up to discuss how the production process is going. The future
orders and expected needed materials are discussed at this time. The lead purchaser buys all
materials that he did not already anticipate, as well as start bargaining for better prices for future
needed materials.
At 5:00pm the production workers go home. Some may have headed home at 4:30pm if they
managed to work early and did some extra work. From 4:30pm to 5:00pm is clean up time. The
team that performed the best that day gets to miss this step and head home.
At 6:00pm the sales team and purchaser head home.
At 7:00pm the CEO and production manager have done the final walk through, discussed any
issues that day and they both lock up and head home.
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4.6.2 Typical Week
Each week one house will be completed and be shipped away. Once every two days (depending
on need and ability to organize warehouse) a truck delivering materials will come. The Lead
purchaser will help unload the truck and organize the warehouse.
Every week the foreman (most senior in each of the three work teams), the production manager
and the CEO will meet to discuss any issues with scheduling. If a project cannot be completed on
time or a delay is going to happen the CEO will relay that to the sales team (if not mentioned
already). This is also the time to discuss any production problems like missing equipment or
some other issues (like theft).
The truck delivering the second homes to the site is expected to leave on Friday and return the
same day. There are four different work sites so that one can be left open for that day and there
will still be work to do. That afternoon when the truck comes back we replace the platform and
then construction can start. If the delivery must take multiple days (probably no more than two)
the product must be ready to move by Thursday (for northern Saskatchewan deliveries of cabins,
etc.).
4.6.3 Typical Month
In a typical month four homes would have been sold and moved if the production schedule is
working out. During the last (or first) Friday of every month there will be a large meeting
between all workers in the lunch room. During this lunch people can ask questions and the CEO
will do a brief presentation showing how we are doing as a company. This is a chance to allow
employees to give input and feedback to the upper managers and give them some involvement to
the firm. Employees can take the last half of that day off for staying and giving their input. There
is food served and the employees are free to stay around for a while after.
4.7 Supply Management
The suppliers for Second Home are very large and there are many of them. We are not dependant
on one or two companies for all of our products as all of them are generally available anywhere.
That being said, Second Home intends to make relationships with some premium suppliers of
key products to allow the very best service and highest quality products available to those who
wish to have them installed in their second home.
Wolseley Mechanical is a plumbing and heating warehouse here in Saskatoon. They have high
quality product and can give amazing deals that are only available to contractors. They also offer
services like having all the products ready for loading if ordered in advance and other advantages.
P a g e | 12
With this in mind, we would explore the opportunity to work with Wolseley in order to secure
great deals on the plumbing and heating equipment that will come in our second homes.
For general building suppliers Home Depot, Co-op or other suppliers can be used. The prices are
generally the same across the board, but the lead purchaser will have to look at all of them to see
which can give the best deal. During the first year the CEO will actively approach these
businesses to see which (if any) are willing to give consistently better deals in order to become
our choice supplier. Perks involved with this is that our sales team will actively promote their
products and will only turn to others if the customer asks for a special product they do not have.
Generally the supplier power in this industry is not large, however, because there are many
buyers it may be difficult to get lower prices from these suppliers. There prices may be fixed and
there may be little we can do to lower them. However, proper supply management such as
buying during sales and ensuring that any avenue to get better deals is available and exploited we
should be able to steadily lower our costs over time (or at least lower them substantially to start
and then have them increase with inflation). It should be noted that the business model does not
account for the available contractor prices and the business should be profitable at standard
prices.
4.8 Capital Budget
The capital budget for this project is not extensive. The land is based on prices I found on a
website that advertised the kind of land that I needed. The building is based on fifteen hundred
square feet of office space at one hundred and seventy five dollars and seven thousand five
hundred square foot warehouse (fifteen hundred) and work area (six thousand) at seventy five
dollars a square foot. Therefore the facility is going to be about nine thousand square feet. The
tools is approximately six thousand per contractor (contractors generally have their own tools).
The Forklift is a small Toyota. The pallet jacks are two small ones for maneuvering small pallets
of building materials.
The moveable supports are the cost to build the platforms that the houses will be built on. The
extra cost over the years is for building and repairing new and old ones. Support equipment
includes extras like tool boxes, nail containers, lunch room improvements and other custom work
area improvements needed to start production. The twenty four thousand in office materials are
desks, chairs and computers. The computers that will be bought are pretty new (three thousand a
piece) and should stay effective well into year five.
Second Home Inc. requires approximately one million dollars for its capital expenditures.
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Working capital is kept at a minimum as the houses are presold before we start construction and
the inventory we purchase and carry is only a small percentage as we are ordering frequently to
minimize the amount stored in the warehouse. We assumed that the accounts payable will be
approximately thirty days.
Figure 4.8.1.1
Capital Budget
Year
Year 1
Land
148,000
Buildings
745,000
Tools
30,000
Forklift
10,000
Pallet Jacks
200
Moveable Supports
6,000
Support Equipment
32,000
Office Equipment
24,000
Total
995,200
Year 2
Year 3
Year 4
Year 5
1,000
1,000
1,000
1,000
11,000
1,000
1,000
1,000
10,000
5.0 Human Resources Plan
5.1 The Organizational Chart
As discussed earlier, Second Home Inc. will have a fairly involved organization structure with
approximately fifteen employees at its peak capacity. Figure 4.1.1 has the complete
organization chart. An explanation of that structure is to follow.
Ryan Smith is the CEO and the general manager for all operations. He will make strategic
decisions regarding the direction and marketing strategy that Second Home will follow. Next in
P a g e | 14
line for decision making will be the Production Foreman. This position has many years of
general contracting and home building experience and will supervise the day to day direction of
the main production facility. Beside him/her is the Sales/Marketing manager. This position is in
charge of the day to day securing of contracts and the overseeing of all advertising.
In the main production group there are three supervisors who are considered foreman. They
oversee the two to three individuals that work under them. Each of the job descriptions of
these positions and others are in the following section.
5.2 Job Descriptions
CEO/General Manager
Job Duties: The CEO will be charged with the strategic and functional decision making necessary
for Second Home. They will perform a range of duties including, but not limited to, securing
large contracts, making sales, overseeing advertising, production coordination, securing new
drawings, meeting with customers, overseeing proper compensation, changing production
schedules and hours as necessary, regularly meeting with other managers and foremen and
giving training sessions.
Qualifications: Requires a university degree with a specialization in business with several years
of home building or general building experience. Experience with compensation systems,
general business knowledge, accounting and human resources considered an asset. Experience
with PowerPoint, excel and other programs necessary.
Production Foreman
Job Duties: The production foreman must oversee the construction of second homes and
coordinate several teams. He must effectively delegate to his subordinates and be accountable
for their results. Will meet often with over senior managers and must be able to critically
analyze the business and offer feedback about new housing plans and changes to the job
structure, hours of work, etc.
Qualifications: Must be a red seal journeyman with at least five years of foreman experience
with several years of general home contracting experience. Must be able to read structural and
technical drawings and know how to break down and delegate each step. Business experience
is considered an asset.
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Lead Purchaser
Job Duties: The lead purchaser will report directly to the CEO and the construction foreman and
meet with both regularly. He will be expected to communicate any new developments in the
industry. They will be expected to stay abreast of any new products and be able to explain their
benefits to the respective positions. The will be expected to write up purchase orders and other
relevant purchasing materials.
Qualifications: Minimum of two years purchasing experience. They must be physically capable
of loading and unloading material using a forklift (forklift license required).
Secretary
Job Duties: The secretary will be required to answer and direct phone calls effectively and
politely. They must be able to use basic accounting programs and will be responsible for
collecting and organizing the necessary information for shipping to the accountant agency.
Qualifications: One year of experience as an administration clerk or professional secretary
preferred. A certificate from a local community college as an administrative assistant is
necessary.
Sales/Marketing Manager
Job Duties: The sales manager will report directly to the CEO. They must organize sales data and
be able to write and prepare detailed reports regarding the number of sales, profitability
analyses and details about customer demographics. Tracking and compiling data and designing
systems for collecting that data is necessary. They will be expected to meet with potential
clients and answer calls and emails from potential clients. They will need to get acquainted with
the company cost structure so they can give a preliminary quote on prices. They will meet
regularly with other senior managers and are expected to contribute constructively to
performance meeting. They will supervise at least one other person.
Qualifications: Sales experience and home building knowledge considered an asset. A university
degree or business certificate with a specialty in marketing required.
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Supervisors/Foremen
Job Duties: The foreman will report directly to the construction foreman. They will oversee two
or more professional journeymen and/or pre-journeyman employees. They will carry out the
directions of the CEO or the construction foreman and delegate duties to their team.
Qualifications: Vary depending on position. A journeyman ticket in a related field is required.
They must have several years experience in their journeyman trade and several years in the
other possible areas is preferred. They must be willing to learn new trades and take direction
well from others. Supervisory experience preferred but will train.
Sales Person
Job Duties: The sales person will report directly to the Marketing/Sales manager. They will
follow direction from the sales manager. They will be expected to make sales calls, answer
customer enquiry and be able to give a general quote to potential clients. Cold calls may be
necessary. They will also oversee advertisements and may present ideas or prepare marketing
strategy with the final approval of the sales manager.
Qualifications: Several years of sales experience necessary. Home building or selling experience
considered an asset.
Assistants
Job Duties: Assistants will answer to and take direction from their respective foreman or from
the production foreman. They are required to perform their duties diligently and be prepared
to learn and perform under the supervision of different foremen if they have completed their
work on time.
Qualifications: Need to possess, or be in the process of earning, their journeyman ticket in the
relevant field of their work team. They must have general building knowledge and be willing to
learn all aspects of home building.
5.3 Training
All training will be on the job, or conducted by the supervisors (for work teams), the production
foreman (for supervisors and below), the sales manager (for sales team/purchaser) or the CEO
(for whole organization). All requests for training outside of the firm or seminar attendance will
P a g e | 17
be evaluated by the management team (CEO, production foreman, sales manager). If they
provide a net benefit for the firm, they may be covered.
5.4 Compensation System
The compensation system will be generally a straight wage system. A more complicated system
may be developed in the future, where the management team (CEO, production foreman and
sales manager) will have performance based pay and organizational pay to promote longevity
and commitment to Second Home. However these sorts of pay plans can be risky for employees
and specific goals and targets need to be developed. The compensation system will be
reevaluated at the end of year five as Second Home reaches capacity and all future increases
depend on worker efficiency.
In year one (or year two, depending on when they are hired) these are the wages they are paid.
Raises are (on average) going to be approximately 2% of total compensation per year (inflation).
These costs may go up but as people leave and the position is rehired at the base wage (only
senior employees base wage will increase with inflation) it may stay around a 2% increase per
year.
CEO - $70,000/year
Production Foreman – $65,000/year
Sales/Marketing Manager - $35,000/year
Secretary – $25,000/year
Sales Personnel – $28,000/year
Lead Purchaser – $32,000/year
Framing and Roofing Supervisor - $31,500/year
Framer and Roofing Assistant - $26,000/year
Interior and Siding Supervisor - $34,000/year
Interior and Siding Employee - $27,000/year
Finishing Supervisor - $42,000/year
Finishers – $37,000/year
Total compensation ranges from $408,000 in the first year to $610,589 in the fifth year. The
wages are slightly lower than the average for workers in these fields. This is because the work is
less complicated and indoors, decreasing the amount needed to be paid. Wages can be changes
and ownership may be given to the management team as added compensation; however this
will be evaluated in the first couple years of operation.
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6.0 Marketing Plan
6.1 Market Overview
Second Home Inc. is marketing a product that is built and sold directly for and to its customers.
Our marketing will target baby boomers and people between the ages of 21-109. Because of
the versatility of our product they can be used as starter homes, guest rooms, granny flats,
cabins, investment properties, etc. Limiting their uses would be self defeating; however
marketing to all of these groups would be costly and may interfere with our general message. In
this light Second Home will focus marketing towards baby boomers in the areas of “granny flats”
and to entrepreneurial homeowners as investment properties. A good portion of the marketing
manager and CEO’s time will be spent targeting property developers and securing large
contracts. However, this will be done on a more personal level and the mass advertisements
that Second Home will utilize are not targeted at them.
6.2 Market Competition and Analyses
6.2.1 Four “P”s of Marketing
Product
Second Home’s products are small ready-to-move home units between four hundred and fifty
to seven hundred square feet in size. They are designed to be moved to their location and
placed on the main lot beside the primary home. They can also be retrofitted to be used as
cabins. This is mostly an exterior finishing issue and they can be cheaper as they may not need
to be winterized. This is up to the customer’s discretion.
Place
Second Home’s production facility is about ten minutes north of Saskatoon in the Warmen
industrial lots. This allows proximity to both Saskatoon (the primary market in the early years)
and the rest of Saskatchewan. This allows Second Home to gain access to this lucrative market
and access to the skilled labor located here in Saskatoon. There is also proximity to some of the
largest building suppliers in Saskatchewan. The delivery expense is not a major one for the
company as it is mostly paid for by the consumer, however, the proximity lowers their cost.
Price
Second Home’s products range in price from the standard finished four hundred and fifty
square foot model at fifty thousand dollars to the standard finish seven hundred square foot
house at seventy thousand dollars. The standard finish means that the options included in the
P a g e | 19
base model with little or no change of materials, finishing’s, counter tops, etc. Any part of the
interior of the house can be changed but there is a cost attached. Prices increase depending on
two key factors. Our cost is included as well as a premium for the risk in having more expensive
products on our lot and the increased time required to ensure it is not damaged and the like.
There is no theoretical cap on the price of the home; the only limit is size as our production
facility cannot build much larger than seven hundred square feet.
Promotion
Our promotions are focused on our quick build times and low cost. We are able to get our
products out faster than the vast majority of our competitors and our cost structure is such that
we earn a premium by completing them so quickly. Thus we are incentivized to complete
projects quickly and the process will be set up so that the projects are done right each time.
Quality will not be advertised however we hope that the products will speak for themselves.
Once the products and the Second Home name gets a good reputation, this may prove to be a
good opportunity for future advertising.
Our promotions range from billboard advertisements to pamphlets for handing out. There will
be advertisements run in newspapers and in industry magazines (like the home buyers guide
and the local Saskatoon home sales flyers). They will target homeowners and the elderly. The
elderly are included on the advertisements so that it can be seen that they are intended to use
these products, however they will not address this directly. In Appendix 1 you can see an
example advertisement where the elderly are figured prominently but are not using Second
Home as a retirement home, but rather as a lifestyle cabin.
Also in Appendix one you can see an example pamphlet that could be handed out by sales
people and during the initial home selling that will occur as our facility is being built.
6.2.2 PEST Analysis
Political
The granny flat industry in Saskatoon is behind major city centers as they still have the Second
Homes intended market/product stifled as bylaws prohibit such buildings. They are intended to
prevent poor quality eye sores from being built as a “money grab” exploiting the housing crisis.
This problem could be prevented by better quality builders, like Second Home, making the
products affordable and hassle free. If the legislation passes this business model can take
advantage of the lack of direct competition as no one in Saskatoon is currently building exactly
the same sort of product.
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Environmental
The competitive environment in Saskatoon in the ready to move home building sector is
intense. There are many large builders that are in the industry and many other large and small
contractors that could do the work. However, Second Home is hoping to capitalize on the large
influx in demand once the legislation passes. This large demand and movement to satisfy it will
incentivize some to move into the industry, however very few will have the economies of scale
to keep others out. The fact is, as homes get larger, so does the profit margin. Second Home
relies on their business model being based on these lower margins as we are prepared for it.
There is also the hope that large builders will stay out of the market to some extent because of
the lower margins. The idea is that Second Home can build cheaper than the smaller builders,
and accept lower margins than the larger builders.
Social
Saskatoon Saskatchewan was in (or is still in) a housing crunch where home prices are
escalating to levels closer to other large city centers. There is also an influx of people regularly
and a ready pool of potential renters. Second Home’s products satisfy this demand perfectly as
that is exactly what they are designed to do. They make housing areas denser, giving affordable
housing to students and the elderly. Saskatoon is ready for, and needs, products like the ones
Second Home Inc offers.
Unsightly second homes are a possibility however these products are quality products that are
sold quite cheaply. Saskatoon seems ready to accept the risk of these homes developing on the
potential benefits this bylaw change could have for the cities most at risk individuals, students,
the elderly, and the poor.
The only other risk is that people stop needing homes, or group homes become more
acceptable living arrangements than independent living. With people living longer and healthier,
this seems unlikely. More likely that semi-independent home’s, like granny flats, will become
the norm.
Technological
There has been a new housing development whereby the company buys shipping containers
and converts them to sustainable housing. These units are inexpensive and compete with the
Second Home market. They are limited in their ability to satisfy the range of demand semicustom RTM builders like Second Home can do, however this is the most intriguing
technological change that affects Second Home. We believe we can compete on costs and
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compete on the fact that it is relatively untested market. The market for regularly built homes is
established and, if they have no benefits in costs, more lucrative.
All other major technological potential changes can be implemented into Second Home
products. There is no reason that Second Home could not built those shipping container homes,
they require a different model of building and different expertise, and there doesn’t seem to be
a large market it could satisfy that the regular Second Home models could not also satisfy.
6.2.3 SWOT Analysis
Strengths
The first strength of Second Home is its indoor building model. This provides consistent quality
throughout the year and better working arrangements for employees. Another strength is that
this market is untapped as of yet, and Second Home can start to capitalize on the market with
only moderate fears of larger competitors running it over. Second Home’s cost structure is
strong and the utilization of labour is very high. There are also lower costs for building materials
because of bulk purchases that other builders cannot achieve. Our buildings are also moveable,
so they can be transported long distances for relatively low costs, allowing competition all over
Saskatchewan.
Weaknesses
Home builder’s reputations are extremely important, and without a track record, it is hard for
consumers to know that we are a quality builder. The business model depends heavily on
reasonable cost of materials and labour, so a major change in the labour market or a major shift
in home building supplies could negatively impact Second Home’s bottom line. There are also a
lot of competitors all of who will want to stop Second Home from capturing this market.
Opportunities
Second Home can use the fact that all they build is second homes as a basis for further
advertising. Their model accounts for the specific cost structures of small RTM buildings that
other may not have accounted for. The recent and continuing trend of Baby boomers retiring
and the changing demographics makes the granny flat market a lucrative future market place.
There are also more seniors who would rather live independently and the “semi-independent”
ability to stay near home yet live independently may become very popular. Also baby boomers
may want to have a second home for their live-in caregiver, where they live in a home just
beside your own and can help you when needed throughout the day, but “head home” at night.
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Threats
Many strong home builders in Saskatoon can move into the market relatively quickly. If the
bylaw is not changed over the course of the next few months, the target market for Second
Home will dissolve. It is important to mention that the cabin market, markets in other towns
(where they are allowed) and individual starter home markets are still there. If the legislation
does not pass there is potential to start anyway, and hope that the bylaw changes within a few
years. The bylaws failure to change would just be a risk factor that must be accounted for.
6.2.4 Porters Five Forces
Bargaining Power of Suppliers
Suppliers for Second Home range from potential partner suppliers (Wolseley Mechanical) to
general suppliers (Co-op, Home Depot). Neither have any particular advantage over Second
Home. Each sells similar products to other competitors and their products can be found for
similar prices almost anywhere. Suppliers have very little power over Second Home.
Bargaining Power of Buyers
The business model of Second Home means that buyers have some power over Second Home,
however, there is a vast number so there is not as much as some other RTM builders. The
percentage of sales that one home (and thereby buyer) is between two and four percent. This
represents a small number of our overall buyers, but it is not negligible (doesn’t take many
before we lose ten percent of sales). Overall they have moderate power over Second Home
which is why a customer focus is important.
Threat of Substitutes
There are many substitutes for our products depending on which market you are talking about.
Seniors could move to group homes over their children purchasing a second home. First time
home buyers may rather take on a “fixer upper” rather than buy a second home. Renters may
rent out a room sooner than build a detached building for their renters, or retrofit their
basements sooner than buy a building. However the demand for these products (and ours) is
immense and Second Home products are a drop in a larger bucket. Just because some may
prefer a group home over semi-independent living does not mean everyone does.
Barriers to Entry
There are a few barriers to entry, in Second Home’s industry there is a bylaw preventing
competition (for now) which has helped alleviate some of these pressures. However there are
initial set up costs and contacts which are hard to price. Ingrained dealers and builders have
many advantages that Second Home must contend with. However, these should be overcome
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due to the strong business model, marketing plan, and strong management to overcome the
short run disadvantages for the long run advantages. Every year Second Home is in the market
is another year of history that Second Home can use against its competitors and another year of
deals and contacts that are made.
Competitive Intensity
The competition in the home building industry is intense in Saskatoon. There is a lot of demand
but the ingrained home builders try very hard to satisfy all they can. Although price cutting and
other measures is hard to implement for home builders (you can either beat the other guys
price or you can’t) and the industry is large enough that it’s tough to track all the small players
that jump in. Unless competitors actively try to ruin Second Home the company should be able
to compete on cost, which is where the long run advantages come in. Undercutting them and
having them not notice until Second Home is building at capacity and the cost savings are
realized is vitally important to the success of Second Home.
7.0 Financial Plan
7.1 Debt and Equity Financing
Second Home Inc. will require five hundred thousand dollars of equity financing and five
hundred thousand dollars of debt financing. The debt financing should be relatively easy to
obtain as it is approximately half of the estimated value of the facilities. The remaining
financing will come from internal financing and angle investors. Ownership of the company will
be sold as common stock once all available financing methods are exhausted. Employees may
become owners.
7.2 Dividend Policy
Second Home Inc. will start to pay dividends in their second year. Although there is enough free
cash flow to begin paying in the first year according to the plan that money will need to be
reinvested in the first year. In year two dividends are one hundred and fifty thousand dollars
paid on the fiscal year end. IT steadily increases as shown in the following graph to a maximum
amount of five hundred thousand dollars per year.
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Figure 7.2.1.1
Dividends
500,000
400,000
300,000
200,000
100,000
Dividends
Year 1
-
Year 2
150,000
Year 3
250,000
Year 4
400,000
Year 5
500,000
7.2.1 Cash Flow to Investors
Dividends
Equity
Equity to
Investors
150,000
250,000
400,000
500,000
150,000
250,000
400,000
500,000
(500,000)
(500,000)
7.3 Economic Forecasts
In the financial model it was assumed that inflation would be approximately two percent and
would continue to be for the next five years. Wages, prices and costs all inflate at this
percentage. Inflation is not a critical variable so a conservative estimate is used.
7.4 Ratio Analysis
The ratio analyses are focused on the debt to equity ratio, the gross profit margin, net profit
margin and the wages/sales. As we can see looking at the graph to follow our debt to equity is a
healthy 41% in the first year and steadily declines to 28%. What is important to remember is
that this very low debt to equity is from having more equity than absolutely necessary to act as
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safety net against uncertainty. Also, an extension of this business plan is to use debt financing
for aggressive expansion, which is feasible as there is very little debt in the origination after the
first five years.
The gross profit margin is a steady 47% after year one. This is because prices of our goods are
increasing with inflation, and so is the price of materials. This may fluctuate, but 48% is quite
low but appropriate for the home building industry (standard is 50% material cost, 50% labour).
The net profit margin is very important and we can see it steadily increases over time. As we
build more houses the economies of scale start to show in the projection and Second Home
makes a healthy profit margin from year three and on.
Wages/Sales are being used to show the increase in worker efficiency over time. Workers
should be getting better at their work and range from thirty percent to a low of twenty percent.
This is a little lower than industry expectations but that because this is an indoor facility and the
work involved in these smaller homes takes considerably less time and are much easier than in
an outdoor and large designer home.
Figure 7.4.1.1
Ratio Analysis
Debt Ratio
Gross Profit Margin
Net Profit Margin
Wages/Sales
41%
51%
7%
29%
38%
47%
9%
25%
33%
47%
12%
23%
30%
47%
14%
21%
7.5 Financial Feasibility
The purpose of the financial projections is to use reasonable assumptions to give a general idea
about the feasibility of the business. In the model I used a required rate of return of 30% to
illustrate the actual cost of the equity financing. With this and the other assumptions the
financial model has an internal rate of return of 60.8%.
During the financial analysis several key variables were identified. These were cost of materials,
labour costs and sales price/amount. A sustained increase in either of these would greatly
influence the viability of the business.
28%
47%
16%
20%
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Figure 7.5.1.1
Change
Price drops 10%
Demand falls 20%
Costs increase 20%
Labour costs increase 20%
Internal rate of return
23.90%
19.60%
29.30%
46.20%
As we can see a price drop of 10% cuts our rate of return to 23.90%. A 20% cut sees our ability
to make a profit severely hampered. In all events this is very unlikely. The pricing is appropriate
and may be too low. A premium price may be available.
If demand falls 20% in the first year and doesn’t recover our IRR falls to 19.6%. This also seems
unlikely as the estimates are conservative. However, this needs to be addressed and if they did
fall that drastically there would need to be some serious issues resolved. This does not account
for the decreased labour required for the decreased demand; however the impact would be
similar.
Costs increasing 20% would decrease the IRR to 29.3%. As we can see it cuts our IRR in half. This
is one of the more likely increases as housing prices can be quite erratic. However, the
estimated values should be accurate; the importance of this variable means the values should
be checked and rechecked to ensure that there is no initial misrepresentation of the data.
A labour cost increase of 20% would decrease the IRR to 46.2%. This is not a large decrease
considering the amount increase. However, it should be noted that skilled labour wages also
fluctuate widely and this amount may increase. More labour may be required also, which could
increase this value from the ones predicted. However, during discussions with some industry
contacts the amount of time and people allocated to each task is appropriate.
7.6 Break Even Analysis
An economic and an accounting break even were performed to show the amount of housing
that need to be sold and the price that is required. There was also one run on the maximum
cost of goods sold increase necessary.
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Figure 7.6.1.1
Variable Changed - Accounting BreakEven
Current Value
Homes Sold
197
Price
New Value
Percentage Change
136
31%
55,000
47,060
14%
COGS
707,506
898,985
27%
Variable Changed - Economic BreakEven
Current Value
New Value
Percentage Change
Homes Sold
197
161
18%
Price
55,000
50,256
9%
COGS
707,506
823,004
16%
As we can see in the charts above there is some cushion between what Second Home is
forecasting and how many are required in each category. All variables except price can be suffer
(or increase) by more than 15%. In the price category a 9% decrease is all the company can
handle without dipping below the required rate of return.
In this case we must look to find purchase orders to see what price people are willing to pay for
this product to ensure that the price won’t fall, that it will only increase. As mentioned earlier,
the likelihood of the price having to drop is low, however it is an important variable to keep in
mind.
8.0 Business Plan Summary
This business plan has shown the viability of a ready to move indoor home builder located in
Saskatoon manufacturing flats between four hundred and seven hundred square feet at a price
of one hundred dollars a square foot. According to the financial data, a fifty-fifty equity and
debt financed venture at a value of one million dollars could make an internal rate of return
over sixty percent by investing in this venture. Given that the assumptions are valid there is a
great business opportunity here in Saskatoon, if the bylaw changes.
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9.0 Future Considerations
Second Home Inc. is a highly profitable business if the assumptions are correct and the bylaw
changes that allows the construction of the businesses main product, granny flats.
In the future, if the bylaw changes and the business prove to be successful there are several
possibilities available to the business owner. These plans will be expanded upon in later
projects, but they include:
1. Delivery - Second Home should purchase a truck and hire a team so that it could
bring the delivery of Second Home’s products in house.
2. Work closely with property developers – Second Home could move exclusively to
dealing with major property developers like Northridge to avoid advertising and
direct selling costs for a more focused strategy of meeting their needs for their
projects.
3. Expand services offered – Second Home could become a general contracting
business that could provide all steps of the home owner’s needs, instead of just
offering the second home itself.
4. Integrate vertically – Expand to become a property developer that will use the
industry contacts and the in-house production facility and create demand for itself
as a property developer that offers these units.
5. Expansion into other markets – Alberta’s housing market, if it picks up again, may be
able to handle a manufacturer of this type if there is financing backing to buy the
expensive materials and develop contacts in that area.
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10.0 References
Painter, Marv. Venture Management, Building Your Business with a Business Plan. University of
Saskatchewan: Wilson Center for Entrepreneurial Excellence. Online textbook, 2009.
Garret Boehm and Adair Pidwerbesky. Prairie Biofuels – Green Fuel for a Green Future.
Commerce 447 Business Plan. Online, 2008.
“Granny Flats Australia.” Kit Homes Nation-wide PTY Ltd. www.kithomes.net.au/grannyflats.htm.
Retrieved December 3rd, 2009.
“Granny Flats.” House Smart – Our goal is to have satisfied customers by providing quality, affordable
homes. http://www.housesmart.ca/granny-flats.asp. Retrieved December 3rd, 2009.
Cabins. “Granny Flats.” Cheapcabin.com.au – January 8th, 2009.
http://cheapcabin.com.au/granny-flats/granny-flats/. Retrieved December 3rd,2009.
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Appendix 1: