Leading a Legacy

R.C. "Rosie" Romero Jr., CR, founded Legacy Custom Builders, Scottsdale, Ariz., in 1988 with the intention of selling it to his employees. This year, it finally happened. That in itself is noteworthy; every remodeler struggles with developing a personal exit strategy and with building a sustainable business that will continue to thrive after the founder's departure.

But what makes this company's leadership transition truly remarkable is the timing. Its target market has been hit hard by the recession, and sales are down by about a third. And Legacy has been wrapped up in mediation with a client (and former friend of Romero's) who stiffed the company for $250,000.

It has been a year that would have put a lot of remodelers out of business, but it has made Legacy Custom Builders only stronger. That's not just because of Romero, who retains 6% ownership.

Credit also must go to the three other owners - president Mark Olson; Mark Dixon, CR, project consultant and vice president of systems development; and Brad Christiansen, CR, vice president of production - and to every other employee.

"The people that are here are choosing a new way and a better way," says superintendent Dave Whittaker, Legacy's longest-term employee at nine years. "We're balancing a better view of the business than ever before. We're more fiscally sound than ever before. We're all a lot more responsible to each other."

Legacy's succession plan is a rare model in an industry in which selling the business usually consists of passing it along to a son or daughter or being bought out by a partner. By instead allowing key leaders to buy stock and implementing profit sharing for everyone else, Legacy has ensured long-term, widespread commitment at every level. For an innovative succession model from which remodelers of all sizes can learn, PR names Legacy Custom Builders our 2002 Remodeler of the Year.

Realizing the dream of succession

For the past few years, Romero had been considering his departure more and more seriously. Church and volunteer activities and the opportunities emerging from his radio show, Web site (www.rosieonthehouse.com) and television appearances were pulling him away from the company. He had talked about developing an employee stock ownership plan (ESOP) since the beginning, even used it as a recruiting tool, but had yet to find a way to fund and implement one.

Olson came into Legacy last year, planning to be the No. 2 guy. But by the end of 2001, Romero suggested selling 50% of the company to him. As they discussed options, Romero realized he wanted even less than half-ownership, and Olson said he wanted no more than 51%.

"I wanted 51% because somebody needs to be in control so the organization never gets bogged down in key decision-making," Olson says. "But I never wanted anything more."

So they identified other individuals within the company who were serious about ownership, which they had decided would require a straight cash purchase of stock to improve the company's cash flow. At one point, six employees were interested, but four eventually decided that the projected timing - June 1, 2002 - and capital required weren't possible.

In the end, Olson held to 51%, while Christiansen and Dixon each took 21.5% of the stock. Romero maintained a 6% minority, as everybody thought the company needed not only his experience but also his community presence and marketing skills. Romero also retained sole ownership of Romero Productions, through which he runs the Rosie on the House radio show and Web site, plus his TV appearances and potential book deals.

The ownership transfer took place Oct. 1, after nine months of working out the details. The process began with a memo written by Olson outlining what each party wanted from the deal and went through several iterations among the four partners until it was finalized as a letter of agreement that all four signed. "You get the lawyers involved, and it complicates things," says Olson. He does recommend consulting an accountant, however, to fully investigate the ramifications upon one's individual finances.

"We have significant recordable income with the settlement, but there's no cash payment out," Olson explains. "The income tax issues can be devastating if you're not aware."

Legacy's four new owners, or principals, now compose the board of directors. Their cash investment went right into the business for capitalization and to cover short-term cash-flow problems. Although plans for an ESOP were scrapped because Legacy didn't have enough cash, the board decided on a compromise: a profit-sharing plan to begin in 2003.

While compensation for many employees was already tied into profitability, this new plan calls for profits to be dispersed equally among employees. Dixon explains that the board first set parameters for what Legacy needs to maintain for capitalization, as well as 2003 targets for sales volume, gross profit and net profit. Assuming those goals are met, the board has set aside $50,000 to be divided among all employees who have been with the company for at least three years. The amount will be paid out in January 2004. The short-term employees won't receive anything until they reach three years of tenure, but then they will receive that year's full amount, plus one-third of the share from their first year of employment and two-thirds from the second.

Dixon likens the compensation and profit-sharing system to that of an NFL team. "Everybody on a football team gets paid according to what they do. Nobody's less important than anybody else, but they get paid according to skill level," he explains. "But if the team goes to the Super Bowl, everybody gets a ring because they all played there."

The guidelines under which the owners receive dividends from Legacy ensure that the profit sharing comes first.

Building a better culture

Romero is the first to admit that his big heart didnÆt always lend itself to the best hiring choices. He tended to hire anyone who needed a job. Developing a company culture of increased efficiency, accountability and profitability - while retaining the "family" feel - required having the right people in the proper roles.

One of the biggest changes was bringing in Brian Shaurette as vice president of sales and marketing and adding him to the executive committee. Romero and Dixon had taken turns acting as sales manager. As the top salesperson, Dixon now needed to focus solely on selling. Shaurette, as vice president of sales for an Arizona home builder, had led the creation of its award-winning design center. He was supposed to help Legacy build a showroom, but he talked Legacy out of it, believing the volume of business didn't justify the expense.

What he has done is encourage the project consultants to go after $50,000-$100,000 jobs and take on more kitchens and baths instead of looking for the large jobs that used to be the firmÆs stock in trade. He also has improved teamwork between the project consultants and superintendents, even working with Christiansen to develop written guidelines for sales/production interaction.

To better support the project consultants, Legacy created a design specialist position. Emily Foote now turns the project consultants' designs and specs into floor plans and elevations. She also pulls all the permits and gets approvals from homeowners associations.

Estimator John Matteson, CR, remained in his position but no longer does all the estimating himself. Instead, each project consultant does his or her own estimating using Legacy's proprietary system, and Matteson reviews the estimates, responding to each with what he calls QACS: questions, assumptions, corrections and stipulations. Refining the estimating system continues to be a priority.

Foote and Matteson report to purchasing manager Sharon Schneider, who has been in that role for 21/2 years. She buys all materials and handles all trade contractor relations, with a focus on keeping costs down. "A good purchasing agent should pay his or her own way," she says. Her current project is putting together a packet of recommendation letters from Legacy's trades to help the project consultants sell.

Christiansen remains in charge of production and has added Schneider's group to his responsibilities. He's working to improve systems put in place through the total quality management initiative begun several years ago. To improve the close-out procedure, he has helped develop a pre-final walk-through with the superintendents, a sign-off sheet for the customer and a 90-day walk-through with the project consultant and warranty person, all aimed at achieving a zero-punchlist.

The warranty position also is new. Before 2002, each superintendent did his own warranty work. Depending on what his new project was, the response time was not always great. Now, William Stiles fulfills all warranty work and also runs Legacy's concierge service. Until the handyman division shut down, he split his time between handyman and concierge. "At first everybody was a little frightened," he says of all the changes the past year has brought. "But it's not a bad thing in the long run. It's better for the company."

Having outgrown its longtime general manager, Legacy created a controller position. Ilene Takiguchi, with the assistance of a staff accountant, aids Olson with finance and operations by handling all financial reporting, cash management, accounts receivable, accounts payable and human resources. In 13 months with Legacy, she has worked with Olson to implement a new chart of accounts and changed the way profit-and-loss statements are run. P&L's are now on a 10-business-day close instead of 30. She has implemented a paid-time-off plan that allows employees to earn more days with increased tenure, while her search for a new health insurance plan has lowered fees for the company and the employees.

New project consultant Ron Sims began at Legacy in November. "They were upfront with me about where they've been," he says. "I never got the feeling there was a problem or an issue. I was drawn to the process they were using and the quality of the people."

Cutting overhead by a third

Originally, Romero met with Olson in summer 2001 only to seek advice on attracting investors. Instead, they decided Olson was a good fit for taking over the company's finances and operations. At the time, the company already had been running for several years under a management team of Romero, Christiansen, Dixon and a general manager who's no longer with the company.

Olson began by restructuring the financial reporting to be more accurate and help the management team better understand the link between every decision and its impact on the bottom line. He says the five-year business plan needed updating and a firmer grounding in reality.

"The old one looked at revenues and said, 'What do we want to make each year?' That was the starting point," he says. "I asked to look at what we made this year, what we made last year, look at it by salesperson and ask whether this person is logically going to increase sales that much."

From there, he explains, he looked at the type and number of project consultants, or salespeople, it would take to generate revenue goals, the superintendents it would take to produce that work and the office staff it would take to support them.

Olson concluded that although Legacy was maintaining its targeted 42.5% gross profit, overhead had to be reduced by about a third to increase net profit.

"The overhead structure was planning for growth that didn't come," he says. "People don't feel as wealthy as they used to, so they're not spending money as freely. The job sizes have gotten smaller. People are shopping. They're finding out the prices. They're going to keep whittling away at things. We have to be able to accommodate the market instead of trying to force the market to match the reality we want."

Cutting overhead meant shuttering the 2-year-old handyman division, which brought in about $750,000 in revenue in 2001 but wasn't profitable. It also meant cutting some unnecessary personnel, such as the person who oversaw the phone calls from Romero's radio-show listeners who wanted referrals to subcontractors. While a valuable service, this didn't generate revenue for Legacy.

It takes smarts, skills and courage to implement a succession plan during a soft market, a major contract dispute and a company reorganization.