DIVISIONAL MANAGEMENT PLAN & DISCUSSION Steve Rost General Manager J.C. Restoration, Inc.

1. DIVISIONAL MANAGEMENT PLAN & DISCUSSION Steve Rost General Manager J.C. Restoration, Inc.

2. What is Divisional Management Concept? Divisional Management Structure essentially divides each class/operation of a company into a separate business entity • Each Division Manager acts as business owner of their own operation • Divisions report revenue, costs and expenses to Accounting and receive an audited monthly P&L statement from GM • All divisions work towards individual goals, contributing to the overall budget of the company • Division manager is held accountable for their financial decisions

3. How does it work? Owner

4. How does it work? • Each division manager prepares their own budget & submits to GM for approval • Division budgets encompass only expenses, not COGS • Minimum COGS % is set by GM & President • Division expenses include: • Payroll expenses • Vehicle requirements/expenses • Education budget • Divisional tools & equipment purchases • Divisional wish list… • Water div – Fans/Dehus/Meters, etc.

5. Challenges to Overcome • Developing incentive/compensation plan for Division Managers and their employees • Traditionally bonuses were dependent upon overall performance of the company – paid on overall sales • Bonuses were given on Gross Sales, without possible regard to Net Profit • How much bonus to pay out, what is fair? • Bonuses paid out on large, profitable losses • Recruiting • Finding appropriate talent to “own” their division without a written bonus plan • No established budgets for business classes

6. JCR before Divisional Management • Excessive strain on Owner trying to manage wide range of services and growing employee base • Lack of time/resources for Biz Development limited growth of company • Which operations were truly turning an acceptable net profit? • Where/whom to focus our education budget resources on? • Expenses were often miss-classified • Job, divisional or overhead Expense? • Accounting nightmare

7. JCR decides to move to Divisional Management Structure • Recruiting- How to locate the right talent? • Ideal candidate • Entrepreneurs • Smaller restoration contractors who excel at production side of business, but may struggle with overhead type issues • Division Managers = Former business owners or operations managers who understand how a business functions but do not want to manage overhead responsibilities • Division Staff = Division Managers locate employees with appropriate skills for their specialty

8. JCR decides to move to Divisional Management Structure • Restructure management of Overhead class in divisional style • Information Center • Accounting/Human Resources • Marketing • Executive • Information Technology • JCR Outsourced until 10/2007 • Warehouse • Determined how to manage materials, consumable and equipment purchases related to services

9. Benefits of Divisional Management vs. Traditional Management • Each division functions as a separate business unit • Easier to track profits/expenses • Division Manager responsible for finding employees • Allows Division Managers to focus on area of expertise • Gain additional training and become experts and specialists in their fields • Expert status will assist in company growth • Each division has own education budget

10. Benefits of Divisional Management vs. Traditional Management • Division managers earn bonus payments based on both gross and net profits • Bonuses insured by setting divisional budgets • P&L statements are reviewed monthly with GM • All divisional COGS and Expenses are drilled down to confirm accuracy • Monthly P&L meetings allow chance to run variance reports against budget • Division Managers act as extension of Marketing staff • Reach people Marketing Staff would be challenged to reach (ie – insurance adjusters)

11. Benefits of Divisional Management vs. Traditional Management • Frees up time of Executive Branch to focus on business development • Divisional roles are clearly defined during a CAT • Transparency of calculations • Everyone in company takes “ownership” in their divisions • Reward is more quantifiable and just • We get to share a greater understanding of business practices with management staff

12. JCR after Divisional Management • JCR has doubled in employee size since move to Divisional Management Structure in 01/2006 • 135 % growth in Field Staff • All 40 field employees hold IICRC cert. • 90 % growth in Office Staff • JCR ‘bottom line’ has increased each year in the past 3 years, because each division has increased their own bottom lines • Everyone in company has bought into concept • Examples…

13. JCR after Divisional Management • Division Managers have expanded services offered within their divisions • EME: Consulting Services • STR: Consulting Services • ENV: Biohazard, MRSA • CON: Electronics, Esporta

14. ACME RESTORATION Divisional Management – Case Study • ACME Restoration, Inc. • Anytown, USA • 2009 Company Budget Sales set at $10M • 60 Full Time Employees • 35 Field/Technicians • 25 Office Personnel • Full Service Restoration Contractor • Four Production Divisions • Emergency (EME) Services Division – [20 employees] • Structural (STR) Repair Division – [6 employees] • Environmental (ENV) Remediation Division – [6 employees] • Contents (CON) Division – [13 employees] • Six Overhead Departments • Marketing (MKT) Dept. – [5 employees] • Information Technology (IT) Dept. – [1 employee] • Finance/HR (Acct) Dept. – [3 employees] • Information Center (IC) Dept. – [4 employees] • Warehouse (WH) Dept. – [4 employees] • Executive (EXE) Dept. – [2 employees]

15. Financial Reporting Structure

16. ACME RESTORATION Single Division P&L Statement Case Study • Payroll Expenses • Salaries & 401k type contributions • Insurance/Benefits • Auto Expenses • Fuel, Insurance, Repair & Maintenance • Lease & Depreciation payments • Sales & Marketing Expenses • Printed materials & give a ways • Marketing events & Advertising • Meals & Entertainment • *Mktg reps salary/commission not figured in* • Bldg & Maintenance Type Expenses • Real estate taxes & Utilities • Business insurance (W/C, G/L, Prop, etc.) • Rent/Mortgage • Maintenance and repair to building • Small tools & equipment • Net interest expenses (bank & service charges) • Office Type Expenses • Professional Expenses & Office Supplies • Computer network maintenance & Cell phones

17. ACME RESTORATION Divisional Management P&L • Four (4) Revenue Generating Divisions • EME/STR/ENV/CON • One (1) Overhead Division • Six (6) Departments within OH • MKTG/IT/ACCT/IC/WH/EXE

18. ACME RESTORATION Overhead Division P&L

19. ACME RESTORATION Div Manager Bonus Plan The OH net income is reallocated back to the (4) revenue generating divisions. Top Line Bonus Payment = 2% of Div Gross Profit Bottom Line Bonus Payment = 5% of Div Net Income after income tax provision

20. ACME RESTORATION Company ‘Bottom Line’ • ACME will not pay div manager bonuses if company bottom line falls below 4%. • 2. ACME will not pay a div manager bonus if the div net income after OH allocation is more than net income after tax provision.

21. THANK YOU QUESTIONS? Steve Rost J.C. Restoration, Inc.