Interior Design Services

INDUSTRY PROFILE Interior Design Services 1.5.2015 NAICS CODES: 541410 SIC CODES: 7389 Industry Overview Companies in this industry plan and design interior spaces such as hotels, hospitals, residences, commercial businesses, and offices. Although no major companies dominate the industry, a number of large architecture and design firms offer interior design services, such as Gensler, HOK, Interior Architects, and Perkins + Will (all based in the US), as well as M Moser Associates (Hong Kong), Space Matrix (Singapore), and Stantec (Canada). The US interior design industry includes about 11,000 establishments (single-location companies and units of multi-location companies, with combined annual revenue of about $7 billion. In addition, there are about 16,000 self-employed designers in the US and Canada who generate about $1 billion in annual revenue, according to the American Society of Interior Designers (ASID). Another $1 billion in revenue is generated each year from architecture firms' interior design services. Competitive Landscape Construction and renovation of residential, commercial, industrial, and institutional buildings drive demand for interior design services. The profitability of individual companies depends on accurate bidding, timely delivery, and a steady volume of projects. Large companies have advantages in marketing, developing partnerships, building a large client referral list, and getting priority service from suppliers. Small companies can compete effectively by providing better service, specializing, and using unique or custom product sources. The US industry is highly fragmented: the 50 largest US firms account for about 10 percent of revenue. Competitors include suppliers and consumers. Suppliers compete by expanding their services to include interior design; consumers compete by establishing their own independent businesses, typically a home-based operation focusing on interior decorating. Products, Operations & Technology Major services of interior designers are selling products as part of an integrated design service, providing fee-based consulting services, and managing subcontractors. Full-service interior design accounts for about 75 percent of industry revenue; resale of merchandise, 15 percent. Service Segmentation by Revenue - Census Bureau

Homeowners, businesses, and government entities engage interior designers to plan, design, and supervise physical and aesthetic projects for interiors of buildings. Clients may hire interior decorators, who are part of this industry, to consult solely on the aesthetics of interior spaces, not the physical structure. Designers evaluate clients functional needs, style preferences, and budgets, and customize interiors to meet those requirements. Designers determine how the intended use of an interior will affect a variety of issues, such as foot-traffic patterns, floor layout, heating and air conditioning, lighting and electrical outlets, public and private spaces, furniture, and decor. Designers ensure that their plans comply with local building, health, and safety codes. Interior design firms may specialize by client (residential, commercial, or government) or project type (new construction or renovations). Some firms may specialize in industries or projects that have unique requirements, such as health care and hospitals, retail stores, or the hotel and hospitality industry. Large firms may offer full-service, integrated design services across many industries and types of projects, while small firms typically have a narrower focus. Depending on the project, designers may specify and buy wall and ceiling materials, flooring, fabric, furniture, lighting, appliances, cabinets, doors, accessories, and other interior design materials. Design firms with commercial and industrial building clients often conform to the standards of the Construction Specifications Institute. Firms generally buy wholesale from suppliers on a per-project basis. Designers maintain samples and marketing materials to show clients, but don't stock inventory, other than what the firm orders for specific projects. Designers keep photographs of completed projects to help clients visualize how materials will look in use. Regional style preferences exist among clients and designers, although every market has a mixture. Traditional styling is popular in the South; Colonial in New England; eclectic in New York City; contemporary and Mediterranean on the West Coast; and Spanish in the Southwest. Regional magazines like Sunset (for the western US) and Southern Living play a big role as style-setters. Designers also support the decor and design media industry by providing project photos, design tips, blog posts, and articles. Some designers write books or are featured on television. Well-known designers also may have their own product lines such as bedding, accessories, or fabrics. Interior designers use drawing as a planning tool and a way to communicate designs to clients, and increasingly use computer-aided design (CAD), and specification software. Larger firms may have CAD talent on staff, but smaller firms typically outsource the creation of technical drawings. Cutting-edge architect firms that also have interior design services are beginning to use 3D visualization software that simulates the experience of walking through a finished interior. The Internet is enabling design firms to expand their teams and partnerships in other areas of the country and world, to reach a dispersed client base and to buy materials electronically. Sales & Marketing Typical customers of interior design services are commercial and industrial companies, homeowners, and institutions, including government. Some design firms specialize by customer segment or industry, such as health care facilities, which have unique needs. Customers typically engage interior designers early in the planning stages for new buildings or major renovations, although many homeowners use design services simply for redecorating, often as a result of minor remodeling. Major types of marketing are through online directories and local real estate and home fashion magazines and blogs. Referrals are a major source of customers, so building relationships and partnerships is very important. Interior design firms seek good relationships with architects, builders, realtors, and product providers for interiors,

such as furniture stores. Design firms use newsletters, open houses at completed projects, and social events to build and maintain client and professional relationships. Members of the American Society of Interior Designers receive marketing tools from the organization and participate in their regional chapter s projects, such as the designer house of the year. Individual firms seek publicity by entering design contests and submitting photos for publication in leading architectural and design magazines. Sales efforts of larger firms typically focus on the commercial and institutional segments, and rely on senior executives contacts and a direct sales force. In smaller firms, the owner or partners are the only salespeople and use a highly personal, one-on-one, consultative approach with prospects and clients. Institutional projects go through a controlled proposal and bidding process, as do many corporate jobs, although executives' preferences often are the deciding factors with commercial customers. Pricing may be based on hourly fees, a fixed-price bid, or a percentage markup on materials and services. Hourly consultation fees are the most common, and depend on the experience level of the designer and the region. Hourly rates typically range from $100 to $300 per hour. Fixed-price projects, which range from $1,000 to hundreds of thousands, are often used for specific projects where time and material costs can be easily estimated. In a cost plus fee structure, designers price products by adding a markup of 5 to 100 percent to the cost they incur for items, such as flooring, wall tiles, furniture, lamps, and carpeting. Some firms prefer to take a flat percentage fee based on the total cost of purchases and services of any subcontractors they hire, such as electricians, painters, or installers. Most designers charge between 10 and 35 percent of the total cost of the project. Some designers charge by the square foot, typically between $5 and $6 or more per square foot. Design firms typically buy wholesale, but the smallest companies may not receive much discount and may buy decorative items at retail. Retailers and manufacturers compete for product sales, because clients can buy directly from stores or producers showrooms. Finance & Regulation Interior design firms that specialize in residential interiors often have higher revenue in third and fourth quarters, unlike the commercial and institutional segments, which are steadier year-round. A typical US interior design firm has a gross profit margin of around 55 percent and accounts receivable of between 30 and 40 days sales. Inventory generally represents about 45 days sales. Design firms order products on a per-project basis, but otherwise don't typically stock inventory. Certain states and Canadian provinces legally recognize the interior design industry as a profession and the terms "interior designer," "certified interior designer," or "registered interior designer" are limited to professionals who meet certain requirements. Although requirements vary, legal recognition typically requires designers to meet specific educational standards and experience prior to receiving official registration. Renewal usually requires a set number of continuing education hours. Local governments view registration as a way to protect consumers by identifying qualified professionals, and as a source of revenue. Several states have had their laws concerning interior designers challenged, and some states have repealed the laws, citing freedom of speech issues. Interior designers projects must comply with building codes and health and safety regulations. Because projects often depend on construction or renovation by other contractors, interior design firms carry high levels of liability and errors and omissions insurance. International Insights The US and Europe dominate the interior design services market, but emerging economies such as China, India, and Central and South America are driving growth in the industry. Firms are expanding in regions where corporate spending and consumer disposable income are rising. Demand for interior designers is highest in urban areas. Imported materials and furniture are increasingly important to interior designers, as more manufacturing occurs offshore. Most designers buy wholesale from US suppliers, but special orders can have significant shipping delays. China, Canada, and Vietnam are the top sources of furniture imports. Regional Highlights In the US, regional differences in interior design reflect the mix of local industries, personal income levels, and style preferences. Demand for interior design is greatest in urban areas and places with high commercial or institutional concentration, such as New York or Washington, DC, and places with high personal income. States with the highest median household income include Maryland, New Hampshire, Connecticut, New Jersey, and Massachusetts. States with the highest number of employed interior designers include California, New York, Texas, Florida, and Georgia. Human Resources Interior design requires special training, and most firms hire designers with college degrees. Accordingly, the average hourly industry wage is moderately higher than the national average. In addition to formal training, as

prerequisites for achieving registration or licensure, many states and most Canadian provinces require on-the-job experience of one to three years ( apprenticeship ) and passing the standard exam of the National Council for Interior Design Qualification. Designers need to take continuing education courses for license renewal. Large firms have the luxury of hiring people for specialized functions, like drafting or computer-aided design (CAD), proposal development, or product selection, but small firms must rely on employees who perform multiple functions. Interior designers also outsource work and employ contractors and consultants to complete projects. Most work occurs in an office or client environment, so industry injury rates are negligible. Industry Employment Growth Bureau of Labor Statistics Average Hourly Earnings & Annual Wage Increase Bureau of Labor Statistics Industry Growth Rating Demand: Driven by construction and renovation Need accurate bidding and steady work volume Risk: Economic health affects spending on non-essentials Quarterly Industry Update 1.5.2015 Opportunity: Design Firms See Demand Grow from Health Care Facilities - US hospitals and other health care facilities are turning to interior design firms to help improve the patient experience and increase patient satisfaction. The impetus behind the trend is the Affordable Care Act or Obamacare, which emphasizes patient outcomes rather than services rendered. interior designers, such as Perkins+Will and Cannon Design, are using

design to help facilities decrease readmissions, for example. Key components include integrating nature and light into facilities to help patients heal faster, offering flexible options to accommodate changing health care needs, and creating inpatient facilities for acute cases that accommodate families, according to Interior Design. Furniture and other manufacturers also are helping create more hospitable environments that are soothing and control infection, but are not sterile. Industry Impact - Firms interested in designing health care facilities should see continued demand as as the Affordable Care Act directs attention to improving patient outcomes. 10.6.2014 Opportunity: Rosy Forecast for Interior Designers into 2015 - Steady growth is predicted for the interior design industry in the six months ahead, according to the American Society of Interior Designers (ASID). The society's second quarter 2014 Interior Design Billings Index, which measures billings data from 300 interior design companies across the US, reveals ASID firms in the Midwest, South, and West all experienced increased monthly billings during the first half of this year. Single-family and multifamily residential sectors also reported increases in billings in May and June. Smaller firms (fewer than 10 employees) performed particularly well, reporting consistent growth since first quarter 2014 as well as year over year. Industry Impact - Interior design firms may want to increase staffing to take advantage of steady industry growth that is expected to continue into 2015. 7.14.2014 Trend: Interior Designers Innovate with 3D Printing - Interior Designers, architects, and furniture makers are experimenting with 3D printing to create innovative spaces, furnishings, and accessories. Companies are using large-scale 3D printers to make objects with materials such as cement polymer, wood, nylon, and acrylic. A Swiss design team created an entire room made from 3D printed sandstone. One example includes a bio-morphic interpretation of a bench that resembles a slug made by US-based Emerging Objects. The 3D printing process (also called additive manufacturing) opens new opportunities for product customization and new design. However, questions regarding durability and safety are holding back widespread use of 3D printing in construction. Industry Impact - Designers can create innovative spaces that blur the line between form and function by using 3D building components, facade elements, lighting, and furniture. 4.21.2014 Trend: Collaborative Workspaces - Businesses are increasingly inviting customers, contractors, and even the general public into their headquarters to encourage creativity, promote transparency, and possibly even drum up some business. This open-door trend is influencing workplace design. One of the most progressive open-door policies belongs to Detroit-based interior design firm dpop, which once a month allows anyone into their unique office space for an entire day, according to Quartz. Visitors can hang out inside dpop's quirky offices, enjoy free coffee and Wi-Fi, and chat with employees. Other companies opt to have shorter open house hours in order to limit disruptions and reduce security risks. Industry Impact - Interior designers and companies are embracing community collaboration as a design trend in workplaces. Industry Indicators US corporate profits, an indicator of corporate demand for interior design services, rose 0.4 percent in the third quarter of 2014 compared to the same period in 2013. US personal income, which drives consumer ability to pay for interior design services, rose 4.2 percent in November 2014 compared to the same month in 2013. Total US revenue for other professional, scientific, and technical services, which includes interiors design services, rose 8.7 percent in the third quarter of 2014 compared to the previous year. Industry Forecast The output of US interior design services is forecast to grow at an annual compounded rate of 7 percent between 2014 and 2018. Data Published: September 2014

First Research forecasts are based on INFORUM forecasts that are licensed from the Interindustry Economic Research Fund, Inc. (IERF) in College Park, MD. INFORUM's "interindustry-macro" approach to modeling the economy captures the links between industries and the aggregate economy. Forecast FAQs Companies Company Country Sales Hainan Zhuxin Investment Co., Ltd. China $169.60M NOBEL DESIGN HOLDINGS LTD Singapore $86.16M Industry Drivers Changes in the economic environment that may positively or negatively affect industry growth. Data provided by First Research analysts and reviewed annually Energy Prices Change in crude oil and related energy prices Consumer Spending Change in overall level of consumer spending on goods and services Technology Innovation Advances in science and technology, including information technology Critical Issues Reliance on New Construction, Renovations - The interior design industry depends on new building construction and renovations as major sources of projects. Since the housing bust and recession of the late 2000s, construction spending and the overall US economy have improved in most parts of the country. Building and renovation spending, particularly in the residential, retail, and hospitality sectors, has grown since 2012. The Design Billing Index, tracked by the American Society of Interior Designers, also has experienced steady improvement, and firms have reported higher proportions of project backlogs. Dependence on Consumer Income, Local Economy - Spending on interior design services is a discretionary expense that depends on personal income and the health of local economies. US personal income, an indicator for consumer discretionary spending, increased 10 percent from 2011 through 2013. Since most interior design firms work locally or regionally, local economic activity also influences demand. In 2012, economic growth was

strongest in the Southwest, led by Texas, and weakest the Great Lakes region. Business Challenges Low Barriers to Entry - Independents or small startups can enter the interior design market easily, especially for interior decorating. In many states, an interior design business can be started without certification or industryspecific experience, and startups don t need employees or an official office. Many designers and startup companies offer online services to assess clients' needs and present ideas and plans. Firms downsized during the economic recession in order to cut costs, and some large companies acquired small and midsized firms. As demand for design services improves, more competitors likely will emerge. Competition for Key Personnel - Interior design firms rely on the expertise and influence of the principals and other key personnel, so competition for employees can be keen. Mid-to-large firms particularly compete for top designers, who often eventually leave to form their own companies. When a principal or key designer leaves, clients often follow. Many firms have only one or two employees, so the loss of one person can be a major blow to operations. Reliability of Subcontractors - Most interior design firms are small businesses that use local tradespeople and other small companies as resources, a dependency that adds risk to projects. Designers depend on skilled tradespeople, such as floor and tile installers, painters, and upholsterers, to complete their work on time, so an illness of a sole proprietor or the loss of an employee can delay or stop a designer s project. Workmanship and attention to detail are important to designers and their clients, so substitution isn t always a readily available option in a local market. Business Trends Niche Specialization - Although the public may perceive interior design as home decorating or full-service interior space planning, many interior designers specialize in niche aspects. Lighting, kitchen and bath, and closet design are common specialties. In high demand are acoustics and noise abatement specialists, many of whom have combination engineering and design degrees. Advances in technology have increased specialization in home theaters, spas, indoor gardens, security systems, and state-of-the-art conference facilities. Dominance of Large Architecture Firms - Large architecture firms, some with offices in more than 20 cities, are leaders in US interior design. Architecture firms have extended their services to include interior design, as well as urban design and planning, strategic consulting, and graphic arts services. To provide expanded services, architecture firms are buying interior design and other specialty practices. Prominent architecture firms consistently rank among the top interior design firms in annual rankings by Interior Design magazine, a leading industry publication. Celebrity, Designer Brands - The popularity of brand-name products can limit the creative range that interior designers prefer. World-famous designers and design-house furniture are popular among clients on the high end, and celebrity-branded merchandise among clients of more moderate means. Martha Stewart and Cindy Crawford are among the moderately priced celebrity brands that have received high visibility and popularity through advertising campaigns. Fashion Consciousness - Interior design in many markets is closely pegged to current fashion in décor and use of space. Colors, style, themes, and interior building materials are subject to fashion trends, creating opportunities for redesign or redecorating within a few years. For example, office design has evolved from cubicles to open space and back to cubicles, and home design now favors marble, granite, and natural wood. Interior designers use the same annual color authority as do fashion designers: the definitive PANTONE Textile Color System. Staying current with new colors, fabrics, materials, products, and styles is a necessity for designers with fashion-conscious clients. Industry Opportunities Superior Customer Service - Providing the best responsiveness to clients is a differentiating factor in interior design, because service defines the business. Smaller firms that focus on providing better service can compete effectively with larger companies. Better service involves listening more attentively to clients and paying more attention to details, being flexible, searching for materials or products, offering clients choices, and honoring due dates and budgets.

Universal Design - Interior designers whose projects conform to universal design principles can quickly become experts in the field. Universal design involves product selection and creation of environments that are easy for people of varying physical abilities and ages to use. Examples are wide doorways and minimal thresholds that accommodate wheelchairs, and lever style handles that children and the elderly can use easily. Design for Aging-in-Place and Multigenerational Living - Home modification for aging-in-place is the fastest growing segment of the residential remodeling industry, according to the National Association of Home Builders (NAHB). Most retiring or retired homeowners plan to remain in their current homes as they age, according to the American Society of Interior Designers, but will need to modify their houses. To prepare for this growing market as baby boomers age, designers may enroll in the Certified Aging-in-Place Specialist (CAPS) program NAHB developed in collaboration with AARP. The program addresses business, technical, and customer service skills specific to aging-in-place issues, as well as shared homes that may contain family members of all ages. Sustainable Design - Sustainable, or green, design is the fastest growing segment of the interior design business, according to American Society of Interior Designers. Green design involves using environmentallyfriendly materials and products that come from sustainable, renewable resources and are healthy for people and the planet. For example, green designers use wood that the Forest Stewardship Council verifies comes from ecologically sustainable forests, paints that are noncarcinogenic and have minimal chemical emissions, and appliances that have earned federal Energy Star ratings for efficiency. Health Care Industry - To attract new patients and reduce costs, health care facilities are redesigning interiors to make them more efficient and inviting to patients. Consolidation in the health care industry leads to the expansion and redesign of existing buildings and the creation of suburban and satellite offices that bring services closer to targeted patient populations. Health care companies redesign interiors to increase patient-per-day ratios and address the needs of growing demographic groups, such as the aging population. Online Services - A growing number of designers and startup companies provide access to their services through the Internet. As opposed to an on-site designer who makes visits to a space, online designers assess clients' needs remotely by evaluating photos and lifestyle questionnaires and conferring via email, phone, or video link. The designers then can use the Internet to present idea boards, detailed plans, or step-by-step instructions on how to carry out a redesign. By offering online services, designers can operate outside their geographic areas and potentially undercut competitors' prices. Executive Insight Chief Executive Officer - CEO Building Customer Relationships The top executive of an interior design company represents and upholds the firm s brand, because the industry is highly relationship-based and image and reputation are important to clients. In smaller companies, the CEO typically is the firm s top designer, salesperson, and dealmaker, and in larger corporations, may focus solely on sales and deals with important clients. Design firms carefully manage transitions of CEOs to minimize potential negative effects on the company s status or reputation. In small firms, the departure of the top executive can devastate the business, often leading to a sellout or closure. Expanding Services Interior design firms of various sizes are expanding services to compete better, attract and retain more clients, and increase revenue opportunities. Although the industry remains highly fragmented, the large, multiservice architectural and pure-design firms consistently dominate important project wins, interior design awards, and press attention. Executives follow the strategies that these larger firms implement: they bring services in-house, align with partners who can provide complementary services, and ultimately, may merge with or acquire other firms. Chief Financial Officer - CFO Reviewing Bids and Project Performance Accurate bidding and project expense control are key contributors to profitability, so management closely monitors individual projects. Competitive bidding is important for winning service-related business, but changes in product prices and third-party labor costs can affect margins once interior design projects are in progress. Financial teams track performance-to-budget, a task that smaller companies often neglect or don t have the resources to do. Monitoring project due dates is also important, as a significant portion of revenue often comes from end-of-project billing. Negotiating With Suppliers Financial executives negotiate contracts to help ensure a steady supply of products and materials from key sources and to minimize price risk on interior design projects. Large firms specializing in big projects in commercial and institutional segments are most likely to commit to spending specific dollar amounts with a

supplier, and consequently specify that vendor s goods in most projects. Large design companies have an advantage in getting priority service. Most interior design firms, however, are small businesses that use local tradespeople and other small companies as resources, a dependency that can add risk to projects. Chief Information Officer - CIO Using Technology to Expand Business Opportunities Interior design firms expand their business resources and customer reach through the Internet and other networking technologies. The ease of communicating and doing business via the Internet enables firms to expand their design teams and partnerships in other areas of the country and world, reach a dispersed client base, and buy materials electronically. Large design companies have offices in over 20 US cities and some firms are expanding abroad, requiring technical staff to provide support across multiple time zones and ensure that software conforms to local requirements. Automating Design and Business Processes The interior design industry is moving quickly from a low-tech business to one that makes use of technology, with technical management leading integration efforts. Proposal software; computer-aided design (CAD); furniture and material specification systems; and project collaboration tools are increasingly in use. Cutting-edge companies are implementing 3D software for visualizing interior spaces. Human Resources - HR Retaining Key Personnel Interior design firms rely on the expertise and influence of the principals and other key personnel, so retaining important employees is a top management concern. Competition for employees can be keen, especially among mid-to-large firms. When principals or top designers leave, often to form their own companies, clients typically follow. To avoid such problems, firms attempt to give key employees the creative or business responsibilities, compensation, and recognition that they want. Developing Balanced Skill Sets Most interior design firms are small and can t afford the luxury of separating creative and business roles, which is a challenge to many founders whose experience and training are in design. In small companies, cross-training in design and business skills is important for executives and employees who interact with clients. Companies join the American Society of Interior Designers for its tools and resources and encourage employees to take classes at local colleges. Companies are eager to hire people with both design and account experience or dual degrees in design and business. VP Sales/Marketing - Sales Increasing Firm s Public Profile Image and reputation are important reasons clients select an interior design company, so marketing focuses on building relationships and promoting the firm s public profile. PR efforts promote the top designers, executives, and notable projects. Stiff competition exists to receive coverage in highly visible magazines, like Architectural Digest or Interior Design, which publish an annual list of top firms. Ensuring a Steady Stream of Projects Ongoing sales efforts are a major concern of management, because profitability depends heavily on obtaining a steady volume of projects. Larger firms can hire sales and account managers, but in smaller companies, the people selling the projects are also instrumental in design, product selection, and delivery. Firms may plan a project in phases to better distribute revenue flow, but doing so risks cancellation or delay of subsequent phases. Timely delivery is important to small firms with a few employees, because they can manage only a limited number of projects simultaneously. Executive Conversation Starters Chief Executive Officer - CEO What is the firm's strategy for enhancing its relationships with key customers? The interior design industry is highly relationship-based; top executives play key roles in attaining and nurturing client relationships. What plans for growing its services does the firm have? Larger firms expand services by acquiring smaller firms with specialties or complementary services. Smaller firms may merge to compete better with larger firms. Chief Financial Officer - CFO

How common or problematic are project cost overruns? Accurate bidding and timely completion are key contributors to project profitability. What is the firm doing to increase discounts from suppliers? Negotiating contracts can minimize price risk on interior design projects. Chief Information Officer - CIO How is the firm using the Internet to expand its business? The Internet is allowing companies to market to expanded geographic markets. What plans does the company have to use technology to automate and improve the design process? CAD, specification programs, and 3D visualization software are increasingly being used to enhance the design process. Human Resources - HR How dependent is the company on retaining key personnel? Interior design firms rely on the reputation and expertise of the principals and other key personnel to gain new business. What challenges does the firm have finding employees with a mix of business and design skills? Larger firms can afford hiring people who specialize in one area, but smaller firms need people with a combination of business and design skills. VP Sales/Marketing - Sales How is the firm using PR to increase its public profile? Design firms send newsletters, hold open houses at completed projects, participate in professional design group showcases, enter design contests, and seek coverage in consumer and industry publications. How is the company challenged to ensure a steady flow of projects? Ensuring a steady stream of projects is a major concern of design firms. Call Prep Questions Conversation Starters How important to the firm are projects for new construction, compared to renovations? The interior design industry depends on new building construction and renovations as major sources of projects. How have the local economy and consumer spending affected the firm? Spending on interior design services is a discretionary expense that depends on personal income and the health of local economies. How concerned is the firm about the entry of new competitors in its market? Independents or small startups can enter the interior design market easily, especially for interior decorating. How does the firm differentiate itself? Providing the best responsiveness to clients is a differentiating factor in interior design, because service defines the business. What plans does the firm have to incorporate universal design into its services? Interior designers whose projects conform to universal design principles can quickly become experts in the field. How much of an opportunity is design for aging-in-place in residential remodeling for the company? Home modification for aging-in-place is the fastest growing segment of the residential remodeling industry, according to the National Association of Home Builders (NAHB). Quarterly Industry Update How could growing demand for good design at health care facilities impact the company s project load? US hospitals and other health care facilities are turning to interior design firms to help improve the patient experience and increase patient satisfaction. Operations, Products, and Facilities What are the firm s major services?

Major industry services include selling products as part of an integrated design service, providing fee-based consulting services, and managing subcontractors. Does the firm have a specialty? Companies often specialize by industry; building use (commercial or residential, for example); or project complexity; however, many small firms focus on interior decorating. What advantages or challenges does the firm have dealing with suppliers? Large firms or companies that often do large projects get priority attention from product suppliers and service providers. How dependent is the firm on third-party tradespeople? Design firms depend on third-party tradespeople, such as upholsterers and stone fabricators, to complete full-service projects. How many facilities does the company have? Most interior design companies have one location. Does the company have a particular design style that it prefers? Regional style preferences exist among clients and designers, although every market has a mixture. How broad of a geographic area does the company service? Most firms serve a local or regional market, but some large firms are nationwide. Customers, Marketing, Pricing, Competition How is the firm using public relations to increase its public profile? Design firms send newsletters, hold open houses at completed projects, participate in professional design group showcases, enter design contests, and seek coverage in print and online publications. More designers also are engaged in social media as a way to promote their services. What challenges does the company have in ensuring a steady flow of projects? Ensuring a steady stream of projects is a major concern of design firms. What is the firm s primary customer base? Typical customers of interior design services are commercial and industrial companies, homeowners, and institutions, but firms may serve specific segments. What percentage of the firm s projects is due to new construction? To renovations? New building construction and renovations drive business for interior designers. Which types of marketing are most effective for the firm? Firms often use ads in Yellow Pages and local real estate and home fashion magazines, including publications that focus on new homeowners or home improvements. What types of partnerships does the firm have? Design firms may have formal, contractual partnerships, or informal, referral relationships with architects, builders, Realtors, and providers of products for interiors, such as furniture stores. How important are client referrals to the company s business? Many established design firms receive a majority of work from client referrals. What concerns does the firm have about pricing competitiveness in its market? Pricing varies greatly, depending on project scope, the firm s reputation, and locale, but in all cases, accurate bidding is important to profitability and customer satisfaction. How does the company price its services? Companies may charge by the hour or as a percentage markup of products they buy. Large projects may involve fixed-price bids. Regulations, R&D, Imports and Exports Which states require interior designers to be certified or licensed? Over half of the states and most Canadian provinces require interior designer certification or licensing. What percentage of the firm s interior designers has certification from the state or a professional association? Many design firms gain credibility by being certified by a respected organization like the American Society of Interior Designers, even if the state doesn t require certification. How does the firm ensure compliance with local regulations and ordinances, like building codes? Designers may subscribe to newsletters or join professional groups that track building code changes. How important to the firm is the use of innovative products and materials? Some designers specialize in trend-setting styles and products.

How reliant is the firm on imported products and materials? Most furniture and many interior materials, like marble, granite, and wood, come from other countries. How is the firm challenged when ordering special or custom, imported products or materials? Special and custom orders from other countries are often subject to shipping delays, which can affect a designer s estimated project completion date. Organization and Management How dependent is the company on retaining key personnel? Interior design requires special training and most firms hire designers with college degrees. How is the firm challenged by finding employees with a mix of business and design skills? Larger firms can afford hiring people who specialize in one area, but smaller firms need people with a combination of business and design skills. What is the ownership structure of the company? Many interior designers are self-employed, and most interior design firms are small partnerships owned by the principal designers. How many employees does the firm have? Most interior design firms have fewer than four employees. What is the ratio of designers to staff? The ratio of designers to staff can vary greatly. How involved is management in sales? Executives of larger firms are very involved in high-level sales, and in small firms, often are the only salespeople. Financial Analysis How does the firm expect its margins to trend in the coming year? A typical interior design firm has a gross profit margin of 40 to 45 percent. How seasonal is the company s business? Interior design firms that specialize in residential interiors often have higher revenue in the third and fourth quarters, unlike the commercial and institutional segments, which are steadier year-round. How timely are collections? A typical interior design firm has accounts receivable of about 35 days sales. What plans does the firm have to improve the bottom line? Firms focus on project estimate improvement, costs, and timely delivery, and obtaining better terms from service contractors and product suppliers. Business and Technology Strategies What is the firm's strategy for utilizing new technologies? The Internet is enabling design firms to reach a dispersed client base and to buy materials electronically. What are some barriers to entry in the interior design industry? Independents or small startups can enter the interior design market easily, especially for interior decorating. What plans does the company have to improve the design process? Interior design firms are increasingly use CAD and specification software. What are some competitive strategies the firm uses? Small companies can compete effectively by providing better service, specializing, and using unique or custom product sources. What plans does the firm have for incorporating universal design, aging-in-place, or sustainable design into its services? Home modification for aging-in-place is the fastest-growing segment of the residential remodeling industry, and sustainable, or green, design is the fastest-growing segment of the interior design business. Financial Information COMPANY BENCHMARK TRENDS

Quick Ratio by Company Size The quick ratio, also known as the acid test ratio, measures a company's ability to meet short-term obligations with liquid assets. The higher the ratio, the better; a number below 1 signals financial distress. Use the quick ratio to determine if companies in an industry are typically able to pay off their current liabilities. Financial industry data provided by MicroBilt Corporation collected from 32 different data sources and represents financial performance of over 4.5 million privately held businesses and detailed industry financial benchmarks of companies in over 900 industries (SIC and NAICS). More data available by subscription or single report purchase at www.microbilt.com/firstresearch. Working Capital Turnover by Company Size The working capital turnover ratio, also known as working capital to sales, is a measure of how efficiently a company uses its capital to generate sales. A high ratio is generally better, but a ratio that is too high suggests that the company lacks sufficient working capital. A low ratio can indicate that a company has too much capital tied up in accounts receivable and inventory, relative to sales. Companies should be compared to others in their industry. Financial industry data provided by MicroBilt Corporation collected from 32 different data sources and represents financial performance of over 4.5 million privately held businesses and detailed industry financial benchmarks of companies in over 900 industries (SIC and NAICS). More data available by subscription or single report purchase at www.microbilt.com/firstresearch. Current Liabilities to Net Worth by Company Size

The ratio of current liabilities to net worth, also called current liabilities to equity, indicates the amount due creditors within a year as a percentage of stockholders' equity in a company. A high ratio (above 80 percent) can indicate trouble. Financial industry data provided by MicroBilt Corporation collected from 32 different data sources and represents financial performance of over 4.5 million privately held businesses and detailed industry financial benchmarks of companies in over 900 industries (SIC and NAICS). More data available by subscription or single report purchase at www.microbilt.com/firstresearch. COMPANY BENCHMARK INFORMATION NAICS: 541410 Data Period Last Update January 2015 Table Data Format Mean Company Size All Large Medium Small Size by Revenue Over $50M $5M - $50M Under $5M Company Count 10335 23 308 10004 Income Statement Net Sales 100% 100% 100% 100% Gross Margin 100.0% 100.0% 100.0% 99.9% Officer Compensation 3.7% 2.2% 3.2% 5.3% Advertising & Sales 1.8% 1.8% 1.8% 1.9% Other Operating Expenses 91.8% 93.3% 92.4% 90.3% Operating Expenses 97.4% 97.3% 97.4% 97.5% Operating Income 2.5% 2.7% 2.6% 2.4% Net Income 1.3% 1.5% 1.4% 1.1% Balance Sheet Cash 14.8% 12.1% 14.7% 16.7% Accounts Receivable 34.1% 36.9% 36.7% 30.4%

Inventory 21.5% 26.4% 21.1% 18.5% Total Current Assets 76.5% 82.8% 78.4% 71.2% Property, Plant & Equipment 14.6% 10.4% 12.9% 18.5% Other Non-Current Assets 8.8% 6.8% 8.6% 10.3% Total Assets 100.0% 100.0% 100.0% 100.0% Accounts Payable 13.9% 14.7% 14.2% 13.1% Total Current Liabilities 35.4% 38.8% 35.1% 33.5% Total Long Term Liabilities 26.4% 22.1% 26.1% 29.4% Net Worth 38.2% 39.1% 38.8% 37.2% Financial Ratios Quick Ratio 1.38 1.27 1.47 1.41 Current Ratio 2.16 2.14 2.23 2.13 Current Liabilities to Net Worth 92.8% 99.1% 90.5% 90.0% Current Liabilities to Inventory x1.65 x1.47 x1.66 x1.81 Total Debt to Net Worth x1.62 x1.56 x1.58 x1.69 Fixed Assets to Net Worth x0.38 x0.27 x0.33 x0.50 Days Accounts Receivable 50 58 45 50 Inventory Turnover x0.01 x0.00 x0.00 x0.02 Total Assets to Sales 41.3% 44.0% 34.2% 46.1% Working Capital to Sales 17.0% 19.4% 14.8% 17.4% Accounts Payable to Sales 5.6% 6.4% 4.8% 6.0% Pre-Tax Return on Sales 2.1% 2.4% 2.3% 1.8% Pre-Tax Return on Assets 5.2% 5.4% 6.7% 3.9% Pre-Tax Return on Net Worth 13.5% 13.9% 17.3% 10.4% Interest Coverage x5.91 x7.74 x8.12 x3.97 EBITDA to Sales 6.5% 6.8% 6.5% 6.1% Capital Expenditures to Sales 4.2% 4.3% 4.1% 4.2% Financial industry data provided by MicroBilt Corporation collected from 32 different data sources and represents financial performance of over 4.5 million privately held businesses and detailed industry financial benchmarks of companies in over 900 industries (SIC and NAICS). More data available by subscription or single report purchase at www.microbilt.com/firstresearch. VALUATION MULTIPLES Interior Design Services Valuation Multiple MVIC/Net Sales MVIC/Gross Profit MVIC/EBIT MVIC/EBITDA Median Value N/A N/A N/A N/A

MVIC (Market Value of Invested Capital) = Also known as the selling price, the MVIC is the total consideration paid to the seller and includes any cash, notes and/or securities that were used as a form of payment plus any interest-bearing liabilities assumed by the buyer. Net Sales = Annual Gross Sales, net of returns and discounts allowed, if any. Gross Profit = Net Sales - Cost of Goods Sold EBIT = Operating Profit EBITDA = Operating Profit + Noncash Charges SOURCE: Pratt's Stats, 2014 (Portland, OR: Business Valuation Resources, LLC). Used with permission. Pratt's Stats is available at https://www.bvresources.com/prattsstats Industry Websites American Society of Interior Designers News for designers and business resources. Canadian Interiors Magazine News, links, and events. Center for Universal Design, North Carolina State University Universal Design information, technical assistance, and research. High Point Market Market week details, exhibitor list, market history and facts. Interior Design Magazine News, features, and trends. Interior Designers of Canada Media, events, links, education, and employment resources. Interiors & Sources Industry news and trends. International Federation of Interior Architects/Designers International organization news and publications. International Interior Design Association Awards, news, and continuing education information. National Council for Interior Design Qualification Certification program. The Interior Design Society Resources for residential designers. Glossary of Acronyms ASID - American Society of Interior Designers CAD - computer-aided design CAPS - certified aging-in-place specialist CSI - Construction Specifications Institute IIDA - International Interior Design Association NAHB - National Association of Home Builders NCIDQ - National Council for Interior Design Qualification