With Recovery in the Distance, Contractors Need to Develop a Long-term Business Plan

I recently returned from the Associated Equipment Distributors (AED) annual meeting. As you can imagine, attendance was down, with even manufacturers limiting the number of people they sent.

My goal in attending the meeting was to find out what dealers were doing to plan for the next 24 months, and how they intend to get contractors financed when they buy a piece of equipment. I also wanted to hear what the various financial sectors were saying about interest rates and the financing options they were offering to existing and new customers.

As a result of the meeting, I don't have much good news to report, but across the board, it is not as bad as I thought. What you do and where you work will determine how much downside risk you have to cope with.

Twelve, 18 or 24 - take your pick. These are the number of months both contractors and dealers suggest it will take before we see a turnaround. Hence, the "intermediate" planning title of this article. Again, where you are and what you do will determine if you fall within these guidelines or even beyond them.

Survey summarizes industry outlook

The annual Wells Fargo Construction Industry Forecast was completed in October and early November 2008, and released at the AED Convention on January 14, 2009. This well-done report is based on telephone interviews with over 900 executives of construction contracting and equipment distribution companies from around the country. It also contains regional data to help you with your planning. (The complete report can be found at www.forconstructionpros.com/pdf/wellsfargoforecast.pdf.)

As part of the forecast, Wells Fargo produces an annual Optimism Quotient for assessing and comparing respondents' expectations for increased local construction activity for the coming year compared to the current one. A score of 100 or more represents high optimism, while a score above 75 represents more cautious or measured optimism.

From 2003 through 2007, the Optimism Quotient rose from 89 to 109, before slipping back to 80 for 2008. For 2009, it plummeted to 42. In summary, 43% of contractors and 39% of construction equipment distributors foresee less non-residential activity, while 55% of contractors and 48% of distributors expect residential work to decrease. All in all, an average of 28.5% of the respondents who feel there will be decreasing activity believe it will be 12 months before we see improvement; 19.5% believe it will take 18 months; and 24% predict it will be 24 months before recovery.

So there you have it - the majority of contractors and dealers expect a decrease in construction activity in 2009 and beyond. And there you sit in your office planning out 2009. But based on what we are saying here, your planning should be extended to include an 18- to 24-month period using different sales levels to arrive at defensive financial plans in order to ensure adequate cash flow.

Uncertain financing calls for a plan
The report also indicates that contractors plan to buy used equipment in 2009, with some expanding their fleets. Of note is the fact that the average age of contractors' principal equipment increased from five years in 2006 to eight years in 2008, with an expectation of over 10 years in 2009. If there was ever a time to work out a maintenance contract with your local dealer, this may be it.

The Rental Overview in the report suggests that rental rates will remain steady or be slightly lower because of competition for rental business. While more contractors use rental (60% planned to rent in 2009), they mostly do so to meet unusual demands or the need for specialty equipment.

Financing will certainly be an issue in 2009 and for the next 12 to 24 months. If you currently have working relationships with your financial institutions, it would be best to keep them in play and put in the effort to enhance them. (See "Don't Get Squeezed by Tight Credit", Running the Business, October 2008, for more on this topic). Outright purchases may now require a down payment. Good credit ratings will be a must.

Certain manufacturers will have better captive finance programs than others. Rent-to-sell transactions may be the way to go to build equity in a unit. Leases may or may not be available. Selling used units and using a like-kind exchange program to defer taxes will provide more cash flow for the down payments required to buy new.

In summary, the 18- to 24-month plan is what you need. Keeping in mind that "cash in king," cash budgets should be part of the planning. Compare your plan to actual results and be proactive with changes. Work hard, but work smart.

Garry Bartecki is the managing member of GB Financial Services LLP and VP Finance for the Associated Equipment Distributors. He can be reached at (708) 347-9109 or gbartecki@comcast.net.