| LOOKING AHEAD - 2011
Recommendations for critical strategic problems and opportunities |
 Pete Smith |
|
Introduction Happy New Year!
May 2011 be a healthy and prosperous year for you and
your family. In previous issues
of “Looking Ahead,” we have addressed operational and financing issues:
hoarding cash, training, labor productivity, customer E-communications,
diversification, industry consolidation, etc. While these issues
are still relevant, this issue of “Looking Ahead” addresses economic trends and
how these might be used to improve your sales, number of active customers and
your bottom line. Four Year Perspective For many electrical
apparatus service companies, 2008 was a record positive year, 2009 a record
negative year (at least since 2004), and 2010 a year of recovery. Not only were sales off across the board in
2009, but most businesses lost at least one or two of their top customers. The trend to move manufacturing offshore
continued; however, the
greater problem was that the cash flow of many businesses was unable to
withstand the almost shut-down of the banking system after the collapse of the
Lehmann Brothers in September of 2008. Most
economic indicators point to a 2011 better than 2010, at least for top line
sales. As usual, this
assumes no major geopolitical changes: wars, major acts of terrorism, etc.
Whether that sales increase will translate to improved bottom line profits is up
to you! Good News / Bad News J Demand
for raw materials and
certain manufactured products will increase with the continued growth of
developing nations, specifically China. US companies that export products have benefitted
and will continue to benefit from this growth. The Vice-Chairman of General
Electric is relocating to Hong Kong. J Food
and energy demands will
continue to increase in both the US and worldwide. Prices for coffee, sugar,
and other food commodities are up from 30% to 60% in 2010. Starbucks has raised
prices on most coffee products. Coal and oil prices are headed north again; the
average pump price is now over $3.00 a gallon for regular gas. Investment in
wind and alternative energy sources remains high in spite of the higher cost
per kilowatt hour than conventional energy. JThe
results of the November elections
and the recent legislation to continue the Bush tax cuts and to provide
incentives for business investment are the first bright spots for business
under this administration. L Inflation
is coming; inflation is coming; inflation is coming! The abuse of the government debt both
in the US and abroad is catching up at the federal, state, and local levels. By
any “business” financial measures, the US government, many foreign governments,
most of the 50 states and hundreds of local governments are bankrupt. Greece,
Portugal, Spain have already aired their financial crises. The European Union
is inherently unstable. The Chinese have recently raised their government
interest rate to slow down their nation’s inflation – a very surprising move! The
trickle-down effect of these macro-economic crises will impact every business
including yours! L
The price increases in almost all commodities, including copper, are the result of both increased real
demand and some speculation by commodity traders. Either way, they are the
seeds of inflation as these commodities are turned into products and sold.
Increased prices to the end user are needed to maintain margins, but hard to
obtain from the customer especially for service businesses. L
Residential and commercial real estate development will remain low. There is still a
surplus of real estate available from foreclosures and desperate owners. Lower prices
are stymying any significant construction.
A local company near my home rents out construction trailers; another company
rents out construction cranes. Both of these companies have product in their
storage yards piled as high as I have seen in thirty years. L
The new health care legislation
and certain senseless provisions within it, such as requiring 1099 forms for
every vendor, will cost you more money. Increased taxes, fees, and regulations
dreamed up by government employees (at all levels) who have never had to meet a
payroll are unavoidable. At least the new Congress in 2011 may be able to slow
down some of these increases at the federal level. J L
Job recovery will be slow. Ninety-nine
(99) weeks of unemployment benefits is a license to take a two year vacation at
the expense of business owners who foot the bill for unemployment insurance.
(Many of these “unemployed” also moonlight in the underground economy and are
paid in cash!) The upside is that as these benefits finally run out, there may
be a better pool of unemployed talent from which to hire new employees. I have
visited a number of shops in the latter part of 2010 that are understaffed,
have work on the floor to be done, but are not hiring new full time employees because
of the lack of good talent available and the, still to be determined, costs of
the new health care package. J L
The banks have money to lend.
The credit and paper work requirements to receive these loans are becoming more
onerous. The SBA now requires certified
appraisals on business loans over certain limits. Collateral requirements are
becoming more stringent. J L
Business buying and selling activity has increased. Global merger and acquisition activity
is up 18% in 2010. Public companies have the cash available to make
acquisitions, and private equity groups are activity seeking new acquisitions. Generally, these are bigger deals than
individual companies in this industry. However, in the past six months, I have
seen some of the trickle-down effect into this industry as select
companies are looking to make acquisitions. The core problem
is that the selling companies have a jagged track record of profits and cash
flow from the up, down, up results of 2008-2010. Potential buyers don’t know
how to predict the future and are generally pessimistic in their financial
projections. Potential sellers are overly optimistic in their projections,
seeing 2009 as an anomaly rather than part of the overall economic cycle that is
inherent in this industry. Some of us remember the economic down cycles in the
early 1980’s, again in the mid-1990’s and then in the 2003-2004 time frame. Recommendations Customers: Look for potential customers that are
exporting. Find out from your local Chamber of Commerce or other business association
which companies in your area are exporting. While the US economy is predicted
to improve, the real action will remain overseas. In the past I have
recommended going after infrastructure business: water works in particular.
Many of your municipalities are broke. Prices will be negotiated to the bone
and getting paid will be a hassle. Be
careful! Look for new
customers in the food, energy and commodity industry. These include suppliers
and companies supporting those industries. Be careful with customers in or
serving the new construction industry. The silver lining in the construction
doldrums is those companies that produce for or serve that aftermarket. Repairs
and energy efficiency improvements of current residential and commercial real
estate will increase as these structures age.
Personally, I
think natural gas will be the preferred source of energy in a decade or so with
nuclear being the long term answer over the next century. Natural gas is
cleaner and more efficient than most other fossil fuels; less capital
expenditures are needed to deliver the product to the end user. The US has huge
reserves underground. However, demand and the price of natural gas remain low.
Political and popular attentions remain on other alternative energy sources. Pricing: Work hard to increase prices every
day. If you are not getting a pricing complaint from at least one in ten to
twenty jobs, you are probably leaving money on the table. Make your quotes
subject to changes in copper prices. Copper has increased around 30% in the
last 90 days and is still climbing! If
you are not aggressive on pricing, inflation and increased commodity prices
will freeze or decrease your real dollar bottom line. Health Care: If you are providing 100% of the
family or even 100% of the employee’s cost for health coverage, re-look at that
policy. There will also be some “quick
fix” programs that some new or very small insurance companies or other
companies looking for a fast buck will dream up to “help” business owners keep
their cost down in light of the new health care legislation. Be very careful if someone offers you a new
health insurance package that seems too good to be true – remember Bernie
Madoff. I don’t know how
the final legislation will treat the deductibles. I’m no expert; I admit I haven’t
read the 2000 pages in the bill. Investigate
the possibility of increasing the deductibles and sharing that cost directly
with your employees. It may cut down on the trips to the doctor for a runny
nose. Loans: If you have any variable rate loans,
convert them, or at least a part of them, to a fixed rate, even if it costs you
four, five or more points. Many of you maintain a line of credit that never
reaches zero. At one time lines of credit were supposed to be at zero at least
once a year. Their purpose then was to cover financing needs for annual
cyclical or seasonal trends related to particular industries. Today, many
companies rely on their lines of credit to operate. The balances never go to
zero; the interest is variable, and the note is callable by the bank in 90
days. Your banker has no reservations
and all the power needed to increase your variable rate as the bank’s cost of
funds increases. Buying
/ Selling Deal
activity within this industry was very slow in 2009 with some improvement in
2010. For a few months the number of listings of Business for Sale in Electrical Apparatus could be
counted on one hand with fingers left over. That count has started to increase. Business appraisal
has never faced a tougher set of problems than today. Business valuation is a
prophecy of the future. While history is usually the best indicator of the
future, there are so many “unknowns” that make the future speculative and
history unreliable: economic, geopolitical, energy, etc. As I mentioned
before, the differential in price between buyer and seller is much greater now
than after a run of three, four, or more years of consecutively increasing sales
and profit years. My business focus
has shifted more toward business advisory services:
Call me in confidence to discuss any of these services.
There is no cost or obligation for an initial phone consultation. I have enjoyed working with business owners
in this industry for the past thirty years and look forward to the next decade. For online
copies of the “Looking Ahead” newsletters, visit the following links. http://www.value-a-business.com/EAS/LookingAhead2007.shtml http://www.value-a-business.com/EAS/LookingAhead2008.shtml http://www.value-a-business.com/EAS/LookingAhead2009.shtml
includes 2010 http://www.value-a-business.com/EAS/LookingAhead2011.shtml
this issue Thank you.
Pete
Smith Member
of the Institute of Business Appraisers Accredited
in Business Appraisal Review (ABAR) petesmith@value-a-business.com http://www.value-a-business.com Office:
(205) 987-5315, Cell: (205) 837-4845 |
