Construction supply dealers who hope to grow with housing’s nascent revival must trim their debt burdens now, ProBuild’s former president and a one-time senior officer at the giant LBM operation urged fellow dealers Thursday.
“The recovery is upon us, but I don’t think we’re out of the woods yet,” Paul Hylbert said in Orlando, Fla., at a breakfast hosted by ProSales during the International Builders’ Show. “We’ve had huge numbers of casualties.”
The good news, he said, is that many of the dealers still standing have strong management teams and thus should be poised to profit. But he cautioned that “any dealer with a significant amount of debt is going to be facing challenges.” That’s a widespread problem, he said; one gypsum manufacturer told him that the price increase it’s implementing is going to cause 17 of its dealer customers to max out their credit with the vendor.
So where will the money come from? Hylbert and fellow ex-ProBuild executive Steve Swinney, who have since become partners in the Denver-based investment firm Kodiak Building Partners, offered these suggestions:
- Review internal sources of capital first. Board members, current shareholders, management, and employees all might be willing to provide funds for growth.
- Reach out to business partners, such as landlords and suppliers.
- Outside that circle, talk to local business professionals and wealthy individuals in the area. Government funds also might be available, such as the community development block grants that 84 Lumber secured two years ago.
- Local banks and financiers may be willing to lend, but don’t stop there. “Look at the larger companies,” he said. “You shouldn’t be shy about hunting down these folks. … The asset-based lenders are out there looking.”
- As a general rule, promising equity in exchange for funds can be expensive, but in some cases it’s preferable to borrowing. If you go this route, however, “make sure you know who you’re partnering with,” Hylbert cautioned.
Along with these actions, dealers also should work to improve their current balance sheets and be willing to renegotiate banks loans to get better terms, Hylbert said. His bottom line: Debt kills.