Generating cash and boosting access to credit are of prime concern to LBM dealers today, especially in the face of improving market conditions and growth opportunities, panelists at the ProSales 100 Conference said March 8.
Controlling inventory, maximizing turns, and imposing standards for accounts receivable and reviewing them regularly are all good ways of generating internal cash. When it comes to external cash, debt is the dealers’ typical default position, but panelist Matt Ogden, managing principal, Building Industry Partners, told dealers at the gathering in New Orleans that equity partnerships can be a better risk than debt. Owing less of a business with a partner can unlock incredible economic opportunities, he says.
While a lot of dealers may be hesitant about giving up a portion of the business--especially a family business, built over the generations--to a partner, Ogden says that there is an enormous cost associated with debt that isn’t reflected in the cost of the loan and its associated fees.
“When you go to a lender you are dividing your cash flow," he said. "The bank is getting the first cash stream, and you get the second. In down times, that leverage causes your profits to decline. That’s the leverage you put on your business.
“With equity, you’re sharing the risk, the upside and the downside," Ogden continued. "I would argue that equity is a much less dangerous form of capital."
Ogden said the private equity world has developed greatly over the past 10 years, and dealers who are interested in looking into equity partnerships have much to choose from. There are generalists, groups that focus on growth, some on distressed companies, others that demand a majority share as well as those that take only a minority interest in the companies they partner with. Options abound.
Panelist Rick Kolaczewski, CFO of US LBM, whose company has used private equity partnerships to acquire new yards—13 acquisitions over the past three years alone, prompting moderator Ruth Kellick-Grubbs to call the dealer the poster child for this type of expansion—said communication and constant contact is key to working with equity partners. “We have a call every Friday with BlackEagle (US LBM's equity partner), and it’s been good,” says Kolaczewski.
Bringing on an equity partner won’t harm an LBM dealer’s relationship with his banker either, a fear brought up by Kellick-Grubbs.
“No, I don’t think so,” said Wells Fargo executive Bird Anderson. Anderson, director of the bank’s homebuilder group, said, “It’s neither a good thing or a bad thing,” just another variable to consider in the equation.
What is definitely good news for the LBM industry, Anderson says, is that rebound in the housing industry is being followed with a rebound in banks offering credit to builders, at least in those regional markets (like Texas and the Washington, D.C., metro area for Wells Fargo) where the market shows real growth.
“Two or three years ago, we had no demand for money to buy lots," Anderson said. "No one was knocking on our doors. Boy has that changed.” The national builders looking to buy A and B lots—at least those who haven’t left a trail of destruction, he said wryly—are finding banks receptive to their advances for credit.