Time to Start Worrying About the Better Times Ahead
By Troy Taylor, Larry Comegys and Travis Hendren, The Algon Group
Even though talk of a housing recovery may seem a bit premature with sales activity and pricing power still weak and inventories high in most housing markets, the tunnel is at least coming into focus and there have been a few flickers of light.
And for savvy business owners, that means it’s time to start worrying about — and planning for — the better times ahead.
Many builders today are not prepared for the market's return. They have spent much of their time during the housing correction winding down their companies and otherwise adjusting to and surviving the difficult market realities.
Now that we're nearing the beginnings of a rebound, it’s time for builders to ask themselves if their business is appropriately capitalized for when the market returns.
The rebound certainly will not be a return to the golden days of the mid-2000s, but there will be growing consumer demand — and there will be less competition.
The government’s first-time home buyer tax credit has already breathed some life into first-time buyer demand and this activity could lead to some growth across all segments of the housing market as consumers become more comfortable with economic conditions and begin to see their home purchasing power strengthen.
Will your business be ready to take advantage of the increase in activity when the market turns?
There are steps you can take now to prepare for the better times — while still maintaining your diligent focus on cost management and capital preservation.
Your First Step — Review Your Balance Sheet
The first step you should take is to do an honest assessment of your business. This is a particularly difficult task for many, but it must be done.
The easiest place to start is to review your balance sheet. If you really want to begin positioning your company for the eventual recovery, it’s imperative that you review your balance sheet as soon as possible.
To do this, the question you must ask yourself — and honestly answer — is:
- Are my assets, under realistic and downside projection scenarios, worth more than my liabilities?
This simple question addresses the most basic premise about your business — does it have long-term value?
If your answer is “no,” you have a difficult decision to make. If the loans are non-recourse and your assets are over-valued, it’s time to meet with your lender.
Since borrowers are a lender’s best hope for recovery, lenders do have the option to re-price or restructure loans. But, if your lender won’t restructure or re-price your loan, the only option you may have is to turn your assets over to the bank.
Get Your Lender to the Table
However, if the debt is recourse, your lender won’t restructure the loan and your personal assets are protected by smart preplanning, you should consider Chapter 7 or 11 bankruptcy. Both are last resorts, but the threat of bankruptcy may get your lender to negotiate.
The point here is to develop a plan and exhaust all possible avenues to get your lender to the table.
Every part of the company ought to be analyzed. To ensure that your personal assets and family are protected, you should probably seek outside, expert advice. Your primary responsibility as the owner at this point is to keep focused on overseeing operations of the business and the team. Having advisors will allow you to do this more effectively.
Be Realistic About Your Balance Sheet
If your answer to the question about your assets' worth is “yes” and your business does have long-term value, your balance sheet still may need restructuring.
This is not a complicated process, but it does require you to be disciplined and honest about your business, its current condition and the value of its assets. And as the business owner, you will need to accurately forecast expenses.
This realistic business plan ought to include at least a 12-month cash flow model and a plan to work with lenders to re-price assets to market values. Any plan that is presented to lenders must be realistic and supported by facts.
You will need to develop — and explain — the benchmark you used to determine why you believe your assets are priced appropriately. During the process, ask if an informed person in the industry will buy these assets today at the value shown on the balance sheet.
Finally, make sure to review your personal planning to determine and ensure that your personal assets are protected.
Keep in mind that reviewing your balance sheet is only the first step in preparing for the housing recovery. Your business as a whole should eventually be reviewed — including management, marketing strategy and product mix. But, reviewing your balance sheet will probably be your most important step.
A problematic balance sheet is one of the quickest indicators of a failing business, so don’t be afraid to seek out support and guidance from legal and financial advisors.
The goal of starting now will clearly justify your efforts. A lean builder with a clean balance sheet will be one of the first ones to attract new capital as the recovery takes hold and capital becomes available.
The Algon Group is a financial advisor and investment banking firm based in Atlanta that specializes in distressed situations. During the last 12 months, the Algon Group has successfully advised home builders and developers on restructuring a combined debt of more than $3 billion. For more information, e-mail Troy Taylor, president, or Larry Comegys or Travis Hendren, managing directors; call them at 813-220-4630; or visit the Algon Group Web site at www.algongroup.com.
Take Control of Your Finances
“Accounting & Financial Management for Residential Construction,” available through BuilderBooks.com, is a solid resource for builders, remodelers, developers and contractors that provides detailed information on how an accounting system operates and the basic principles for processing financial data.
To view or purchase this publication online, click here, or call 800-223-2665.
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