February 4/11, 2019: Volume 34, Issue 18
By Scott Perron
During my 20s in the early 1990s I went through a very sobering financial experience along with my family that permanently etched a painful scar in my brain. Since that time, I have probably taken a more cautious than normal approach to increasing debt for fear of ever repeating that scenario.
I am fortunate, however, to have learned many valuable best practices from other owners (Russell, Mitch, Doug and Brad) along the way, which has helped get us to where we are today. Our commercial property purchased in 2013 has a mortgage after renovation equaling 25% of the property value, and we have a small loan with a financier that we will pay off in the next 24 months or sooner. Outside of that, all of our equipment, inventory, samples, vehicles and hard assets are paid in full. Although it could be even better, our overhead is vastly less on average than that of our competitors, which allows our new company to be aggressive against the most seasoned dealer or big box.
Over the last 10 years, business has been steadily recovering and, for the most part, we all are benefitting. Without trying to sound alarmist in any way, this was exactly what occurred prior to the recession of 2007-2009—a time most of us would like to forget. The objective of this column is simply to advise you to take a long, hard look at your to debt-to-asset and debt-to-income ratios and prepare for the future.
In the event you have not purchased the property you work from, it would make good sense to lock in the best lease renewal options and make sure to leave yourself a reasonable escape clause during that period should you need to upsize, downsize or perhaps buy your next location. My advice is always to purchase rather than lease, as it is usually the first or only saleable asset of a flooring company. Due to the current acceleration in pricing, it is becoming a challenge to find commercial real estate at a value. Typically, even in good times like these, the hard assets such as FF&E, inventory and vehicles sell for a fraction of their true value during liquidation.
In addition, take a long look at any inventory you have that is over 180 days or a year old and decide why it’s still there. I know many of you hate to sell bad choices at a lower price or even a loss, but unless you are extremely wealthy or only desire a savings account filled with antique inventory for your older years, I can promise you the best move is to turn it into cash. Most who hang on to these assets never count the cost of carrying it along with the rest of your overhead, so in reality it becomes less valuable to you on a daily basis. Take the proceeds from the selling of bad decisions and use it to purchase items that turn quickly or help promote your business.
Next, get your best performance numbers in front of your banker and negotiate any debt reduction, credit line increases, merchant services and refinancing of long-term debt to a fixed rate where possible. Get prepared to have the proper capitalization even if you don’t need it now; you might need it eventually.
Finally, be careful not to put yourself in the position of being personally liable for some or all of your liabilities tied to the business as you may be setting yourself up for disaster in the event of another correction. Do your best to separate business and personal assets or liabilities by consulting your CPA or tax attorney.
Scott Perron is the president of 24-7 Floors and Floor4Pros based in Sarasota, Fla. He is also an industry trainer and motivational speaker. He can be reached at email@example.com or 860.250.1733.