Every week, we will seek out expert advice to help a small or medium-sized company overcome a key issue it is facing in its business.
Marc Gauvin was all set to launch a significant expansion of his company’s warehouse after a major contract rolled in.
But with the global economy in trouble, the client put its project on hold for at least a year, causing Mr. Gauvin to do the same with his expansion plan.
Now, however, he is having second thoughts, wondering if he should still go ahead with the renovation, or wait until the economy gets better.
The founder and president of Burlington, Ont.-based Aluminum Surface Technologies , a 35-employee company that provides aluminum coating for vehicles, had planned to spend about $600,000 to expand its 26,000-square-foot warehouse by nearly a third to 34,500 square feet. It was to help accommodate the project, which would have brought in $600,000 a year for five years.
Aluminum still has about 300 other customers, and will bring in about $4-million in revenues this year.
Mr. Gauvin still wants the additional space – the warehouse is getting crowded and he thinks other major clients will eventually come through the door.
But he’s worried that if he adds on to his plant now and that big contract – or another – doesn’t materialize, he could face a financial squeeze. He’s concerned that if he finances an expansion over a planned 10 years, rising interest rates could make borrowing more expensive and, if things get a lot worse, a bank could even call a loan.
“People say you need to spend to help the recovery. But I remember 2008, when things went off the cliff,” he said. “If that happens again, it could be deadly to expand.
“I’d love more space, but you never know what will happen.”
The Challenge: Go ahead with an expansion now or wait until the economy improves?
THE EXPERTS WEIGH IN
Tony Tartaglia, managing partner, BDO Dunwoody
To help him decide what to do, he needs to do a sales forecast, and redo it often. Projections he made based on what the economy would look like three months ago would look different now. So he needs to re-evaluate. Then he can play around with the contract and see what would happen if it came through or not.
If he sees that he’s taking on too much risk, then he shouldn’t commit. But he should play around with the numbers until he’s comfortable. Present a bunch of different scenarios. What you’re really trying to do is get focused on the risk of expansion.
Dave Zimmel, vice-president of private enterprise, MNP LLP
During the downturn in 2008, many companies took it upon themselves to expand because interest rates were low and construction costs were slashed. So maybe he can expand, but he needs to negotiate.
Go to the bank and say you want to amortize the loan over a longer period so payments are lower. And construction prices are soft, so negotiate better terms and build a building at a more reasonable cost.
If he can’t use the space, he should consider renting it out to someone else. Put in good terms and a renter might think it’s a good deal and the person can provide some cash flow to cover the cost of building the expansion. In the rental agreement, though, say we can evict you with six months’ notice. That’s a way to get some money until his contracts come through.
Cam Clark, owner of Airdrie, Alta. Cam Clark Ford Auto Group
We’re building a new $22-million facility and had the same concerns. But it comes down to knowing your customer. We looked at our business plan again and ran numbers on how many leases were due over the next two years; we tried to figure out how many would return for maintenance; how many would get into a wreck; how much repeat business we’ll get and so on. We tried to understand what the customer would do, and then make sure our expenses would coincide with this plan.
He should talk to customers, too. We don’t get too crazy with economic discussions, but we pay attention to our customers. He needs to research what’s going on in their company and understand the challenges they face, too.
THREE THINGS ALUMINUM SURFACE TECHNOLOGIES CAN DO NOW
With the economy in constant flux, revisit sales forecast projections every three months.
Negotiate a better deal with the bank. The construction sector is also more willing to negotiate in tough times.
Talk to customers
Don’t be shy to talk to customers to gauge their plans. Understanding their challenges may shed light on whether contracts will come in as expected.
Special to The Globe and Mail
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