July 2014

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On the Numbers July 2014 | Construction Equipment Distribution | www.cedmag.com | 55 I was reading my financial journals over the weekend and noted comments by Richard Lehmann in Forbes (June 16 issue) where he states that it is the resilience of business that is propelling growth as opposed to the various Fed programs geared to pump up the economy. And, of course, when I hear the word resilient I immediately think of AED members and how they continue to manipulate their way through the business cycles associated with the construction industry, including the grand- daddy of them all that started in 2008-09. Lehmann also noted that our resilient corporations are reflecting growth in earning without the top line to go along with it. With the "sales" line lacking, cost-cutting, downsizing and productivity gains have been used extensively to grow profits and generate "economic growth" that keeps pumping stock values higher and higher. A great program if you can pull it off: flat sales but an increasing earnings stream to generate economic growth. Being able to provide these types of earning moves is a real positive, but if you throw in some financial engineer- ing the results can become even better. Producing exciting annual numbers is only part of the puzzle to get maximum shareholder value. Financial engineering also has to be considered. In short, how does management take steps to increase shareholder value over and above what earnings provide? What public companies are doing from a financial engineering standpoint are three things: 1. Leverage the balance sheet to generate cash to buy back shares, which thus increases earnings per share. 2. Use their cash balances to buy back shares. 3. Take advantage of these low interest rates and cash balances to make acquisitions of poorly run operations, which when brought under the control of the acquirer will add to earnings. If an analyst reviewed your company what would they say about your ability to manage earnings; would you be a "Buy," "Sell" or "Hold?" My point is there is no reason why an AED dealer can't duplicate what the public companies are doing in terms of downsizing, productivity and overall cost-cutting. But if you don't know the answer to the above question or the results provided by these activities that's a problem, because you should. In addition, you should also have discussed financial engineering options and at least been able to make informed decisions about banking terms, financing options, downsizing the balance sheet based on current sales levels, M&A opportunities or product line optimization. I encourage you to review the The Strategic Profit Model in the front of the new CODB Report, because it covers both the earning and financial engineer- ing aspects of running the business. These are important financial issues that need to be reviewed regularly. If you plan to transition out of the business within the next five years or plan on making acquisi- tions to improve the value of your business, you need a plan to maximize EBITDA by increasing productivity and properly finan- cially engineering your company. You also need a detailed tax plan for individual and company tax basis, including projected changes in tax basis applying anticipated changes to the tax laws. It does you no good to maximize EBITDA if 40+ percent goes to Uncle Sam when the deal closes. AED's new performance peer group program is designed to help dealers understand and take action to cut costs, right-size when necessary, improve productivity and financially engineer their balance sheets with a goal to increase the value of those shares sitting in your personal "vault." This is not going to be a typical 20 Group program – your group will review operating results but also cover the topics discussed in this column. This will be a flexible program where we match dealers by size and provide coaching as requested for better overall performance and value. Size of groups will be flexible, as well. I see no problem working with as little as five members if they are of similar size and truly interested in reaching the goals they have set. Two meetings per year, monthly or quarterly reporting, virtual discussions and updates – this is an investment that is sure to provide a significant ROI every year. I want to hear from you. I need dealers in the $200 million plus range for a group. And $50 million and up are also required. Others will be created for any size dealer, as long as we can get the dedicated players. So, are you ready to find out if you are a "Buy," "Sell" or a "Hold"? What's In Your Vault? How do you financially engineer increased profit without increased earnings? (Hint: AED peer groups and coaching raise the tide on everyone's performance.) BY GARRY BARTECKI GARRY BARTECKI (gbartecki@ aednet.org) is founder of Dealer-Rental Success LLC, is a financial consultant to the equipment industry. He can be reached at 708-347-9109.

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