Prepping for Uncertainty: The Smartest Plans Include A, B and C Options

By Michael Collins

There is no better time than January to look back at the prior year and forward to the year ahead, searching for lessons in how to improve door and window manufacturing. Starting with merger and acquisition (M&A) activities, 2022 produced only seven acquisitions, versus sixteen in 2021. Possible reasons for a softer acquisition climate include the fact that buyers and sellers struggled to agree upon how to treat any non-sustainable impacts from COVID-19 and inflation on companies being sold. Fortunately, most manufacturers raised prices much more in 2021 than they did in 2022. In other words, most fenestration companies are not entering 2023 with component and product prices that are highly inflated, versus 2022 levels.

As we turn to the year ahead, it’s natural to wonder whether there will be a recession. A recent Wall Street Journal article canvassed economists working at two dozen of the largest banking and financial institutions that transact directly with the Federal Reserve. Just over two-thirds of those economists predicted there will be a recession in 2023.

I hesitate to take the contrary position to so many learned economists—all of whom devote their entire professional efforts to closely monitoring economic signals. Let’s assume they’re right and there is going to be a recession this year. All signs point to the fact that this is not going to be your parents’ typical recession. Also, we are not in touch with a building products manufacturer or distributor that is not working from a healthy backlog of new business.

Positive Signs

Inflation has been a huge challenge, but the annualized inflation rate peaked in June 2022 at 9.1%. Supply chain challenges have loomed since the start of COVID-19 and continue today. Otherwise, this has been the most palatable lead-up to a recession that I’ve experienced in my nearly thirty-year career. Reduced spending during the pandemic has left the typical homeowner with more cash and less debt than in the past. For these reasons, we have a hard time believing a major recession looms. Rather than failing to heed the warnings of experts, though, we recommend running several scenarios for 2023 market performance. Growth cases are probably already part of your planning, so spend some time on how you would respond to scenarios where the market is flat or down 5%, 10% or 20%. These seem unlikely, but if you have a plan B (and C and D) prepared for when you need it, you’ll be that much further ahead if the market softens.

Pay special attention to inventory levels. We simply recommend stress-testing your levels and delivery availability of key components to make sure our company will not be caught shorthanded if component delivery times waver in the year ahead.

Another bit of advice we can’t resist passing along concerns all the potential new customers that most door and window manufacturers were forced to turn away in recent years, to ensure steady supply to their existing loyal customers. While those companies were undoubtedly disappointed when they hung up the phone, they also learned that your business does not chase every last dollar, to the possible detriment of its loyal customers. Those customers already know that you put your customers first, so now may be a great time to reach back out to them. Best case, you win a
new customer. Worst case, you confirm that you made the right decision last year.

Michael Collins is an investment banker and a partner in EquiNova Capital Partners. He specializes in mergers and acquisitions in the door and window industry.
mcollins@buildingia.com

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DWM Magazine

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