Boatyards may be particularly well- positioned to take advantage of the new day in boating expected to dawn as the global economy comes back to life, says Michel Weisz, a Miami attorney who has represented yacht builders.
Before the recession, builders were selling too many boats to too many people who couldn't afford to buy them, says Weisz, a commercial litigation attorney with the firm Berger Singerman.
No down payment, no income-verification loans were the engine that powered the unsustainable levels of boat production and turnover in boat ownership of the last few years, he says. A major contraction in the industry was inevitable, along with a devastating loss of businesses and jobs - maybe as much as 50 percent.
"The world became a place where anyone could afford anything at any time," Weisz says. People who weren't even that interested in boating bought boats.
"We've gone back to the business model of the 1950s," says Weisz. Buyers today have to pay 30 percent down, be well-qualified and document their incomes. Buying a boat isn't nearly as easy anymore.
Weisz says that's going to bring a different customer back to the dealership - the avid boater. Again, it's a throwback to the '50s and '60s, he says.
Weisz outlined his views in a seminar on boat-business economics last fall at the International BoatBuilders' Exhibition & Conference in Miami.
"People who bought boats in the '50s and '60s loved boats and used their boat," he says. "That customer model changed in the '70s, '80s and '90s. People bought boats who didn't need a boat and [it turns out] really didn't want a boat."
Weisz says most boaters won't be buying a new boat every three to five years anymore. They're going to keep their boats longer and use them more, he says, and that should be a boon for the boatyard.
"People are going to want to keep their boats in good shape, and they're going to want to update them," he says. Post- recession, there likely will be fewer yards, but they should be getting work. He anticipates slow growth - 2 to 3 percent annually - in the core business of maintaining, repairing and upgrading yachts.
Weisz says the key to survival is "cash management" - cutting costs and maintaining a positive cash flow. He says this may not be possible for those who borrowed heavily against the rising value of their properties, then saw their properties plummet in value and their incomes shrink dramatically. Now their debt payments exceed their incomes by a wide margin.
"Analyze your business," he says. Analyze your equity, your liabilities, debt, income, costs. "Make sure what you're doing makes sense financially."
It may not.
To cut costs, Weisz recommends:
- Reduce inventory to the minimum necessary. "Sell it and keep the cash," he says. "What you need in this market is cash."
- Renegotiate terms with vendors; restructure your debt with creditors. He says many are willing to do this to avoid losing their businesses and to avoid the costs of foreclosure. "Nobody is waiting in the wings to buy your property," he says. "It is in their [the creditors'] interest to keep you in business." You may have to offer additional collateral or personal guarantees to extend your credit.
- Re-evaluate your lines of credit and decide whether you need them (and need to be paying interest on them). Understand that credit is very tight. "You can't get it," he says. "That's the reality. Banks are trying to reduce their credit limits [not increase them]."
- Keep a close eye on your receivables. "Don't let your customer debt go out too far," he says. Use liens on boats where necessary to collect on an outstanding debt. Weisz says a company can lose 15 to 20 percent of its income in bad debts. Do credit checks on customers before doing business with them.
In an economy in which cash is king, you can get it by:
- Borrowing, though that is very difficult today. You can try to refinance your debt. That, too, is a difficult option in this economy.
- Bring in new partners - new investors - who might be willing to buy you out once you're out of the woods. But remember, "You're not going to get the price you could several years ago."
- Sell the business outright.
- Find tenants to run their businesses out of the yard - especially tenants who add value to your business.
- If you rely on transient traffic and that's way down, as it is in Florida, develop a local and regional customer base.
If after doing all this you still can't pay your creditors and they've given you a deadline you can't meet, you have to decide whether to declare bankruptcy.
There are several options, Weisz says:
- Out of court. Negotiate with your creditors, liquidate your holdings and come to a negotiated agreement on how you will pay off your debt.
- State court proceedings. Liquidate your holdings and pay off your debtors in a negotiated settlement overseen by a state court.
- File for bankruptcy under federal bankruptcy law. Under Chapter 11, a business can reorganize under court supervision with the intention of remaining in business while it works out a repayment plan with creditors. Under Chapter 7, the business liquidates and negotiates repayment of creditors under court supervision and administration of a trustee.
Chapter 7 doesn't have to be the end of your business. "You can buy your business out of bankruptcy out of your personal assets," Weisz says.
If you've got the gumption to try again, it can rise up out of the ashes like a Phoenix.
This article originally appeared in the February 2010 issue.