Rental Lessons Lived and Learned

Feb. 1, 2005
At Hageman, Stansberry & Associates, our primary business is selling rental companies. When selling a business, you have to know everything about it:

At Hageman, Stansberry & Associates, our primary business is selling rental companies. When selling a business, you have to know everything about it: its strengths, weaknesses, employees, customers, owners, fleet, facilities, financial results, etc. A business gets more scrutiny than ever when it's time to sell. The scrutiny starts with us as the intermediary and then it is scrutinized from potential buyers, from accountants and from attorneys.

It is our job to share our industry knowledge and experience to maximize the price achieved by a seller.

Before my company gets involved with a seller, a series of actions (or inactions) affecting the direction and profitability of the company taken prior to the potential sale will have a direct impact on the value of a business. Fred and I always learn something new from each deal we do. When we stop learning, we tell ourselves we need to move on to other ventures. Whether a rental company is looking to sell its business or just maximize its profitability and potential, here are a few of the lessons we've learned about certain actions over the years:

  1. Don't Coast.

    One of our favorite sayings is “you are either going forward or going backward, you never stay the same.” We live and swear by this mantra, and so should you — regardless of your business or place in life. So often we see rental business owners trying to maintain the status quo. They are not sufficiently reinvesting in their rental fleet, facilities, delivery trucks or other assets. They are not marketing their business or seeking new customers. They are not developing their employees but rather tolerating the shortcomings of their existing ones. They are comfortable and happy with staying the same, which means, frankly, that they are not moving forward, but backward very slowly. We see this most often in long-time businesses or businesses with absentee/less involved or remote ownership. You have to be proactive in all areas of your business and do more than just the daily grind. Develop a diverse customer base — don't rely on the same old group of customers. Employees should be customer oriented — training and recruiting should be ongoing growth processes. Equipment age should average five years or newer, present a good appearance and, most certainly, be well maintained.

  2. It's Not All About You.

    One of the reasons many owners come to us to sell their business is because they are burned out. The patterns of these businesses are fairly typical — an individual started the business, probably grew it quickly, gained a good reputation, and then the business leveled off. We believe a rental store owner needs to be involved in the business, but often we see store owners that are too involved or can't delegate even the most basic of tasks. A good organization must build a good organization underneath itself — the owner can't do it all and eventually the business will stagnate if the owner does. Give your employees responsibility but also make them accountable for their actions. Have faith that the employees you trust will do their jobs — you don't have to touch every order, or control every event. The company should not be “Joe Smith Rentals” but rather “Smith Rental Center.” We believe in personal relationships with customers, but putting customers in the mind-set of doing business with the organization, not an individual, is a lesson we've learned and taught many times. When it comes time to sell your rental business, your organization — not just you — will make your company much more valuable.

  3. Address Facility Issues.

    A rental facility should be an attractive, well-located, environmentally compliant, long-term home for your business that also has room for growth. Ideally, your facility should have all these characteristics with a five-year assignable base lease (with an option for 10 to 15 additional years) at a rate no more than five to eight percent of your current total annual revenue. Short-term leases, grumpy or greedy third-party landlords, cramped facilities, environmental issues or long-term leases at exorbitant rates are all deal (or profit) killers — a term we use very sparingly.

  4. Surround yourself with competent (and responsive) advisors.

    Have an outside accountant prepare or review your financial statements at least quarterly, if not monthly. Your accountant should know and understand your business, the rental industry and your tax situation and be a trusted member of your inner circle. You and your accountant should be willing to stand behind the integrity of your financial statements — especially in a sale. When you sell your business, a competent business broker that is extremely knowledgeable in the industry is a must, and that intermediary must be on the same page with you with an up-front realistic price expectation that reflects current market conditions. You must also employ a competent deal attorney that responds to issues the day they arise, preferably within hours.

  5. Keep accurate and up-to-date records.

    Have an accurate, computerized list of your rental and non-rental assets including make, model, serial number, date of acquisition and original cost. Know what assets have been expensed and are off the books and what assets are capitalized and depreciated. Add assets to the lists immediately when they are purchased and purge assets that are disposed of or are scrapped. Track all assets individually, not as a group, and include revenues and repairs and maintenance expense. Keep an accurate list of resale merchandise including quantities and cost per unit. Most rental industry software is capable of tracking your assets and providing the reports you need. A physical inventory of both rental assets and resale merchandise should be performed annually, or semi-annually, to verify the detailed listings.

  6. Know your financial results.

    Always have accurate up-to-date financial records that can give you daily, weekly, monthly and annual revenue and all expenses. Make sure important categories of revenues and expenses are broken out separately, including rental revenues, delivery charges, damage waiver, equipment and supply sales, rental equipment sales, cost of goods sold by category, and equipment repairs and maintenance expense. Make note of owner salaries, expenses and benefits recorded on the business books. Track fluctuations in revenues and expenses from year-to-year (or month-to-month) and document the reason for these fluctuations. Note any unusual or non-recurring expenses including the nature and reason for expense, as well as the date and amount. Too often, the most in-depth analysis of financial results is done by us as the intermediaries and then later by the potential buyers of the business. Business owners should know exactly where their business stands financially and have plausible explanations for any unusual items or fluctuations in revenues and expenses. Too many times we hear of “gut” feelings that seem to never pan out as originally presented. The numbers don't lie, gut reactions typically do.

  7. Don't go off on tangents.

    When deciding to go into another line of business, remember that, in our industry, rental is almost always the most profitable business segment you can have. Complementary revenue such as the sale of supplies and expendables, as well as other items such as propane and concrete sales almost always contribute to the profitability of a rental business without diluting focus. Two of the biggest mistakes we see companies make are getting into dealership-type new equipment sales or opening a satellite store that doesn't reach a critical mass revenue. New equipment sales, especially larger ticket items, generally require a large investment in inventory and have a longer sales cycle that can distract ownership and employees (especially salesmen) from the core rental operation. Small satellite stores often increase overhead and require additional management or ownership time and focus. When looking for a new location, make sure the store can support a minimum of $750,000 revenue per year, attainable within three years of start-up. Also, commit to a shorter-term lease (36 months or less) with additional option years if the business takes off. Tangents almost always detract from the value of a rental business or reduce the pool of interested acquirers. If you do go off on a tangent, be sure to account for it separately so that it can be easily tracked.

    Making the right decisions in your business increases profitability, which in turn will increase your company's value. Learn from these lessons and make the right strategic moves well before you're ready to sell the business.

Gary Stansberry is a partner in the consulting firm of Hageman, Stansberry & Associates (HS&A). HS&A specializes strictly in the rental industry, offering operational consulting, mergers & acquisitions and valuation services. More information about HS&A can be found on its Web site at Stansberry can be reached at (817) 563-6882 or by e-mail at [email protected].

About the Author

Gary Stansberry | Founder and president

Gary Stansberry is president of The Stansberry Firm LLC and specializes in business sales, fair market business valuations, operational consulting and positioning businesses to increase their value.