The Great Challenge: Profitable Disposals

The long-term success of an equipment rental operation is dependent on its ability to dispose of its used rental fleet. Profitable disposal is one of the greatest challenges facing rental companies today, from large consolidators to small independent rental centers.

Many factors have a bearing on a rental company's success in selling its used equipment, some of which are determined years before used equipment is sold, often at the time the new equipment is purchased. These factors include the following:

* Purchase price.

* Specification of the equipment.

* Depreciation policy.

* Equipment maintenance.

* Equipment age at the time of disposal.

* Company's reputation as a seller of used equipment.

* Disposal methodology.

Purchase price Purchase price is dependent on the quantity of equipment bought as well as the commitment a rental company is prepared to make in advance. Negotiations are a major part of the process of arriving at a purchase price. I recom mend that the rental company, large or small, should determine its equipment requirements as early in the cycle as possible. Go to your supplier and advise its personnel of your firm's equipment requirements.

For instance, if you know the quantity, make and model of equipment your company will require, meet with your supplier/vendor in advance and make a commitment, you will buy better. If you place a firm order in December for the following year, your company will reap the rewards. I also suggest staying with the same supplier, year after year, forming a relationship.

Obviously, the larger the quantity, the better you buy. Less obvious, though, is the fact that the more disciplined you are, the better you will buy.

Specifications Think about selling equipment before you buy it. At times, adding a feature at a small cost at acquisition time will make the equipment more desirable for sale at disposal time. Too often management thinks about the short-term revenue opportunity and not about what the company will do with the equipment a year from acquisition date, let alone three or four years down the road when it is time for disposal.

Depreciation policy No single item has more bearing on the financial success of a disposal program than the proper depreciation policy. The purpose of depreciation is to adequately estimate the life of the equipment so that at the time of disposal, you can sell off the equipment and stay whole.

There is no one magic depreciation policy; it depends, to some degree, on experience. The life of a backhoe, for depreciation purposes, is often seven to 10 years, while a chain saw's life is one year. One depreciation policy does not fit all categories of equipment. If you get the depreciation policy wrong, you will often overstate the short-term profits of the business. However, you will have to take a loss on sale of the used equipment years later or, worse, be unable to dispose of the equipment because of the financial loss consequences on disposal.

Equipment maintenance It goes without saying that a well-maintained piece of equipment will result in a higher price for the equipment than will poorly maintained equipment. This applies not only to mechanical maintenance, but also to appearance. The cost of a sandblast job and a coat of paint will pay for itself many times over. If the seller could supply a maintenance jacket or folder on the equipment to support the preventive maintenance program, so much the better.

Age of the equipment In today's market, there appear to be three age brackets of most equipment for sale: new, 3 to 4 years old, and 7-plus years old. The problem selling 7-year-old equipment today is that everybody else is also selling this age category. It's the old supply-and-demand story.

I recommend selling equipment in the 3- to 4-year-old category when it has depreciated about 50 percent. Then the equipment is young enough to command a high price on the used equipment market. There is minimal competition for this age category of equipment because few firms have a policy of disposing of equipment at this young age. Based on my experience, this is the best time to sell the equipment.

Reputation Customers do not come to your company because you suddenly have used equipment for sale. The successful sellers are in the marketplace month after month, year after year. They have established a reputation, and the buyers seek these firms out because they know there is a used equipment product offering. The successful companies have trained sales forces to call upon the customer base.

Reputations take time to establish. Likewise, customers take time to cultivate. Selling used equipment is a business in itself. The business must be worked at and the reputation built over a period of time.

Your word is another important factor when you describe the condition of the used equipment. You must stand behind the equipment condition as represented. After the equipment is sold if the customer is dissatisfied and feels the equipment was misrepresented, your company must have a policy.

Generally, when you sell equipment, you make a representation as to condition. If the buyer comes to inspect the equipment in person, you can often sell it on an "as-is" basis. Otherwise, they will rely on your description. If the buyer, shortly after receiving the item, disputes your description, your company should offer to make good either by giving a cash allowance or repairing the problem. Although it might not be necessary contractually, your long-term success as a seller of used equipment depends on your reputation as a company that lives up to its word.

Disposal methodology There are three basic methods:

* Retail is obviously the best method, provided you have the reputation, sales force and a constant used equipment product offering. Another benefit is that you know the customer and, hopefully, you can prevent the equipment from coming back and competing with you in your marketplace. But it costs money to administer such a program and your sales force may be distracted from its basic mission, which is renting equipment.

* Brokers are a good source of sales for the bigger companies that have large quantities of equipment to sell on a yearly basis. Their pricing for the equipment is on the low end because brokers make their money by buying your equipment and often trying to "back-to-back" the purchase with a sale.

I see two problems with brokers. First, the equipment can, and often does, come back to compete with you in your marketplace. Second, there are, to my knowledge, no brokers working on a national scale.

* Auctions are an excellent source of used equipment sales. They charge a commission, but often obtain retail type prices. There are several fine national auction companies with solid reputations. The equipment sold in an auction generally winds up in a marketplace where it does not compete with you. Auctions are held often, and sales are final.

The best feature of an auction company is that you are out of the equipment quickly, thereby avoiding the depreciation and interest of caring for the equipment until a sale is made. I especially like auctions to surgically balance a fleet, especially near year-end, such as October or November. Often the savings on depreciation and interest more than cover the auctioneer's commission.

If you are in the rental business, then you are in the used equipment sales business. But don't just sell off your equipment without developing a methodology. Plan today to be successful tomorrow.

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