I am often asked, “What is the right time to sell used rental equipment?” To maximize returns, should used rental equipment be sold after two years, five years, or 10 years? The answer differs from company to company and type of equipment.
The first objective of selling used rental equipment is the same if your company is a rental giant or a small rental center. That objective is not to lose money.
Remember that if you are in the equipment rental business, you are also in the equipment disposal business. Let's take a look at the many variables and come up with a recommendation.
Net book value is defined as acquisition cost minus depreciation. An important factor in selling used equipment is to determine when the net book value is above the market price. Net book value depends on how well one buys and the depreciation policy utilized. Market value also varies depending on the method of sale and the geographic location (hot market, cold market) of the sale.
Depreciation policy has the strongest impact on the equipment-disposal decision. No matter how well you buy, it is safe to say that it is almost impossible to sell used equipment without at least two years depreciation expense accrued against the equipment.
Current depreciation policies are often based on a company's actual selling experience during the period from 1998 to 2000 — the period of rental industry consolidation. It was also the best period of construction equipment sales historically, with very high used equipment prices.
But that was yesterday. Most equipment manufacturers are experiencing a 20 percent decrease in new construction equipment sales from 2000.
Rental companies, in an attempt to increase their operation profits, have revised their depreciation policies to reflect their experience from 1998 to 2000. These policies reflect equipment lives of 10 to 12 years, versus six to seven years used in recent years.
I recommend a general conservative depreciation for smaller equipment rental companies (see table below left).
The table should be used as a general guide for small rental companies with fleets below $10 million. For fleets with a first cost higher than $10 million, a more sophisticated depreciation schedule is recommended.
Depreciation policy should be based on actual experience and will vary by type of equipment. The goal of a proper depreciation policy should be to dispose of the equipment after a period of time that allows the seller to neither gain nor lose money on the sale.
Buying prices of new equipment depend on buying leverage, or buying clout. A large equipment rental company buying more than $500 million of equipment a year, purchases at a considerably more favorable price than a small company buying $100,000 of equipment per year. Today, it is common for a large equipment rental company to buy 15 percent of the total production of a manufacturer with orders in excess of $100 million in a 1-year period.
Many manufacturers sell directly to the top 250 rental companies, bypassing the dealers. However, most smaller rental companies, because of their level of purchases, buy from dealers. Dealers buy their equipment from the manufacturer at dealer net, and in turn mark the equipment up from 5 percent to 20 percent.
It is easy to understand why the buying price has such a significant effect on the net book value of the equipment.
New machine prices have risen overall during the past few years, but in many cases, they have actually declined. This is true, relative to the price one pays, if they are a large or a small buyer of equipment. So if the new equipment prices stay flat, I recommend replacing the equipment on a short-cycle basis. This way the equipment stays under warranty and the depreciation costs remain flat. The only increased costs are interest costs, as the new equipment will have a higher net book value.
The type of equipment, regardless of the acquisition price, has a large role in determining the right time to sell. For example, used equipment prices drop dramatically for items such as large air compressors and access equipment. You would not want to sell these items at an early age regardless of how well you acquire them, until they have accumulated sufficient depreciation to bring their net book value in line with market values. Earthmoving equipment seems to hold its value over a longer period of time. Equipment in short supply and high demand, such as large power generators, also maintain their value extremely well.
Sales method is a factor to consider when determining the correct time to sell. Obviously sales at retail bring the highest net value. Many rental companies sell equipment by auction where prices can be very strong because large auction companies draw a significant customer base from a wide geographic area — sometimes worldwide. In an auction, one has to evaluate commission and transportation costs. Large sophisticated auction companies can give you a history of the prices realized in their auctions, making it easier to decide whether to utilize an auction company for equipment disposal.
Condition of equipment is critical in determing value and the right time to sell. It is always recommended that the equipment be in good working order with a proper appearance. The only exception is when one determines that the cost to get the equipment in good working order does not make economic sense. It does not make economic sense when the net book value plus the cost of repair total more than market value. This must be determined on a piece-by-piece basis.
Maintenance costs are another factor in determining the proper time to sell. In my observations, only the larger, more sophisticated equipment rental companies keep careful track of their repair costs. I have yet to see a small rental company track repair costs. A computer software program should be utilized to keep track of repair costs, parts and labor.
Recommendation: If maintenance costs are running on an annual basis in excess of 12 percent of revenue for any piece of equipment, consider selling that piece of equipment immediately.
Uptime is another factor in determining the proper time to sell. Up time is directly related to maintenance costs. In a perfect situation, with a young fleet, equipment should be available for rent 98.5 percent of the time. A more realistic target for equipment availability is 95 percent.
Recommendation: If any piece of equipment is down more than 10 percent of the time on a yearly basis, consider selling that piece of equipment immediately.
Customers want late model, reliable, safe, fuel-efficient equipment that makes the rent. If the equipment in your fleet does not qualify for this description, consider disposing it.
I am surprised at the number of rental companies that have not taken an analytical approach to disposing of their equipment. If you have not taken the time to analytically evaluate the proper time to dispose of used rental equipment, disposing in the 48-60 month fleet age is an overall good rule of thumb.
This will yield a fleet age averaging in the two- to two-and-a-half-year range. By keeping equipment to this fleet age you will find your company in balance with the above variables.
Kaplan, Daniel Kaplan Associates, Morristown, N.J., is the former chief executive officer of Hertz Equipment Rental Corp. and now works as a consultant to the rental industry. He can be reached at 973/285-3199; or [email protected]
When to Sell
When evaluating the right time to sell your used rental equipment, consider:
- Net book value
- Depreciation policy
- Buying prices
- New machine prices
- Type of equipment
- Sales method
- Equipment condition
- Maintenance costs
- Uptime
- Customer needs
