Issue link: http://read.dmtmag.com/i/96778
On the Numbers You Say Rental is Going Great, But How Do You Know? If you don't know where the bar is set, you might be leaving money on the table. BY GARRY BARTECKI And so Election Day came and went. The hope for increased consumer confidence, as well as movement toward energy independence and the related boost to the construction industry has dimmed. The incumbent occupant of the White House will continue to have an effect on your business, including the ultimate value of your business. And I expect more of the same: more public and union employees, higher taxes, and more effort put into avoiding those taxes. Last month I mentioned how the rental business is becoming a material segment of the dealer business. And since then, The AED Foundation produced our second CFO/Rental Conference, which was again well attended with plenty of discussion about the rent-to-rent business and how individual dealers are handling the transition and business risk associated with this changing paradigm shift toward pure rental. I guess the best part of these two conferences were the discussions how dealers were handling various aspects of the rental business. What impressed me most were the different methods used by the attendees, to the point where it would be tough to determine how each dealer compared to the other. As a result, if I asked a dealer "How is your rental business doing?" and the response was "We are doing great!" my response would be, "How do you know?" The results of these two Rental Conferences lead me to believe AED needs to provide more education about rental operations and benchmarking data for dealers who do want to know how they are doing. The attendance list from both Rental Conferences was made up of very accomplished dealers, mostly on the large size, with what they say is a very considerable rental component. What we also had, however, was a large mix of business policies, tax policy, accounting structure, financial statement presentation and even overall differences of what constitutes a rent-to-rent business. In my mind, we primarily had dealers in the rent-to-sell business, some who are somewhat in the rent-to-rent business, some mostly in the rent-torent business and some actually in the rent-to-rent business with a full understanding of what that means. The mix in rental operation types and their varied business policies would make it tough to benchmark them against one another. There is no doubt that pure rental offers better margins and cash flow than sales if properly managed. If we take a look at the public rental companies we can see how they invest in their rental business, how long they keep rental units in the fleet, how much they make when they divest units from the fleet, how they finance these fleets, and how the market values this type of enterprise. The point is, every rental business should look somewhat similar to what these public rental companies look like if a dealer hopes to duplicate the operating results of a rental company. For example: Rental assets would be accounted for as rental assets, with an expectation of remaining in the fleet for (in most cases) a five- to eight-year period. Rental time and dollar utilization would produce five to eight years of rental revenue representing a return of 25-30 percent per year against the purchase cost. Rental assets would be depreciated down to the expected residual value at the time the unit is expected to be divested from the fleet. Rental assets would be sold at a profit in the normal course of business. At least 50 percent of the rental fleet would be "in the money" to compensate for downturns in the business cycle when fleet size may need to be reduced to generate cash. In summary, rental assets would generate maximum revenue and cash flow and produce maximum ROIs over the rental cycle. My concern is dealers who go half way into the rental business will only get half of the rental benefits (if that), while taking on the balance sheet exposure associated with rental. Where rental should improve overall operating results and returns, there will be cases where not being fully committed to rental could reduce overall operating results. Based on my experience during these two Rental Conferences, dealers need more training in all aspects of the rental business. One great way to do that is to join a 20 Group designated as a "Rental Group," with plans to concentrate on rental activities so that the next time someone asks how you know you are operating your rental business in a satisfactory manner you will actually know. This Rental 20 Group is in the works. Call me if you are interested. GARRY BARTECKI (gbartecki@ aednet.org) is AED's vice president of Finance. December 2012 | Construction Equipment Distribution | www.cedmag.com | 63