June 2015

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June 2015 | Construction Equipment Distribution | www.cedmag.com | 25 >> MONEY$$$MAN GARRY BARTECKI Follow The Big Three Your customer demands rent-to-rent, but the business risks are high — understand the role of equipment cost on ROI. L ately, a lot of dealers are being forced into providing rent-to-rent services due to customer demand, whether they want to or not and without a plan to make it successful. To make matters worse, none of the management team knows what to do with it either. Nor do they realize the serious risks. If I get called in to help, we normally spend time separating the rental business from the dealer business following the revenue segmen- tation from AED's CODB report: Sales, Parts, Service and Rental. Sales include the sale of new and used equipment, as well as all Rent-to-Sell transac- tions (RTS), including the RTS rental revenues and equipment sale upon conversion. e Rental silo contains the Rent-to-Rent (RTR) transactions – the daily, weekly and monthly equipment rentals. We also recom- mend that RTR units be separated on the balance sheet and titled as your rental fleet. Depending on the owner's personal circumstances and financial status there are cases where you may want to stay out of the rental business and focus on what you do best. But if you decide you're in the game, we spend quite a bit of time talking about the Big ree. 1. Time Utilization 2. Dollar Utilization 3. Equipment Cost Surprised at No. 3? Read on. When all is said and done, we arrive at an edict that states what time and dollar utiliza- tion results we need to provide the dealer with adequate cash flow to fund the cost of the equipment as well as any operating expenses related to keep the rental units in rent-ready condition. ere is a separate goal for each type of equipment in the rental fleet; all will be measured and reported on. All rent-to-rent metrics are based on the original equipment cost of the rental unit. Rental rates are determined using equip- ment cost; dollar utilization measures rental revenue as a percentage of equipment cost; ROI is based on equipment cost, and many other rental metrics are cost weighted to give the results more transparency in terms of equipment cost. Equipment cost means a lot in the rental business. e residual value of the rental unit is where you make your money in the rental business, and thus you have to plan out five to seven years to estimate when to sell rental units to maximize the ROI on the unit and the fleet in general. e bigger the ROI, the more cash flow generated. In the end, it is the sum of all rental revenues plus the residual sale measured against the cost of the rental unit and all direct expenses that provides the "profit" on the rental unit, which is then used to calculate the ROI. And the ROI is compared to other units of equipment classes to determine if the ROI is satisfactory or not. Now you know why No. 3 is so important in your rental business – equipment cost and the related residual values have so much to do with your ROI on your fleet investment. It is not unusual for public rental companies to do studies on which brands of equipment can be had for the lowest front-end cost and deliver the highest back-end cost, and those are the brands they purchase. When you consider that most rental companies only like to carry no more than two brands for specific equip- ment types, this is a big deal. A properly run rent-to-rent program can improve gross margin dollars and percentage, increase EBITDA, improve cash flow, provide tax benefits and increase the value of the company. You don't want to hear the other side of that story. Management has to be confident that they understand the rental business well enough before risking the company capital by purchasing rental units along with a significant debt service requirement. GARRY BARTECKI (gbartecki@comcast.net), founder of Dealer-Rental Success LLC, is a financial consultant to the equipment industry. He can be reached at 708-347-9109. The ROI is compared to other units of equipment classes to determine if the ROI is satisfactory or not.

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