Should equipment dealerships be looking to acquire rental companies?

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Should equipment dealerships be looking to acquire rental companies?

Guest writer Gary Stansberry writes about an important question in his blog post this week: Should equipment dealerships be looking to acquire rental companies?

In a recent blog in this forum, I wrote about dedicating your business to rental if you are serious about having a successful rental division in your equipment dealership.  That means having dedicated IT systems, facilities, equipment, and personnel focusing solely on rental.  As I mentioned in that blog post, I came from an AED type dealer with a rental department.  Even though we had significant rental revenues, we did not know what it meant to be a truly responsive and service-oriented rental company.  It took me actually working for a dedicated rental business before I fully understood this.  

We have seen more and more equipment dealers become interested in the rent-to-rent strategy. These dealers recognize the growing importance of the rent-to-rent model as an integral component in achieving their desired market share and brand exposure within their trade territory. In most cases, equipment dealerships do not have existing staff that have experience in a high-volume rental environment.  Unless they have worked in a management role for one of the major rental companies such as United, Sunbelt or HERC, or possibly for a larger regional or independent rental company, your rental (and by rental, I mean rent-to-rent, not rental purchase) department is not likely to achieve its full potential.

Our primary business at The Stansberry Firm is selling rental businesses.  Given that some dealers realize they do not have the necessary talent, systems, and expertise in-house, some are now turning to acquiring an existing rental company as a way of gaining that knowledge.  In the last few years, we are now seeing a “new” type of acquirer; equipment dealerships (or their wholly owned rental subsidiaries).  Often, the biggest challenge for these dealer groups is finding a rental company, especially one with multiple locations, that operates solely within their manufacturer assigned territory.  A second issue is that often equipment dealers do not have the in-house capabilities to evaluate, value and/or structure a transaction to acquire a rental company.

I have recently worked with a major CAT dealer to help them acquire two dedicated rental operations to add to their expanding rent-to-rent operations.  In addition, I have sold two of my rental company clients to equipment dealers that are looking at these acquisitions to lead the way to integrate the rent-to-rent philosophy into their existing operations.  Although I am an acquisition specialist, I am a firm believer that your rental growth strategy should come from a combination of acquisitions and “greenfield” expansion.  Most everyone I talk with in the rental industry is complaining that their two biggest challenges are equipment availability and getting good people.  An acquisition is a way getting a proven rental revenue stream, rental ready equipment and rental-knowledgeable people on your team that can help strengthen your entire rental strategy.

I want to leave you with a final thought; the rental market is growing.  The American Rental Association, through its ARA Rentalytics™ service, has consistently touted 2022 to be a double-digit growth year, to be followed by several more years of more modest growth.  There is also a notion that the combination of inflation, rising interest rates, equipment availability and supply chain issues, in tandem with a labor shortage will cause more end users to rent equipment vs. buying equipment: i.e., an increase in rental penetration (equipment rented vs. owned by the end user).  According to the ARA, rental penetration in 2019 was 56.7% and dropped to 54.5% in 2020.  The last major shift in rental penetration was driven by the 2008 recession; according to the ARA rental penetration in the US was only 39.7% in 2005 steadily increasing from 2011 to the current level of 54.5%.  Some industry observers believe the current market factors could drive rental penetration several points higher and possibly as high as 60% within the next 24-36 months.  If potentially 60% of the equipment market is rental, why wouldn’t you be looking to grow this segment.

Gary Stansberry is the President of The Stansberry Firm, LLC and specializes in rental business sales and consulting with businesses to increase their value.

More information on the company can be found at www.thestansberryfirm.com.  

Gary can be reached at (210) 797-7368 or by email at gary@thestansberryfirm.com.

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Staffing Guidelines

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Staffing Guidelines

Guest writer Bill Pyles brings us up to the current situation in his blog piece, “Staffing Guidelines.” After being discharged from the United States Marine Corps, Bill started a lifelong career in heavy equipment dealer product support. Starting as an apprentice technician, Bill worked his way up to the General Service Manager for a multi-state Cat dealer. Bill continued to serve in similar roles as General Manager of Product Support to VP of Service for multistate OEM dealers. Coming up thru the product support ranks gave Bill an invaluable education of customer relations, dealer product support and an understanding of the dealers most valuable resource, the product support team. After 47 years of service, Bill has taken on a new career with Mechanics and Techs LLC, a recruiting company for all Product Support employees as well as Product Support Managers. Bill is living in Florida with his wife Diana and golden retriever, Shelby. Bill & Diana spend their time with their two sons and five grandchildren. Bill can be contacted at LinkedIn; www.linkedin.com/in/billpyles or wlpz28@verizon.net

As we come out of the pandemic and possibly slide into a recession, I’m sure there are dealers who need to ramp up staffing or consider a reduction in staff.  Today I’d like to share some ideas that worked for me during the good and bad times. During the good times, I’d get daily emails from stressed out service managers needing more techs, today, now. But something seemed out of place after looking at the facts. Facts do a good job of removing the emotional side of decision making. I’m being told we need techs, now, today, but the revenue recovery was very low, no overtime to speak of and some other locations are looking for work. 

I’ll focus mainly on technicians for this discussion of adding or reducing the workforce. It seems we’ve had tech shortage issues since the early 1990’s. During the dot-com boom, more and more talent ignored the trades, opting for the glamorous work of internet related jobs. You may remember even the U.S. Army started running recruiting ads showing soldiers launching computer-controlled missiles, running high tech equipment, staring knowingly into radar screens. No more dog faces covered in mud crawling in and out of fox holes!  Equipment dealers also had to dispel the myth that the mechanic’s (before they were technicians, notice the upgrade in the title) knuckles dragged the ground when they walked, and anything could be repaired with a sledgehammer and a torch! But dealers got it together, had great tech recruiting plans and business took off!  

Until the last horrible recession hit in 2008-2009 and many dealers were forced to reduce technician headcount. A very strange phenomena happened; after the recession eased up, all the techs that were laid off were nowhere to be found when business did pick back up. They likely went into other trades as tech recruitment became more of a full-time job at the dealership. It was no longer build a shop or hang out the hiring sign and they would come. The rules changed, wages accelerated, sign on bonuses where generously offered, the promise of a free set of basic tools were offered after so many days / months of employment and many other hiring incentives. 

Trying to forecast a technician reduction is like playing the stock market. Move too soon and you will lose good techs who may not come back when business picks up. Move too late, and your bottom line could take months to recover. I admit I erred on the later side as I wanted to do everything in the company’s power not to lose good techs. But the day would come when the difficult management decisions had to be made. Here are some guidelines I think can help.

Before pulling the reduction in staff trigger, I’d expect to see these items as facts. 

  • Revenue recovery to be 80% to 85% and trending upward.
    Overtime averaging at least 10% in the last three-month period.
  • No other locations have techs to transfer over to the location needing techs, now, today.
  • Labor sales per day are trending at 90% of your street labor rate. 
    • This is a technician efficiency cross check. 
    • Gives visibility to reducing labor rates to keep revenue hours up.
  • Operating profit at or above the forecast. 

My goal was to support the decision of adding techs, not just adding more cost if not required. Adding techs can add revenues. But if your shop is inefficient (not meeting the requirements above), adding techs will only add to your cost. No need to add techs if another location is slow. 

Look at the larger picture, not one location.

I created a short form (regarding the points above) for the person requesting the addition headcount. This forced the person making the request to review and know their numbers and or realize it’s maybe an efficiency issue, not a headcount issue.

Hopefully (by the way, hope is still not a strategy) we will not be crushed by another deep recession. But if the time comes, here are some ideas that worked for me to support a reduction in staffing.

  • Recovery rate below 70 and trending downward
  • 0% Overtime in last 3-month period trending downward
  • No other local stores we can take technicians for the short term
    Labor sales per tech per day 60% (what your daily break-even rate is) or lower, trending downward

Downsizing is tough under any conditions. You should be doing everything in your power to keep the techs you have trained and coached on board. Good techs will quickly be picked up by a contractor looking to get a dealer trained and experienced tech at a lesser cost. One possibility is to go to a 32-hour work week. This keeps all your techs working although working one day less a week. This option is worth talking over with all your techs, get their buy in and no one loses their job.

If the downturn is looking like a short term, get your techs caught up on their training. I know you will already have marketing promotions out looking for work. Get your service trucks cleaned up and finally get to all those items in the shop that need repaired. It’s an investment into your dealership or business. Remember it’s your job to keep the shops full. Hopefully the downturn is short and soon your hair will be on fire (again) when the work picks up and you’re back in the tech recruiting arena.

Here are some ideas regarding support staff or as I called it an admin to tech ratio.

Administrative is defined as a Service Manager, Shop Supervisor, Service Admin, Service Writer, any employee charged to the service department as 100% expense/nonrevenue generating.

I suggest a starting ratio of one (service manager or shop foreman) administrative position for the first five technicians. At five techs, one person will be getting stretched to perform all the service department admin functions, i.e., quotes, labor entry, work order maintenance, customer calls, closing work orders.

Once a sixth tech is hired or being recruited, we can consider a second admin person in addition to the SM or shop foreman. Two service admins should be able to manage an additional 4 techs up to a total of 10.

When an 11th tech is required, consider a third service admin. This will cover the admin ratio up to 15 techs.

At face value, this ratio may look a bit on the high side. But I’d disagree, especially if your service administrative employees are doing all the functions required to keep a service department running smoothly and not burning out the service manager or shop supervisor. I’ll not try to list all the daily functions within your service department (but I bet there are many), but I’d suggest getting out a pencil and make a list of administrative activities being performed daily. And don’t forget to add following up after the work has been completed to ensure 100% customer satisfaction, after all, these customers are the ones who can keep your shops working when the slow down comes!

 

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Dedicate It To Rental

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Dedicate It To Rental

Our new guest writer, Gary Stansberry, President of The Stansberry Firm, has over 20 years mergers and acquisitions experience within the rental industry with 135 transactions totaling over $1.2 billion in transaction value. As an executive with two publicly traded strategic acquirers, Mr. Stansberry served as a buyer’s representative sourcing, evaluating, negotiating, managing and closing transactions throughout the country. Since 2000, Mr. Stansberry has served as a middle market transaction advisor serving business owners, strategic and financial buyers in mergers and acquisitions, market value and operational analysis. In this, his first blog for Learning Without Scars, Gary writes about our time, and the fact that we need to dedicate it to rental.

Recent construction rental transactions include Illinois Truck & Equipment (Morris, IL), Toolshed Equipment Rental (Escondido, CA), Priority Rental (Philadelphia, NYC), B&M Equipment Rental (northern Florida) and We-Rent-It (six locations in central Texas).

Like many of the clients he serves, Gary is an entrepreneur to the core. Prior to his merger and acquisitions experience, Mr. Stansberry founded and sold two successful businesses including a construction equipment sales and rental business.  He has served as President, General Manager, Controller and Chief Financial Officer of several closely held firms including an auto parts distributer, a diversified oilfield services company and construction equipment sales and rental businesses. Gary is a Certified Public Accountant (non-practicing) and spent two years with a national public accounting firm. Gary holds a B.B.A. in Accounting from Texas Christian University.

Mr. Stansberry is a frequent contributor to various rental industry trade publications including Rental Equipment Register and Rental Management. In addition, he is often called upon as a featured speaker with various rental industry trade groups and software providers. Private equity firms, investors and high net worth individuals regularly seek Gary’s advice and expertise in evaluating investments and acquisitions within all aspects of the rental industry including construction equipment sales and rental, party/special event rentals and oilfield rentals and service.

Early in my career, I worked at an oilfield service company here in Texas.  Something I learned there that has always stuck with me is the sense of urgency and the responsiveness to customer needs that were instilled in all levels of the operations.  In the oilfield, “time is money”; keep large drilling rigs or large crews waiting on your services and you won’t be back on the next job.

Fast forward 10+ years when I joined Rental Service Corp. (RSC).  I came to RSC from an AED type dealer that had what I thought was an active rental department.  I thought we were in the “rental business”.  What I found at RSC was a much different sense of urgency mentality, similar to what I had experienced in the oilfield.  My thoughts were recently summed up by the head of the rental division of a large AED dealer.  As we pulled up to one of their operations, the rental executive motioned to the left where the dealership operations were based and said “Those guys move slow”, then to the right where the rental division was located and said “We move fast.”

I can hear the groans from the dealership management saying that’s an unfair judgement.  Maybe so, but I also think there will be some reluctant acknowledgment of truth to that.  Having been on both sides of the equation, I can tell you that, to truly run a successful rent-to-rent operation, it requires dedication to rental.  By dedication, I mean in every send of the word:

  • A dedicated workforce from mechanics, to rental counter personnel, rental salesman and rental management. I don’t want my shop foreman “triaging” equipment and personnel deciding on whether to work on a customer machine or a rental machine.  I don’t want my salesman spending hours on working on a deal to sell a 100,000 lb. excavator instead of the minutes it takes to quote a 3-month rental on a track loader.
  • A dedicated facility with its own rental counter, a shop and a yard. The rental counter is friendly to walk-ins, the yard is segregated by rental ready and machines waiting to be serviced.  Often, this arrangement can be handled with a shared facility, with separate entrances, with shop and yard space designated for rental.
  • A dedicated rental fleet. No blurry lines between new sales, used equipment or rental purchase.  These machines are dedicated to rent-to-rent and generally not for sale unless the rental machine can readily be replaced.  I am okay with dealer oriented selling rental fleet quicker than a rental-only operation.
  • A dedicated set of Key Performance Indicators (KPIs) strictly for the rental division. This may require a separate software system or some customization to your current system.  In rental, it is crucial to track dollar/financial utilization of the fleet, time/physical utilizations of the fleet, repairs and maintenance as % of rental revenues, among others.  There are also some sophisticated “add-on” data services such as Rouse Analytics that provides this key data compared to others in your market that may require specific software.

Some may ask why spend all this time and resources to establish or refine a rental division.  I would point to the following two factors as why rental should be an emphasis of your business:

  1. The Rental Market is Growing.  The American Rental Association, through its ARA Rentalytics™ service, has consistently touted 2022 to be a double-digit growth year for the construction and industrial rental segment.  As recently as February 2022, the ARA affirmed its guidance for 12.1% growth in 2022 over 2021, with additional growth of 6% in 2023.  There is the also notion that the combination of inflation, equipment availability and supply chain issues, in tandem with a labor shortage will cause more end users to rent equipment vs. buying equipment: i.e., an increase in rental penetration (equipment rented vs. owned by the end user).  According to the ARA, rental penetration in 2019 was 56.7% and dropped to 54.5% in 2020.  The last major shift in rental penetration was driven by the 2008 recession; according to the ARA rental penetration in the US was only 39.7% in 2005 steadily increasing from 2011 to the current level of 54.5%.  Some industry observers believe the current market factors could drive rental penetration several points higher and possibly as high as 60% within the next 24-36 months.
  1. Let’s talk margins. New equipment margins may only be 10%-15%. Used equipment margins may be 20%-25% and parts margins may be 30%-35%.  Depending on how you figure your rental margins, generally your true cost of sales (depreciation, repairs, etc.) run only 20%-30% resulting in margins on rentals of 70%+.

Rental is a predictable, recurring revenue stream.    Add in the fact it is a high margin, growing segment of a business that you are likely already in.  Ask yourself, given these margins, this growth, how should you spend your next hour?  My answer is to dedicate it to rental; you just may have to move a little quicker.

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