Changes coming to your rental business
The staff of MHW informed me that the topic of the month is “Rental and Leasing.” A topic subject to MANY changes in the near future.
Right now I am thinking about where to start, but start I must so here we go. These comments do not appear in any particular order. Each management team will need to prioritize them as they see fit.
Tax changes
They will be upon us before the end of the year. If we are lucky they will revert back to January 1, 2017. I hope that happens since it appears a lot of customers are waiting to invest until they know what the tax consequences will be. If they are lucky they will be able to buy and take delivery on December 31, 2017 and get a 100% write off in the process. You can write off 100% to some extent currently but have restrictions once you hit the dollar volume associated with Section 179 write offs.
On the down side your tax deductions may not be worth as much if rates are lowered to 15-20%. That goes the same for any carryovers you may use after the law is passed.
There is the question how pass-through entities would be taxed if the corporate rate is reduced to 20%. The logic I have heard says owners of pass-through entities will have the same rate available on income over and above a reasonable salary. So you pay personal rates on the salary but get 20% on any remaining so-called corporate earnings.
I believe that tax reform will provide you other opportunities or headaches as well. We will have to see what they come up with.
Accounting changes
Leases will be accounted for differently starting in 2019. But all current leases in effect at that time (which may include some of your current agreements) will be subject to the new rules. The new rules will require lessees to record both a right-to-use asset and the full lease liability, both for basically the same amount. The fly in the ointment for lift truck dealers is that lessees will have the option of recording the entire liability including maintenance or account the maintenance separately. I guess that means they will be asking you for the breakdown regarding the maintenance portion, which may or may not be a good thing.
They tell us the banks will most likely ignore this new pile of debt on your balance sheet and on customer balance sheets. Me, I don’t believe that. The new rules don’t affect much else in terms of financial metrics but will certainly change your debt/equity ratios. So I believe you can expect requests to help figure out how to avoid this problem, but that will be tough to do if they sign a four-five year lease with maintenance.
IoT is here to stay
Successful equipment dealers listen to their customers to improve customer satisfaction and retention, and in the process come up with new sources of revenue.
OEM’s now offer remote monitoring and analytics services on a subscription basis that identify an issue before it creates a down situation. This service is offered to both dealers and end-users, with a result of increased revenues for the dealer while improving customer satisfaction and retention because this new service helps avoid costly repairs and downtime.
Another advantage of this remote monitoring program is that the complexity of the system will make working on these units almost impossible without the proper tools, keeping the service business in your company and out of the hands of the general purpose tech.
Digital dispatch of rental units as well as technician services are in full vogue. Soon you will have VR or IR available for techs in the field to help them complete a task properly the first time.
Product-as-a-service and predictive maintenance programs are also being discussed to reduce rental costs and incentivize service levels that strive for max uptime. What customer do you know that would not like both reduced costs and improved efficiency? Probably a very short list.
Lifecycle costs
Want to improve your rental ROI? Then increase the number of years you keep rental units in the fleet. Many public rental companies have extended the life of units in the fleet by three years and seeing a 30% increase in ROI. I know this causes issues with your OEM, but the benefits are there because the rental units of today are of a higher quality which can be properly maintained without causing lost profits.
Some companies with proper facilities and tech strength are even extending units further beyond the initial three-year term by refurbishing or rebuilding the unit and adding another four-five years to the useful life. Fix them up, paint them, and they look pretty good. OEM’s are even starting to offer this product for a substantial discount against the new price.
Want to see you Balance Sheet improve….try not buying new units for your rental fleet…..keep units in the fleet three years longer……refurbish the units and get another four-five years or rental revenue without any note payment associated with that unit. Believe me, it works.
Miscellaneous
As I was sifting through the Ashlead Group annual report for the year that ended April 30, 2017, I noticed a chart which projects that the top 100 rental companies will have between 65-70% of the rental market by 2020. They had 34% in 2010. I take this to mean they can increase market share by buying up the competition as well as taking more market share because they have better programs to offer customers. Watch your back!
I have mentioned Winsby a few times in this column, but I have to update you about their program. I happened to sit through a demo of what they can do and after three hours of discussion I was more amazed of what they can do then I was before. I guess my point is if you sit through a short demo you will miss what the entire process has to offer. If you don’t remember, Winsby, using the latest technology, helps with customer retention as well as marketing to potential customers. I know it works and I am still amazed at how reasonable the cost is to get these results. I know of some fairly good size dealers that dismissed their marketing people and use Winsby instead. Look them up…..and you will find a way to keep customers and increase business.
Time to move on even though I had a number of other topics I could have discussed. Maybe another time.
Garry Bartecki is a CPA MBA with GB Financial Services LLC. E-mail [email protected] to contact Garry.
