Renting is about profit, not sales
Is your major supplier talking to you a lot more about rental? Of course they are and they know what they are talking about, that’s for certain. Almost every, if not every, manufacturer of construction/industrial equipment knows that more than half of their equipment is earmarked for rental and this trend has been on an upward trajectory for decades.
For the first time ever, more than 50% of ALL new equipment sold in North America goes into rental fleets. This phenomenon, called “Rental Penetration,” has been on the rise each and every single year that I’ve been in the industry—since 1988. Think “Cat Rental Store.” Cat dealers were forced, quite frankly, to get into the rental business about 20 years or so ago by corporate. Sure, some Cat dealers scattered across North America were renting prior to the mandate from Peoria, but the majority of the dealers were basically kicking and screaming at the notion.
Having been in the equipment rental and sales industry for 29 years; the last 19 strictly on the mergers, acquisitions, consulting and valuation side of the rental equipment industry, I’ve seen, visited, analyzed or worked with over 3,500 equipment rental companies and dealers from coast to coast. I know what the “best practices” of rental companies are and I’ve seen the best of the best and the worst of the worst.
I’ve visited countless dealerships during my career and many thought (and many still think) that they were in (or are in) the rental business. Most were only kidding themselves. Rental for many equipment dealers–material handling, and others—is surrounded by the old “AED” rental mentality—that rental is simply a financing mechanism for a sale. In reality, successful rental operators have a mindset and an approach of rent-to-rent (to rent)! They, too, know the huge difference between rental profits and profits related to sales of new equipment. Sales are only a last resort/necessity, new or used, for a true rental company or “rental division” of a dealer. Don’t get me wrong, rental companies sell their used rental fleet and their “gain on sale” is nice; but it’s not their focus. It’s a necessary evil.
Equipment rental companies that understand and focus most of their energy and efforts on rental are rewarded with approximately three times (yes, three times) the profit margins that equipment dealers (sales organizations) struggle to achieve. Even a small mix of pure rental will improve any dealer’s bottom line. This has been proven to me time and again as I’ve studied thousands of P&L statements over the years.
In order to improve your equipment sales business and to maximize its value, now and in the future, rental should be a part of it. There are some basic fundamentals that well run, privately owned equipment companies know and perform on a consistent basis (including the publicly owned “big boys”). First and foremost, rental is to make profits, big profits, not a way to make a sale. Rental owners make a lot more than the 18-22% gross margins that dealers make on their equipment. A Rent-to-Rent mentality and total buy in to the rent-to-rent mentality is a must or a true rental “division” of a dealer won’t get off the ground, let alone survive.
Unless an end user has time utilization of approximately 70% or higher, it pencils out that renting vs. buying is the better option. From expensing rent/lease payments, to maintaining the equipment, to transportation, to servicing, to storage, to getting the latest and greatest machines available, to compliance with environmental laws, to no or little down time whatsoever, to no up-front capital expenditures, etc. there is a lot to like about rental for an end user.
Dealer salesman (and I’m a salesman among other things) are generally not fans of rental. Especially heavier equipment salesmen. They like the big number of a sale. What they don’t know is that the profit margin on a sale is 1/3 of the rental guy’s profit margin. Unless they own the company or take the financial risks (among other risks) the owner does, I advise not to let them prevent you, the owner, from getting into the rental business. I’ve seen this very scenario preventing dealers from getting into the rental business. Not the “lease to own” business but the rental business!
I’m only scratching the surface here regarding the merits of rental, the metrics, etc., but I can tell you that the dealers I’ve assisted in getting into the rent-to-rent business haven’t looked back. Virtually all of my clients who I’ve assisted with their entry into rental say to me, without fail, “I wish I would have known or implemented this strategy a long time ago.”
Fred Hageman is the principal of Rental Acquisitions, LLC, a professional Mergers and Acquisitions and Valuation Firm located in Cameron Park, CA. His firm specializes strictly in the Equipment Rental Industry. He can be reached at 530-545-8855 or [email protected]. Please visit www.rentalacquisitions.com for more information and other articles written by Fred.
