by Melinda Zimmerman-Smith
November 30, 2011

Five questions to consider before signing the dotted line.

The owner of XYZ Construction Company mentions to his equipment distributor that he is paying a local rental company $7,200 per year for a boom lift over a five-year period. (A new boom costs $50,000.) The owner asks if he should buy a lift instead of renting it.  

Many business owners face this question. At what point does it make sense to stop renting this type of equipment and simply buy them outright?

Considerations Before Purchasing

Owning assets like construction equipment is a way to reinvest in your company. But you should answer several questions before making this leap:

Does the aerial unit support your core business? At some point, most niche contractors will need to purchase the tools that support their core expertise at some point regardless of return on invested capital (ROIC). For instance, a painting contractor will always need to work in the air so investing in a scissor lift makes sense. But a company that lays foundations and only uses an aerial on occasion should continue renting.

Are you equipped to be an owner? Owning an aerial means you will need to transport the equipment and maintain it. Do you have the ability to haul units to jobsites and the personnel available to maintain it?

How much do you plan on using the equipment? This question is perhaps the most difficult to answer. XYZ Construction Company (mentioned earlier) was using a boom constantly, so it made sense to buy one.

How much should you reinvest in your company? You need to add profit to your company by reinvesting in it. Without any assets, your company has less value and less borrowing power. However, the economic downturn has left many unhappy contractors over-burdened with expensive assets. Be selective with your choices.

Keep in mind that the government is allowing bonus depreciation for the 2011 fiscal year. If you can buy equipment now, this is a good year to do it. On the other hand, rental rates are at an all time low.

How well is the equipment supported? Whether you rent or purchase the equipment, consider the manufacturer's stability, brand and after-sales support. Make sure the manufacturer has a track record of supporting the equipment. The better the equipment is supported and maintained, the higher the residual value five to 10 years down the road. Take into account parts fulfillment and servicing to ensure minimum downtime.

Ideal Equipment for Purchasing

In general, certain types of aerial equipment lend themselves to purchasing, while others make more sense to rent, it depends on the type of work you do.

For example, aerial work platforms (AWPs) and smaller scissor lifts are most often used by niche contractors that specialize in services such as painting and electrical. For specialty contractors, it often makes sense to invest in a few of these pieces to meet their needs.

Contractors that use booms are typically in a narrow niche. Transportation is often an issue given the tremendous size of this equipment. Due to their size and application, it makes more sense to rent booms.

Telehandlers are generally purchased by contractors. "Telehandlers tend to be the ultimate aerial segment purchase for a construction business owner as they are more of a utility piece of equipment," says Thor Wickstrom, senior director of sales at Terex Aerial Work Platforms. "They can do several different jobs and can cover a broad application of equipment all over the jobsite."

Industry Expertise

"Everyone is different," says Wickstrom. "But everyone shares the desire to grow. There is no single right answer, but a good place to start is to determine your long-term strategy and how aggressively you want to grow or diversify the business."

Consider the tools you need for your core business and growth strategy. "If you want to grow, one thing is certain. You will need to buy equipment," says Wickstrom. "Rental can fuel growth, but you will need to come back and purchase equipment to reinvest in those assets that are the tools of the trade."

Renting versus buying equipment is a serious question. Many accountants specialize in the industry, and they can help with this decision.

Accounting professionals can counsel you on the best time to purchase equipment to lessen your cash buildup and provide information on how purchases will affect your taxes.

 

Construction Business Owner, September 2011