There's more to the service equipment investment than negotiating the best price
If there is one true adage of the automotive service industry, it’s that nothing is cheap. And that bit of self-evident wisdom goes double for major equipment, which can run easily into six figures for dedicated diagnostic equipment such as dynamometers. It’s a major purchase decision, but what’s the real cost of that 50 or 60 thousand-dollar investment? Several important issues should be added to the price performance criteria on the buyer’s wish list.
“If I were a shop owner, before I would be buying a piece of equipment from anybody, training would be the number one issue that I’d be concerned about. Training and availability for repairs in the event of maintenance,” advises Cliff Young, director of business development and training for Snap-on Canada’s Training Solutions operation. Although name-brand equipment is backed by well-established organisations, smaller importers and domestic manufacturers, may not have an extensive track record. Young defines the need for a business plan as essential for both parties in a major purchase: “Which company is going to be in business to service this by the time I’ve completed paying for it ? And the other thing, is it updateable, is it capable of updating the software to keep it current so that I’ll be able to work on the newer vehicles going forward?” Ideally, if the vendor appears to have a viable business plan for selling the equipment, the buyer should have a plan for using it. Says Young: “I’d also want to have a business plan for that piece of equipment so that I’d know how I was going to pay for it. In other words, what are my targets for that equipment? Do I want to increase my revenue or maintain a customer base, because in my opinion, in today’s world, if a piece of equipment is not going to generate revenue and create a new business within a business, why are you doing it? Not only on how to use the equipment, but how to help sell it and how to create revenue with it, how to create customer value out of it.” The marketing component of the supplier’s involvement, however, is usually very limited. An intelligent purchaser should come to the table with a marketing plan for generating consumer awareness about the new capability, a plan that needs an adequate budget to succeed.
Insurance is a surprisingly overlooked portion of the equipment purchase decision. The reasons are many, but most stem from the complexity of policy language, and the tendency to follow the advice of bankers or financing companies and simply buy coverage from a local broker. That’s fine if the agent or broker understands the unique needs of the auto service industry, but that is rarely the case, and the results can be catastrophic.
Derrick MacLeod, program director for Automotive Insurance Services relates an important issue: “The most important thing is that 95% of the insurance policies providing coverage for shop equipment contain a penalty clause. And what that penalty clause does is that if the limits of the insurance don’t reflect the actual replacement costs of the equipment that is in the shop, the shop is penalized to the amount of the deficiency.”
MacLeod has performed a study based on a 400 shop sample which revealed a frightening statistic: 344 out of the 400, or 86 percent, would go out of business if they had an insurance claim. By MacLeod’s benchmark, “86% would have taken a 50 000 dollar hit or better out of their own pocket. People only find out about it when they have an insurance claim.”
Owners tend to think about insurance in terms of liability, and while four million dollar settlements have been awarded, protection from a liability standpoint is often a matter of simply buying enough coverage. Protecting the shop and its equipment, however, is more complex. Macleod describes a typical garage policy: “Insurance is set up for 95% of the operations on a replacement cost basis. What happens is that when the average garage looks at how much insurance he needs, he pulls out his financial statements and looks at his books. And if his accountant is doing the job, he’s getting the depreciated value of the purchase price of his equipment, which will crucify him if he has an insurance claim. And his insurance policy has been set up on a replacement cost. So the penalty clauses are going to relate to the replacement cost of the equipment, and yet the amount of insurance that he’s purchasing is based on the depreciated value. The average is 50 cents on the dollar penalty. The highest penalty I’ve seen is 96 percent. So the guy literally got paid four cents on the dollar.”
Compressors and pressurized equipment adds another factor, as most are specifically excluded from equipment loss insurance. Separate “boiler machinery” policies are usually necessary, and will invariably involve a separate set of inspections.
Another often overlooked area is hand tool coverage. MacLeod warns: “A lot of insurance companies specifically exclude hand tools under the regular shop policies. The technician’s equipment is not insured under the shop policies. Or when they say it is included, it’s never enforceable. In other words, Joe’s Garage buys a policy. John Smith is the technician in the back who thinks his tools are covered. Ninety nine percent of the time they’re not. And even if they are, if John Smith turns around and says that he wants the policy to pay him, he can’t enforce it, because he is not a party to the contract. But even the owner often doesn’t have coverage of his hand tools either. We see it too often.”
Paying for it all
The bottom line for most equipment purchases is, put simply, the bottom line. Paying for a sixty-grand dyno generally means a visit with the local banker, but in the current market, the choices are a little more complex. E.K. Williams president Bob Greenwood comments: “The biggest issue is that they are basically forced to lease because they are not profitable enough to buy, and in some cases it is more beneficial to buy than lease depending on what the equipment is. They are not as profitable as they should be in their business to have a real choice; a lot are forced to leased rather than buy.”
Greenwood is describing a classic Catch-22 situation for shops with marginal profitability. To move up, lower gross-margin shops often need to modernize, and are in a position to realize the most benefit from the improved technology of modern equipment. The very fact that they need the equipment, however, makes them a high risk in the eyes of many banks and finance companies. Leasing is one way out of the wilderness. As Bob Greenwood relates: “Leasing is basically off-balance sheet financing; it doesn’t show up. It’s an issue that is taken up in management classes because leasing in a lot of cases is very expensive. But it depends on the equipment, depends on the location and depends on the financial strength of the business.”
For some shops, the leasing is the only way to procure the equipment, a factor which must be considered in a business plan. Greenwood’s strategy is inclusive: “We look at what is the purpose of the equipment, what are the clientele needs and what level of equipment do we have to put in the site itself, but then we have to look at the profitability factor of the equipment. One of the best examples is the dyno. Put in a dyno for Drive Clean (in Ontario) and lose your shirt. You’ve got to crunch out the numbers. They should always bounce it off their accountant.”
From the perspective of the equipment supplier, the situation can be frustrating, especially where the shop needs the equipment, is a willing buyer, but can’t raise the money. Hans Smith, key account administrator for Hennessy Industries Canada describes the environment: “The difficulty for us is that the newer shops always have more trouble getting approval, so there’s quite a battle getting approval.
There’s a couple of leasing companies that we deal with that deal extensively with equipment. And you have to find that type of company.” Smith sees both sides of the lease/buy debate, and uses both to get equipment into the f
ield: “There is a fairly distinct split, depending on the type of business. New car dealers buy outright.
Smaller shops tend to lease more frequently. Established shops try to get the distributor to put out terms to distribute it over several months, but generally buy outright. But leasing is not a common thing in established shops. The advantage comes down to tax implications. If you buy capital equipment outright, it’s subject to capital cost allowance, depreciation, so it goes into the pool of assets to be depreciated, whereas the lease you right it off instantaneously, kind of like leasing a car. The downside is it becomes a liability, and established businesses don’t want to add things to their liability columns. So they pay the cash outright, and they’ve got it, it’s an asset, and they don’t owe anything to anybody on it, which I think is why buying is more popular for companies that can afford it. Like anything, it’s not a hundred percent.”
Much of the battle smaller and newer shops face in procuring equipment comes down to respect, or rather lack of it. Brad Moffat, product manager for ESP Canada Inc., and a former shop owner, sees the problem from both perspectives: “You try to get a loan from a bank, and as a garage, you get no respect at a bank. Even the best bank will look at your equipment and give you pennies on the dollar for it. I experienced that myself as a shop owner in the ‘Eighties.
You say, ‘Look, I’ve got brand new brake lathe, tire changer, balancer, and look at all these hoists I bought’ and they look at you and say ‘Buddy, that’s worth 500 bucks to me’. And the brake lathe is worth four grand, the tire changer is worth seven. That means nothing to them. The whole industry has allowed itself to be bullied by the banks for a long time. And unfortunately it still hasn’t gone away, which is why leasing is a better option than it ever really was.”
Despite the relative ease of the leasing option, Moffat advises an open relationship with a potential equipment supplier for a stress-free agreement: “A lot of people don’t realize how tough it is.
When you start, it’s no big deal. Leasing a tire changer, you sign a piece of paper, walk away and we’ll deliver it. When you get more than $50 000 you need your accountant involved because even though you fill out the lease contract, now nearly all the time you need to have statements. It’s always been the big adage: if you don’t need the money they’re going to trip over themselves to give it to you. And the terms, and the interest and all the options come to those who look like they don’t need it, unfortunately.
We try to get the good guy who bought a partner out, or put an extension on. It’s very tough on their egos.” Tough as the process can be, Moffat warns against dealing with companies whose terms seem too good to be true: “If a company is willing to put something in without checking it first, you have to wonder if they’re trustworthy. A lot of people make it seem easy and friendly. I would question that above all. We had a competitor in the States that had a lease rate that jumped to 18 percent as soon as you missed a payment. It didn’t matter if the payment was late a day because the mail had it, or whatever. Be up front, give all of the information.”
Bruised egos aside, chances are if your shop has generated a strong business case for a piece of new equipment and has a plan which includes training, marketing, insurance, and most importantly, a sensible way of paying the bills, then the outcome will be good for both psyche and bottom line. SSGM
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