Think Strategically When Considering New Equipment

Equipment purchase decisions today – whether you’re pinching pennies or spending heavily – will have an impact when it comes time to cash out the company.
Think Strategically When Considering New Equipment
Do you foresee the need for a new hydroexcavator in your future? Major equipment purchases are a big deal. Make sure you are taking the right approach.

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When it comes time to buy new equipment, you face scores of decisions. What brand? What make and model? What features?

Should I buy new or used? Should I lease instead of buy? Or if I do buy, how should I finance it?

Other questions require deeper reflection: Will this equipment make my business more productive? Will I be able to generate the cash flow to pay off the loan? Is it good for my business?

And some of these decisions have even longer-term implications still – not when you buy the equipment, not even necessarily a year or two later.

Instead, those turn up when you decide you’re ready to retire and sell the business to someone else. And that’s true whether you’re selling it “in house” to a business partner, your children or your employees, or whether you put it on the market and sell it to the highest bidder among a bunch of strangers.

Added value?

It’s a bit like a homeowner who weighs whether to remodel. Sooner or later every homeowner will hear that remodeling the kitchen or finishing the basement will add handsomely to the price your house will fetch when the time comes to sell. And while that’s partly true, there’s a limit to how much you’ll benefit in that way.

Real estate experts point out that, above a limited threshold, you probably won’t get back all the money you put into that remodel. The real impact may be intangible – such as reducing the time your house is on the market before you get an offer.

So your decision to remodel, and how much to remodel, should focus on what you want out of it. Get the high-end stove because you’re an amateur gourmet chef and will use it to practice your skills – not because you think it will guarantee you $5,000 more from the person who buys your house three years from now.

Business owners need to look at major equipment purchases in the same way, says Bud Miller, chief sales officer and senior VP for small business sales and distribution at TD Bank, which has banks across the country. When a homeowner upgrades the kitchen or puts on a new roof, “that will all be a part of the analysis of the new buyer,” Miller says. For a business owner, new equipment before a sale has much the same impact.

In it for the long haul

The first rule, he says, is buy what you need to buy. Don’t skimp – but also, don’t buy more than you need.

Be sure that it will ultimately pay for itself. Don’t think you’ve got to buy some fancy new truck just to catch the eye of a business buyer down the road.

If you really are on the verge of selling, you need to be especially cautious, he adds. “Perhaps you want to not purchase something new if you’re planning on selling the business next year.”

Some new equipment or restrooms can help you “tease” a prospective buyer – but it could just as well work the other way: If you get a particular brand that some future buyer doesn’t like, that could scotch the deal before it’s even off the ground.

Besides that, expensive new inventory is going to add to your debt. No buyer wants that to be larger than it has to be – and if it’s too high, they will walk away without even kicking the tires of your operation.

Consider your exit strategy

Mo Howard, CEO at Ultegra Financial Partners in Denver, Colorado, says that when you buy equipment for a company you know you’re selling in the near future, your decisions need to relate directly to your preferred exit strategy. So it helps to look through the eyes of a potential buyer for your firm.

“You really should consider, ‘What can my new purchaser finance?’” Howard says. “If you’re intending to sell, look at your equipment as the bank would look at your equipment.”

Equipment that has a longer life cycle is probably going to hold its value longer – and so will add the most to your company’s potential purchase price. Short-life equipment will have the opposite impact: If your computers are six years old, don’t expect them to add anything to your overall selling price, considering that information technology tends to be obsolete inside of 18 months.

Second-hand dangers

So should you prefer used equipment instead, since it will be cheaper and put you in less debt?

Not necessarily. Once again, think about your future buyer’s needs.

If you weren’t planning to sell, you would want used equipment that you can rely on – not equipment that will cost you more in continuing repairs than it will make for you in new business.

The same is true if you are planning to sell – only it’s your buyer who will have to rely on the equipment you buy. You can be sure if the buyer’s financial team sees a money pit in your “inexpensive” second-hand trucks, it will come off the bottom line of your sale at best – or leave you without anyone to sell it to at worst.

The bottom line

The bottom line? New or old, and whatever kind it is, you really need to think about whether the equipment you buy will enhance the business when the time comes for you to sell it – or whether, instead, it will just be a burden on the buyer.

“You should operate your business like it’s an ongoing entity – do what is right for it,” Miller says. Whatever you may have in mind for its future, “own it and operate it like you were going to have it another 50 years.”


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