Supply chain issues and increased costs for new equipment are major concerns for business owners in 2022. This has led many business owners to evaluate the purchase of used equipment to expand their operation. Since there are risks in purchasing used equipment, we have a few useful tips to help simplify the process as well as head off potential problems before our customers are stuck with a bad investment.
Before you start looking it is best to do a brief cost/benefit analysis.
Consider the following:
- Do you need to hire an additional person to operate this machinery? What is their monthly cost?
- Are there additional fuel or material costs?
- How much more productive will this equipment make your company…does it enable you to complete jobs 30% faster, does it eliminate your short-term rental costs, does it eliminate your cost of hiring an outside company to perform the work?
- Get prequalified for a lease or loan on the expected equipment cost…that way you can calculate your estimated payments based on the cost of the equipment. With used equipment moving quickly, securing a pre-approval also allows you to potentially negotiate a better price vs other buyers that don’t have their funding secured.
- An ideal cost/benefit ratio is 2 to 1 or better. The additional revenue from the acquired piece should be double the total monthly cost of the machine (lease payments, plus maintenance costs, additional payroll costs, insurance costs). For example, if an additional excavator will cost $2500 a month then it should yield $5000 a month in savings/additional revenue…anything less and you should consider a less expensive piece of equipment to make the ratios work and protect the profitability of your business. There are bonuses for depreciation however the goal of any successful business is increasing cash flow not using depreciation to help make a purchase make financial sense.
Get feedback on different types of equipment.
If you are not familiar about certain types of equipment, then taking some time to do additional research will help you protect your investment. LinkedIn has several great corporate groups/industry groups. The website can be a great resource for asking other small business owners for insight as to what equipment has worked best for them and what challenges they have faced on implementation. Their honest feedback could save you a significant amount of money…this is especially true in the manufacturing sector. Some automation equipment might need additional features to enhance productivity or require a significant investment in power supply/infrastructure to work effectively.
Since maintenance will be a concern when adding a used piece of equipment, find out which dealer in your area will service this equipment. It is also beneficial to call them and ask them if they are seeing part shortages (if something breaks are you going to have to wait months for a replacement?). If possible also ask the dealer if they are seeing a higher volume of certain makes/models of equipment that are breaking down.
Do some basic research on the seller or vendor.
If it is a vendor:
- Check their reputation online with both the Better Business Bureau and resources such as google/yelp reviews…see what other customers are saying about them.
- Ask if they will provide a maintenance log or condition report, have they done any repair work on the equipment?
- Ask if they physically have the equipment at their location or if they are selling on consignment (a vendor selling on consignment typically will not know the condition of the equipment well….they are relying on their seller and may not have physically seen the equipment). Will the vendor let you call the seller with questions on the machine?
If it is a private seller:
- Make sure and verify the seller legally owns the equipment before taking a trip to see the equipment in operation…simply ask them for a copy of the paid off invoice from when they purchased it or a copy of the front/back of title if it is a vehicle.
- Have them send you a picture of the serial number of the machine…if the serial number isn’t legible or they can’t/won’t provide ownership information then find a different piece.
- Ask why they are selling the equipment; do they have any maintenance records they can provide?
When comparing 2 similar pieces, one from a dealer and one from a private seller, the rule of thumb is that the seller’s piece should be 20% less than the dealer’s price. In the current market, we are doing appraisals and finding many pieces of equipment are over-priced….just because a seller invested $50,000 in an engine rebuild doesn’t mean that equipment is worth $50,000 more.
If you’d like to receive further insight of the current market and concerns you may have acquiring a piece of used machinery, talk to one of our experienced Account Managers at (949) 822-3017.