Let’s be careful out there
Remember the TV program “Hill Street Blues?” It was one of the most popular cop shows on TV. At the beginning of each show the sergeant would brief the troops and his last statement to end the briefing would always be “Let’s be careful out there!” Good advice for their line of work.
This month I am going to give you that same advice. Lift truck dealers…..Be careful out there. Why? For a lot of reasons. Some of these being:
Disruption is with us
Business is very good right now but as we all know the lift truck market can turn on you at any time. But this time is different because the entire material handling industry is going through disruption just like many other industries. Consequently, just riding out the storm (recession) that is sure to come may not be enough this time.
I believe we can all agree that OEM’s would love to have fewer dealers to deal with. So they will help consolidate the industry and as a result be able to improve their marketing and sales effort, increase the number of national accounts, start selling parts direct and increase sales to rental companies. Where does that leave you? And, even after doing all of this, they will still expect you to hit your market share numbers.
It is also no secret that the equipment distribution model is moving to a more value added service as opposed to a transaction where customers have to own or lease units. In short, they would rather just have units available as a service to move product when they need to move it. If they could avoid negotiating to purchase or lease units with associated maintenance services, and still find a way to have the utility of the units on hand to move product, I am sure they would consider it. Does this sound like a pure RTR transaction?
It does sound like a pure rental transaction because that’s what it is. A rental company owns 100% of the equipment and the associated ownership and operating risks. It a unit breaks they fix it or replace it. If a customer needs more units the rental company will add them. If the customer needs fewer units they can return the excess units to the rental company. The customer only gets what they really need and want – to move product when they need to at the lowest cost possible.
Could your company deliver this type of transaction? Maybe, but only after a lot of changes are made, some of which will lead to interesting discussions with OEM’s.
The point here is, even though you have plenty of experience riding out recessions, this time your ability to recover lost gross profits that get you back to a 100% absorption rate may not be there to take advantage of. Unit sales margins will be further squeezed. Parts sales may not recover and your ability to renew profitable rental transactions may be almost impossible to do.
It will take time for a lot of these changes to take place, but they are on the way and require every dealer CEO to take steps to investigate and mitigate these industry changes so that company profits and shareholder value are at least maintained at current levels.
The value of a dealer seems to ride with the economic cycles. And most of you are pretty good making it through the recession and recovering lost value caused by the downturn. But what it is worth today may not be attainable five years from unless ownership takes steps to go with the flow and adjust their income steams to meet projected market conditions. From my perspective if you are close to getting out, now may be the time to investigate that option.
How to protect your investment
Really evaluate where you are with your dealership. No BS allowed. Be realistic. The numbers should be good right now, good enough to prepare a reasonable estimate of what it is worth.
Also evaluate your ability to find other income streams you can sell to your customer base other than lift trucks. See if you find some related lines you could give you a higher absorption rate.
Check out your tax situation regarding the sale of your business assets. While you are at it why don’t you calculate your normalized EBITDA numbers for the last three years and also work up an OLV estimate of what your rental fleets and inventories are worth. If you need some help doing this give me a call 708 347 9109 or email at [email protected].
I am not suggesting you will go out of business. What I am suggesting is things are changing and if you don’t invest in your company to adopt these changes the value of your business will depreciate to a lower number than you have today.
Remember, last month I mentioned the ESOP Summit I am participating in May. ESOP’s, if you qualify, can deliver much higher net sales proceeds from the sale of your business assets. The link for more information is http://info.csgpartners.com/esop-summit.html. Check it out.
Other tips of the day
When you receive your 2017 company tax return, turn around and ask our CPA to run the 2017 numbers using the new tax bill. It will help you avoid surprises.
There is a lot of interest in switching from a flow-through entity to a C-corp because of the new lower tax rates. This may work in the interim but C-corps produce a double tax on the sale of business assets that you may not want to incur. And I suspect that most of you will have tax depreciation deductions to offset a substantial portion of your taxable income, perhaps making the switch to a C-corp not really necessary. FYI, an ESOP transaction would eliminate the double C-corp taxes.
With the stock market being what it is many dealers could have employees close to retirement with a substantial portion of their retirement assets in equities. That is their decision to make as long as your plan third party administrator has properly educated employees of the risk of holding a substantial portion of equities when close to retirement age. Dealer management has a fiduciary responsibility to see to it that employees are properly educated about markets and risk assessment. Please check with your third party administrator that they have accepted this fiduciary responsibility as part of their contract and have had management follow all the compliance steps required to keep any potential liability away from management. You certainly don’t need a 64-year-old employee losing 40% of their retirement money and then attacking management because they were not properly educated about investing for retirement.
Other tax issues to consider….all entertainment expense is no longer deductible…..allowances you give to employees have new tax ramifications. Better know what they are.
As I said before ….LET’S BE CAREFUL OUT THERE!
Garry Bartecki is a CPA MBA with GB Financial Services LLC. E-mail [email protected] to contact Garry.
