Business Forecast: To Buy or Rent

The decision of whether or not landscape contractors should buy or rent their large equipment often comes down to dollars and cents. It’s a decision that would also be easier to make if contractors knew they were working through nothing more than a small recession. However, there may be a towline out there waiting to pull in landscape contractors who are looking hard for new work.

Dennis Slater, Association of Equipment Manufacturers (AEM) president, sees the need to get dollars into the construction pipeline.

“An immediate increase in public works funding will help jumpstart the U.S. economy,” Slater says. “Construction projects are being deferred and our customers are looking for work. It’s estimated that there are currently 3,000 projects that could begin work within 30 to 90 days of a governmental funding commitment.”

But regardless of how long the economic downturn lasts or whether public works projects will provide needed work for contractors, Brad Rowe reminds his Michigan State University landscaping students that the decision to purchase equipment often comes down to how much they’re going to use it.

Teaching courses in landscape construction, landscape contract management, plant propagation and sustainable landscape practices, Rowe advises students not to just buy equipment so they can have a toy.

“If you’re not going to use a skid steer all the time in your business, don’t buy it,” he says. “You’ve got to use it enough to pay for it. Look at how much time it’s going to save you; in the case of a skid steer it’s going to save a lot of time as opposed to shoveling by hand.”

With large equipment such as skid steers, Rowe says much depends on the landscaping company and what it’s doing.

“I believe in equipment. I think it saves a lot of time and your employees are going to be happier. Anyone would rather work a skid steer than a shovel, and you can get so much done much faster. But if you buy the thing – use it.”

Rowe feels whether companies will buy, rent or simply maintain what they have with their equipment depends on the size of companies and what they do. If he is constantly building hardscapes, Rowe is glad to have equipment such as a skid steer. If he’s doing mostly annual planting, maybe not.

“I don’t feel that equipment prices are necessarily going to go up mainly because there is less demand for machinery today,” Rowe says. “I would assume there would be less demand for the services, which in turn means there will be less work going on and lower demand for the equipment. This means companies making the tools must cut back their production capacity or they risk having more pieces out there than they are able to sell. That, in turn, will take the price down too.”

If your company is in good financial shape, Rowe says it might not be a bad time to purchase equipment.

“I can see why someone might not buy something and instead go rent equipment, but I’m not sure that would be offset by doing less work. I think the long-term trend for landscaping services is very bright. And the need is only going to increase and people will get paid more. But five years from now, I don’t know what things will look like. I would hope things will get turned around by then.”

CLOSE TIES TO HOUSING

As the recession deepened, construction spending as a whole has lessened, according to Andy Lewis, marketing manager for Compact Power and BOXER Equipment in Fort Mill, S.C. Included in this tightening of the economic belt were landscapers, builders and anyone involved in the realm of landscape architecture, design and installation.

“Most landscape architecture work directly correlates with new home construction,” Lewis says. “In the landscaping industry, a reduction in capital expenditures has been felt on a global scale.”

There is a compounding affect here as well. Residential construction and commercial construction go hand-in-hand. For example, most wouldn’t establish a new Blockbuster franchise in an area without new home construction. The two are dependant on one another. Therefore, the slowdown in housing ultimately equates to a slow down in the construction of businesses that support a community.

“When there is a downturn in the housing market, there’s a slowdown in the entire landscape industry, especially with treescapers, sod installation workers and irrigation people as well as many of the things that come as standard issue with a new home,” Lewis adds. “Frankly, in light of this fact, a lot of contractors are renting as a short term solution for a challenging market place.”

Lewis has noticed an increase in small to medium-sized contractors trending towards renting equipment. Without the mature work pipeline they had just one year ago, landscapers may have a little trouble legitimizing a capital expenditure.

“Of course this is not a uniform truth,” Lewis says. “Many of our customers are purchasing equipment now to leverage the extremely strong financing and warranty programs manufacturers are offering. When the recession lessens, and the work pipelines begin to reach capacity and supply and demand level back off, one should assume these incentive offers will weaken. Savvy entrepreneurs know this and are taking action now, before the end of the year.
 
“The trends I am witnessing show rental is on the rise. Internationally the rental market is growing even faster than domestically. For example, in England, 70 percent of equipment is sold directly into rental or ‘hire companies,’ as they are referred to there. But from a competitive sales analysis perspective, we’re seeing financing rates for purchases I haven’t witnessed in the last five years; they are very aggressive. It’s definitely a real good time to buy.” 

STICKING WITH OWNERSHIP

Sean Ozias owns Ozias Lawn Care & Landscaping, a seven-year-old business in Newton, Pa. Ozias has a Caterpillar skid steer, three Exmark Lazer mowers and various trucks and saws. When he started, Ozias rented nearly all his larger equipment, including steers. But as he has earned more money, he has increased his equipment purchases.

“In the long run, if a business owner plans on sticking with their business, the equipment should be owned,” Ozias says. “At this point, I own most of the equipment I use to run my business. It doesn’t pay to rent a skid steer for $400 dollars per day when you can have a payment for $600 per month.”

Ozias sees owning and maintaining his current equipment as the best option.

“There are many deals available now, as well as quite a few going-out-of-business auctions where deals on good pre-owned machinery exist. For 2009, if you are able to buy you will get better deals than you ever have before. If you were to purchase a Ford pickup, you’d probably get a better deal than you could have two years ago.

“On the other hand, I think there is growth in the rental market as people become frugal with their spending and may be operating on a day-to-day or week-to-week basis. If you have the resources and are not over-extending yourself, I would think now is the better time to buy. People are quite willing to wheel and deal to get items out of their showrooms.”

LEASING WITH AN OPTION TO BUY

Jerry Haupt of Manitowoc, Wis., is a landscape contractor and owner of Lakeland Landscape Service. He has a regular crew of five full-time employees with three or four part-time workers. Haupt was thinking of upgrading one of his three 160 Series Bobcat skid steers, but at this point, he says he’ll probably put that plan on hold.

“We’re going to sit tight through the winter and probably through the start of next year,” Haupt explains. “I’m still mulling over the idea of getting a tracked vehicle; they’re nice but they come with a price tag too. I’m told the tracked vehicles work for snow removal – something we do in winter – but I have to try it first.”

Lakewood Landscape usually buys most of its equipment, but does have some trucks on lease right now. These include a small pickup and small dump truck.
 
“The main reason we went that route is you can keep the monthly payment down and usually buy them out at the end of the lease,” Haupt says.

EYEING THE BIG PICTURE

Due to the economic hardships that a lot of small businesses are feeling right now, Brandon Hutchins, managing partner at Anytime Yardcare in Roy, Utah, has found that renting larger equipment is beneficial.

“Banks are restricting the amount of the money and the frequency with which you can get small business loans,” Hutchins says. “Because of that, it is very important to be as liquid as possible. A lot of the equipment necessary to run a successful landscape company comes with high price tags. In a normal market, it’s not tough to get a small loan with 90 days same as cash, one year same as cash, etc. Using one of those types of loans enables a company to recoup its initial investment for the equipment by performing jobs during that time period. A lot of rental companies are also feeling the economic crunch, so they are more willing to give discounts to frequent renters, and many are lowering their prices to try and earn more business.”

Renting more equipment has helped Anytime Yardcare have more cash on hand and has enabled the company to actually expand its business.
“As banks become more willing to loan and economy grows stronger, we’ll gradually start to buy some equipment that we’re currently renting,” Hutchins says.

In the end perhaps it’s best to consider Ozias’ big-picture assessment of buying and renting.

“Five years from now, I think it’s going to be in exactly the same place it is now – or was two or three years ago,” Ozias says. “There are 50 percent of contractors who are renting, and 50 percent who are purchasing. The ratio holds steady over the years.”