Is it Time to Love ’em or Leave ’em?

A soft economy requires tough decisions about holding or selling owned equipment.

It’s that time again — time to finish up the books for 2008 in order to prepare both statements and tax returns. Under current market conditions, it behooves you to get this done as quickly as possible so you have a complete set of professional-looking statements to use when you meet with your bankers. Having them completed by February 15 will show you have your act together, which is a plus when dealing with financial institutions. It also helps when you have tax refunds coming; the sooner you file, the sooner you get the funds.

I hope those of you who participated in our webinar last month on the credit situation (available for viewing at www.ForConstructionPros.com/webcast) took home some ideas on how to obtain financing and cut operating expenses. Our webinar speakers were all industry experts who can help with the tough decisions you need to make. (If you enjoyed this webinar, or have additional topics to suggest, let Becky Schultz know at [email protected].)

As our speakers suggested, getting year-end financials completed, along with a 24-month business plan and cash flow analysis, will go a long way to help you run the business and support assumptions in the business plan.

When is it time to “fall out of love”?

Speaking of tough decisions, a reader sent me an e-mail asking how to decide whether to stay “in love” with his equipment or covert it to cash in a soft market. As you all know, this is a tough question with many alternatives available depending on your current situation, your expected situation and your ability to obtain additional financing should you need it.

If you own the equipment and it is fully paid off, the decision is somewhat easier to make. If you get reasonable time utilization out of a unit, it pays to just keep it unless the maintenance is killing you.

Renting when you have a consistent need works if you can arrange a deal with a rental company for a long-term commitment. But it works only if you need to sell an owned unit to supply working capital to stay in business. Once you get back on your feet, you will want to purchase a replacement unit, because it will most likely be cheaper than renting. It may also be possible to package all owned units and refinance them for a 36- to 48-month period. However, this may be tough to do at present.

On the other hand, an owned unit that is fully paid off but with low utilization may provide more benefit as a source of working capital, with rental picking up any slack. Units with low utilization will probably not be repurchased.

Owned units with a balance due present a different set of problems. If you are under water on the unit (wholesale value is less than the loan balance), selling it makes little sense unless the loss on the sale is less than the cash loss from making continuous payments on a unit you will not use. To increase cash flow, however, you could take units financed with a line of credit and refinance over a 60-month term.

Owned units with balances where the equipment is “in the money” provide an opportunity to reduce debt and generate cash. But again, you have to assess the current situation and decide if the unit needs replacement, or can have its utility value provided through rental.

Capital considerations

Today, a contractor needs a clean balance sheet, a business plan and permanent capital to operate the business. Capital either comes from converting assets into cash, taking on more debt or proving personal capital. One of the ways to covert assets to cash is by selling off fully owned equipment with the idea to replace utility value with rental until the time when repurchase is feasible.

However, keep in mind that all equipment sales could have tax consequences. As such, it would pay to review these potential transactions with your accountant before you execute a deal.

By the way, I like to receive questions from readers, so please send them along if you have them. You can reach me at the number or e-mail address shown below.

Garry Bartecki is the managing member of GB Financial Services LLP and VP Finance for the Associated Equipment Distributors. He can be reached at (708) 347-9109 or [email protected].

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