What you need to consider before entering the rental industry - Capital and financing
by Connie Lannan
Years ago, many families, even without a lot of money, could enter the equipment and event rental industry, starting small and building their business over time. While these greenfield operations, or startups, still exist, they aren’t as prevalent as what they used to be, according to those who work in this area of the industry. Today, many who enter the industry do so by purchasing an existing rental operation. No matter how you enter, there are some common elements you need to be aware of before taking the plunge.
To begin, you need to do your homework as far as assessing the market, the competition, your potential customer base, their needs, your niche in the market and your location, but you can’t go forward if you don’t have the financing.
“For anything to get traction, you have to have capital and financing,” says Gary Stansberry, president, The Stansberry Firm, Boerne, Texas, who had his own rental operation in the 1990s.
“Most of the people I see enter the rental business have some sort of investor — not necessarily a banker — who will help them start this business. A banker will want to see that you have experience or someone on your team who does. If you want to try on your own, you will need in the range of $500,000 ready cash to get you into anything for the tool side. A banker won’t finance 100 percent of your equipment,” he says.
Stansberry offers the following example. “Let’s say you find a banker who will finance 80 percent of your equipment. If your starting inventory is $500,000, that is $100,000 out of your pocket. The banker won’t finance a person who used his or her last $100,000 to finance equipment. You have to have six to 12 months of working capital to pay that rent, payroll, pay your operating expenses, your electricity and your fuel. Plus, you will need vehicles and support equipment. In addition to this $100,000, you have to have up to $500,000 above that to cover your operating expenses,” he says, adding that “it is usually not just as simple as going to the bank and saying, ‘I need you to finance my equipment.’”
Whoever you tap for the financing will “want to see a good, cohesive business plan,” he adds.
Stansberry remembers when he started his rental business, “I found it very hard to find anyone to provide me with that initial capital or a banker to loan me the money when I started. After we gained traction, all of these people who couldn’t help me in the beginning were helping me all of a sudden. The money was a lot easier to come by. You may need angel investors, often a family member or other business associate who knows you personally — someone who provides seed money — to help you start a business. The person may or may not want to be part of the business. Unless you have a lot of personal capital, you probably will need to go outside the confines of a normal banking relationship to get you started,” he says.
The need for financing never stops. Once you get your initial equipment and have it out on rent, “you will be stagnant if you don’t get more. It is a constant, buying more equipment or selling that piece of equipment with a need to purchase another piece of equipment,” Stansberry says. “Some people think if they can come up with the $500,000, they will be OK. As soon as six months after you start, you might be looking at buying another $250,000 to $500,000 worth of equipment. It is like putting coal in a freight train. You have to keep feeding it to move it forward. Even the people who have been in the business before may tend to underestimate that. Those who have never been in the industry before almost always underestimate that.”
Because of the need for so much capital, particularly for those going into the equipment side of the industry, “the day of entering this business without a healthy capital base is long gone,” says Ed Latek, president, Latek Capital Corp., Lake Forest, Ill. “You need sufficient patient capital to launch the business and then put its earnings back into it to expand the inventory.”
Besides working with someone to assist on the financial end, those starting out need a strong team of advisers to aid in the process, including a lawyer to set up the corporation — an S-Corp., C-Corp. or limited liability company (LLC) — and initial legal documents, a certified public accountant and someone who can help assess the market.
Many enter the industry through the purchase of an existing business.
“We saw back 20 years ago where people started in the industry at a very small level — with just a few pieces of equipment or out of a garage in the party and event side. We have significant buyer candidate activity that could be a husband and wife or family or ex-corporate. They do need to bring an amount of equity to the table, but they can match that with financing from a lender and some seller financing. We see these types of buyer candidates purchasing small- and medium-size businesses on both the general construction industrial side and the party and event side and having success doing it. We have had success with independent-type buyer candidates — families, entrepreneurs and ex-corporate — and for larger opportunities, we have had success with strategic, peripheral strategic and financial buyers as well,” says John Haener, CPA, president, Vendo Rental Solutions, Rockford, Mich.
“The majority of the work that our firm provides is representing sellers, but on the buy side, we also provide acquisition support services. The majority of those who enter the industry do so with the purchase of an existing business. There are people who do greenfield operations, but the majority purchase an existing business,” Haener says.
Many who look into the purchase of an existing operation also will tap into the expert services of Stansberry, Haener, Latek or Dan Crowley, founder and president, Peer Executive Groups, Coopersburg, Pa., and/or others who specialize in this aspect of the industry. Their expertise is sought because there are additional factors to consider when going this route, everything from the valuation of the business and a review of its financial performance to an overview of the existing management staff, to name just a few.
When a rental business wants to expand its reach by purchasing an existing operation, Crowley has even made contact with a rental operation in the target area and shared that, “‘I have a client who is expanding into your marketplace’ to see whether they are thinking of exiting the market in the near future. People are shocked at that statement, but it is very effective. Whether interested or not, they want to know what their business is worth and are interested to know what someone is willing to pay for their business,” he says.
Stansberry, Latek, Haener and Crowley can evaluate a rental business and help prepare it for sale. All agree there are many factors to consider — a process that can take time when done correctly.
So, whether someone is thinking of starting a greenfield operation or purchasing an existing rental business, it is a process that needs due diligence at each interval — not a decision that can be done without one’s eyes wide open and financial backing on hand to boot.