CAP-EX: The Current Rental Industry Dilema
Just in case you don’t know or were afraid to ask what “Cap-ex” means, it is a shortened version (ie: texting/tweeting) for “Capital Expenditures.” This boils down to “What type and how much equipment are we going to buy next as a rental company?”
As rental companies, large and small alike, age their rental fleets in today’s economy, Cap Ex decisions are always a “zero sum game” in the long run in our opinion. It is a “Pay me now or Pay me later” issue. Here’s why:
In order to maintain an overall rental fleet age of 5 years or less—which is and always will be an industry benchmark–a rental company must purchase 10% of its overall rental fleet value EVERY YEAR, year over year. Here’s how the math works:
Let’s say you have a rental fleet with an original cost/value of $1 Million dollars (or $10 Million or $100 Million–the numbers will work out the same.). 10% of your $1 Million (or whatever your fleet cost number is) in fleet is $100,000. You therefore must purchase $100,000 in fleet per year to maintain a 5 year average age old fleet.
Part of the equation is that you would also sell off $100,000 per year in ORIGINAL cost of fleet as well. You won’t get $100,000 for selling this used equipment but what you are looking at is the original cost of the fleet you sell (usually the oldest units of your fleet).
- $1 Million in ORIGINAL cost of fleet
- 10% of that fleet equals $100,000
- After 5 years of Buying new fleet AND Selling off old equipment at a 10% clip (all at original cost) per year yields the following:
- Half of your fleet will be 5 Years Old or Newer and half of your fleet will be 5 Years Old or Older over time.
- That equates to an Average Age of Fleet (based on overall dollar expenditures) of 5 Years!
This equation does not take into account any “Growth” CapEX, which would be additional expenditures (or less divestitures) to grow your revenues with increased fleet to over the $1 Million example.
The bottom line is this: Continue to invest in your rental company’s rental fleet or pay the price later with additional repair and maintenance expense or potentially lose out to those rental companies that have a newer and more desirable rental fleet. It is our strong opinion that any rental company’s fleet age should be 5 years old or NEWER to survive, thrive and succeed long term in this industry!