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Considerations in purchasing

capital equipment

by: Richard Browne

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    TORONTO, Ont. - We have turned the corner on harsh winter weather, and spring is here.

    Spring is a time of renewal and refreshment as nature comes back to life, giving friends and family the opportunity to spend more time outdoors. As we trade icicles for flowers and snow angels for pool loungers, the warmer weather brings sights and smells that brighten up our day. Smells of lavender, vanilla, citrus and eucalyptus are just a few of the familiar and inviting scents gifted to us by spring.

    Even though scents of nature fill the springtime air, some people may have too much on their to-do lists to truly relax and enjoy the outdoors. Armor All is now bringing the natural scents of spring directly into your car. The new Essential Blends air fresheners are infused with essential oil blends of lemon bergamot, eucalyptus mint, pink grapefruit, citrus pomegranate and vanilla lavender, giving you the scents of spring wherever you go.

    "The inspiration behind Essential Blends came from looking at the average person's daily to-do list and thinking of how we could make those little in-between moments relaxing," says Megan Currie, Spectrum Brands director of marketing for Armor All. "A lot of people are in their cars for a good portion of their day, whether they are commuting to work or doing errands. We wanted to transform that daily routine into a comforting experience."

    Essential oils are known for their refreshing and restorative properties. Helping to relieve headaches, relax the mind or even energize the body, the benefits from essential oils are endless.

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There’s no shortage of ways to invest to grow your business. Your options range from purchasing new sites in a similar or new business down to paying your employees more or painting your gas islands. Business owners are faced with these decisions daily. Having a framework to make the best decisions, and avoid bad decisions, is critical to any successful business.

 

The quality of these decisions will result in expanded profitability. The most important measure of profitability, from an investor’s perspective, is return on capital or ROI. ROI is, simply, the amount of money you get back on the money you invest in your business.

 

Investments should be viewed based on several criteria:

  • How does the ROI of an investment compare to your other options, i.e. which investment will give you the best return?
  • How do these returns compare on a risk adjusted basis? For example, purchasing an existing store with known cash flow is likely less risky than building a new store in a new market. If the return on the new store is similar to the existing store, the existing store would have a better risk adjusted ROI.
  • Is do nothing an option? If so, what would you do with the money and what would that return be? If you would put it in the bank and buy a CD, your ROI would be less than 2 per cent annually. If you would put it into the stock market and think the market will grow at 7 per cent/year, this would be a higher ROI but also higher risk. The average ROI for NACS members is around 15 per cent, which suggests the return from smart investments is much better than doing nothing.

 

In determining your ROI, there are three components to consider:

  • What is the cost of the equipment or investment?
  • What will the equipment earn?
  • What could happen to make the return on investment different than you expect?

 

Let's take a quick look at each of these elements: What is the total cost of equipement?

When making an investment, the easiest element to look at is the equipment cost. This is clearly spelled out in a quote from a distributor. It is important to also consider what is known as the total cost of ownership, or TCO. Factors to consider in TCO include:

  • Length of warranty and what is included in the warranty. For example, does the warranty include travel charges to and from your site, parts only or parts and installation, and any type of agreement on response time? Can you negotiate a longer or broader warranty as part of your purchase?
  • What are the costs of staff training, permitting and other related upgrade costs?
  • Service technician availability and reputation? How far away from your business are the authorized service technicians located? What is the service techs reputation for fixing items on the first call?
  • What is the cost of financing the investment? If you choose to pay cash for equipment, it is important to understand the ‘opportunity cost’ of using cash rather than financing or borrowing. For example, could you use your cash to purchase another site that will make you a greater profit than the equipment you are buying? Many people consider it smart to use cash to purchase ‘strategic assets,’ which are investments that grow in value rather than depreciate. With this approach, borrowing or financing is used to pay for depreciating assets, such as gas pumps or LED lights. This approach allows an entrepreneur to maximize their ROI by using a mix of debt and equity to invest in their business. If you could use your cash to earn the NACS average 15% return on your investment, and instead use your cash to finance an underground storage tank upgrade, the tank upgrade is effectively costing you 15% per year.

 

What will your equipment earn?

Although this may seem like an easy question to answer, for many equipment investments it’s not so easy. Some factors to consider:

  • What is the cost of doing nothing? Will I lose gas or in-store business to competitors that are investing in their sites and c-stores?
  • What business benefits will I gain? Investing is usually done for one of two reasons – to grow revenue or reduce costs. If you are adding new gas pumps or upgrading your brand image, you are likely expecting to gain gallons and increase inside sales. In addition to increased gas volumes, will your new pumps allow you to charge a higher price per gallon? Also consider what savings you will realize in reduced maintenance, not just during the warranty period but through the life of the equipment.
  • If you are thinking of selling your site in the coming years, what will the modern equipment, regulatory compliance and increased sales mean to your business valuation?

 

What could happen to create a different value for your investment?

  • With most investments, there is always the chance of an unexpected outcome. Some things that should be considered when making an equipment purchase and using financing are:
  • What could change outside of my control? For example, what impact would a new site across the road have; and how likely is that to happen? Is there technology that could make my investment less valuable?
  • Do you fully understand the terms of the purchase agreement? It is important to make sure that any agreement spells out all foreseeable costs related to installation, equipment commissioning, removal of old equipment, freight, taxes and any other costs.
  • What constitutes the equipment being fully installed and ready for service?
  • If you are financing your equipment, ensure that you receive clarity on all payments, including payments to commence the loan, any payments at the end of the loan, and any additional payments or costs. Confirm that the quoted interest rate is similar to the actual interest rate when all payments are considered.

Making an investment in capital equipment for your convenience store or fueling operation is a big decision. When making a large investment, the lowest cost is not always the cheapest cost, short or long term. It’s important that you do your homework in researching the track record of your equipment manufacturer, the authorized distributor and installer, and others that will help you invest in your business.

Richard Browne, vice president of Marketing, Patriot Capital
Richard’s experience includes working with Global and North American retailers to help grow their fueling and retail businesses.  Mr. Browne’s roles have involved payment and dispenser innovation and deployment in Europe, Asia and Canada.  Prior to joining Patriot Capital, he consulted with midsized high growth businesses as a partner with Chief Outsiders, was vice-president of Marketing with Gilbarco Veeder-Root and was a sales and marketing leader with Black & Decker and Stanley Works.

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