I had a client ask me about upgrading his equipment again this month. It’s one of the most consistent set of questions I get.
Upgrading equipment is a matter between your maintenance guy and your fuel cost calculations, not your accountant. The only exception to that is when an operator seeks help in determining the value of their trade-in on the paperwork. Some situations require a second independent opinion in order to feel assured you understand the whole picture.
When a client is in a lease situation (or ownership) and they have very high maintenance costs, upgrading or changing equipment is a significant temptation.
Sometimes an operator can spend $30-50,000 in two or even one year repairing his truck. It can become very discouraging. How do they deal logically with this problem? There are a couple questions I ask that usually clarifies most situations.
First, what kind of repairs are they? If they are repairs related to pollution control devices they do not bring added value or working life to the truck. Just because $2500 was spent this month does not mean the system won’t fail again next. Real maintenance such as: tires, engine overhaul, tranny, diffs etc. bring added value and working life to the truck.
If the majority of the maintenance is pollution control devices, I typically advise to get rid of the equipment. However, if the repairs are true maintenance that has increased the value of your unit, that may/should change your perspective. Maybe, if you trade it in, you just repaired a truck for someone else to benefit from? In return, if you are considering trading for another used, are you then getting another guy’s problems? Do you have the possibility of having to start your maintenance adventure all over again?
Second, what are you getting on your trade? This may/should be your accountant’s job to figure out if it’s not super obvious. I just over viewed a client’s existing lease and compared it to a proposed new lease with another used truck. A good accountant will always figure out the interest rate the lease is charging (though they never call it interest). The lease had a net charge of 22% while any equity in the existing truck disappeared. So the client was asked to forgo 2-3 years of payments (now finally with equity) with high maintenance costs and start right from scratch (at 22%), with a truck that got very similar fuel economy. Fortunately the client understood his true situation. As of the writing of this article I cannot confirm what choice he made but regardless which it was, he made it with clear and true information. Far too many transactions are made without the operator really knowing what they signed.
The simplest of all transactions are when a truck owned free and clear is traded in on a new truck, with the new truck being shown at actual market value (not artificially inflated to accommodate an artificially inflated trade-in). When trading in a truck the operator must know what they are getting and giving.
I once gave an operator the advice to negotiate with a salesman on a truck by eliminating all the technicalities first, I advised him to: say there is no trade in, say there will be no financing requirements and say there will be no insurance needs of any kind. All you are purchasing is the iron. Once the final price is set, then you can see the added cost each of the terms actually bring. When/if you finally mention you already own a truck you will find out what it is really worth. Many salesmen do not like this type of negotiating. Some even say it’s lying (that may be true). However if you don’t, it’s sometimes difficult to get past the salesmanship deceptions. If you are in the market to buy equipment, finding out actual figures is critical.
Where too many operators fail is in the execution of a deal. When their minds are made up before they sign on the line they forgo their option of walking away. They become vulnerable to last minute pressures or hidden contract terms. If the salesman can tell an individual has already made up their mind, they too often stretch out the negotiations or fan urgency of the sale to get as much from the operator as they can.
The key to a successful trade or upgrade of any sort is the freedom and ability to walk away at any time. If you feel too pushed, to intense pressure or urgency, leave. Cool down, this is business not personal. It’s often times better to limp away with the little you have then burning years of investment and effort. One of the highest costs in the business world is wasted years re-cooperating from one bad choice.
The devil you know is often times better than the devil you don’t know. Never get your business in a state of desperation. Desperate people do desperate things. I have never seen a desperate wealthy business person… at least not for long.