December is right around the corner and Fall is the busiest listings time of year, where production company owners realize they have been profitable for the last 12 months and are looking at cutting Uncle Sam a big fat check to start the new year. This is where production companies look to sell off their old gear and re-asset with new gear to reduce their tax bite. Below are some thoughts on how to balance a depreciation schedule while trying to get the highest resale value for your gear.
The majority of production companies these days run on a 3-year depreciation schedule – you purchased a piece of gear, rented it and maintained it and the residual value, for accounting purposes, is $0. However, a well-maintained piece of gear may very well have quite a bit of value left beyond the 3 years. At this point, if it is sold for cash, the entire value is booked in at 100% pure profit.
Since the “Great Recession” of 2008, both production companies and manufacturers have dramatically altered their buying and selling habits. For buyers, every single penny counts and there is limited speculative purchasing. For manufacturers, the game has been to obsolete products (typically again, within a 3-year cycle) and to produce new items to replace the old. The end result of all of these new products pouring into the marketplace, is a shortened technology cycle and an abnormal depreciation of the equipment resulting in a lower resale value.
So when do you get out of gear without taking a beating on resale value?
The most successful and profitable companies in our industry subscribe to the philosophy that their gear is always for sale. If a profitable scenario comes along, where they can supply used equipment and reload with new gear, they will more often than not take that deal. There are a multitude of reasons for this but the single biggest, is being ale to leverage the manufacturer into getting a better price, thus reducing their cost of ownership and driving more profits.
For the average production company that has new rental gear, putting the items up for sale at the 18-month point seems to be the sweet spot. Here is why:
- Let’s say a purchase is made of 24 moving lights that have a dealer cost of $100,000 and a retail sales price of $120,000.
- If the items are in high demand for the first 18 months, you can expect high utilization (rental demand) plus, from an accounting perspective, your equipment is now worth $50,000 (half way into the depreciation cycle).
- Listing all 24 lights at a selling price of $90,000 will attract retail buyers looking for a deal and, in the majority of cases, will still have factory warranty available.
- This basically leaves the production company with a 10% cost of ownership over an 18 month period.
Using the same numbers, but selling at a 3-year point the numbers look quite different.
- The $100,000 cost lights now have no warranty
- you have at this point paid for at least one year of parts,
- the technology cycle is at the end and the product is more abundant in the marketplace.
- Not to mention the fact, the factory is now beginning to close this product out at lower pricing.
- A typical value for this equipment will on average be 40% of what you bought it for ($40,000).
- Your cost of ownership here is 60%, a 50% reduction in the final 18 months you own the product.
Some will argue that the rental revenue stream will far exceed the cost of ownership which may or may not be the case. Regardless, it still leaves you with a dramatically reduced asset value.
The bottom line, start selling your gear at 18 months, where it’s worth the most and you get the most return all the way around. Adjust pricing as you need to and you’ll be a happier and more profitable rental company.