Making a major equipment purchase is always a thought-provoking, almost overwhelming process—and never more so than in the current economy with credit tight and so many printers struggling. On the other hand, the same pressures also open doors to opportunities for those positioned to take advantage of it. The marketplace is full of resale equipment that is fairly new as a result of business failures or lender repossessions; and manufacturer sales on new equipment are at the lowest level we’ve seen in a long time. So if your equipment is old, the prices are right, and you think that (just maybe) you can make it work financially—should you consider a major equipment purchase now?
There is no simple yes or no answer. Major equipment purchasing is never a “one size fits all” proposition. All critical purchasing decisions—Used or new? Purchase or lease? Now or later?—must be individually considered in light of market pressures and goals, as well as careful assessment of other critical decision making factors. This article will address the “purchase planning” portion of a major equipment decision. Major Equipment Purchasing, Part 2 will be tackling how to negotiate the deal and arrange financing.
Market Pressures and Marketing Plans
Today’s market pressures of fierce pricing competition and overcapacity make it tempting to compete in reactionary ways. Printers too often feel they must match the lowest price quote, or add new technology and services in the belief that “if you buy it, they will come.” But in our experience, it is the lowest price provider who closes his doors, and the impulsive major equipment buyer who finds excess capacity with machines that are under-utilized and is operating at a loss.
Now is the time to prudently act, not just react. Take a step back, and start with the best tool in your arsenal—a solid, well-thought out marketing plan. A good marketing plan will help you focus on what you can realistically produce, and most importantly, the products and services that you can provide most profitably. Once you know what your service focus areas are or should be, you can look at equipping your facility to provide what your clients and the market will support. In making this assessment, your current client base is the best place to begin. Your competitive edge is the relationship you already have with existing accounts, so ask them what’s going on in their companies and how you can help. Make yourself a partner in their success. Find out what they need and want, provide it if you can, then build upon that success by going to the marketplace with those services. If you don’t have or can’t develop the client base to utilize a particular piece of equipment, it doesn’t make sense to invest your cash in it.
Can I Afford It?
Once it is clear what equipment you need to support your services, it’s time to get out the paper and pencil and work on some financial projections. Consider the possibility and potential cost of rehabilitating your current equipment. Then do a cash flow projection with a new equipment purchase. The “Can I afford it?” question is closely tied to cash flow, which is one of the most important covenants you will see in any lending document.
The following Cash Flow Coverage analysis compares a printing company’s current EBITDA (Earnings Before Interest Taxes and Depreciation) and Debt Service to those projected figures after a $500,000 press is added to the mix.
Insert Chart here
Column A shows a current income before taxes loss of $10,000, but EBITDA of $270,000. Total payments in this current scenario of Column A are $250,000, so the EBITDA covers the payments—barely. Typically, we see this happening more and more today.