How to Negotiate Equipment Purchases in a Post-Recession Market

The far-reaching effects of the recession have manifested in myriad ways in the graphic arts industry. There are multiple perspectives on what market changes mean for business. Equipment manufacturers, distributors, financial experts, and print shop owners all have different roles in—and perspectives on—negotiating equipment purchases in the post-recession marketplace.

 

A New Deal

Rick Riesgraf, chairman of Carlson Advisors in Minneapolis, has served the graphic arts industry as a print management consultant and CPA for 27 years. He said unlike the last two years, several of his clients are purchasing equipment this year.

Riesgraf has helped his clients negotiate better equipment deals this year than were available prior to the recession. One client that purchased a multi-million-dollar machine from an international equipment dealer was able to negotiate heavily on a number of things, including price and the terms of the progress payments, he said.

Clients sometimes need interim financing for progress payments before moving to permanent financing after equipment is installed, Reisgraf added. The equipment vendor essentially helped finance the interim part of the deal before installation. In the past, the vendor would have had a progress payment schedule that was much more aggressive.

“Between the vendors and the financing, we’re seeing companies put equipment on the books at packages like they never have before,” Riesgraf noted.

Negotiation of used equipment sold from one printer to another has also been affected by changing market values.

Tony Fadale, who bought North Seattle Minuteman Press in 2007, negotiated the purchase of some equipment with the company’s previous owner. Fadale said at first the seller and he had different ideas about what the equipment was worth. By presenting research on similar equipment being sold online at websites including eBay and Craigslist, he said the previous owner finally came to know that market conditions prevailed.

“He had to actually come down to what market value is, as opposed to actual value, as opposed to book value,” Fadale added. “There are two different things in this world: reality and what’s on paper.”

 

Financial Accessibility

Ed Young, senior sales VP at Heidelberg USA, is responsible for the day-to-day supervision and management of the entire field sales team. In his 32nd year in the industry, Young acknowledged Heidelberg’s customers have had a lot of stress in their businesses from a financial standpoint. Today, the credit approval process, the financing aspects of an investment, are taking much, much longer than they used to, he said.

“Arranging the financing, dealing with things like trade-in machines [and] the value of those machines, there’s a lot of complexity when a customer looks at how he’s going to justify and pay for the equipment,” Young explained.

Nick Howard, manager of Howard Graphic Equipment in Mississauga, Ontario, has been negotiating printing, carton production, and bindery equipment purchase agreements for 35 years. Everything is a lot more conservative today than it was in 2008, he said.

Many lenders that had relationships with manufacturers are demanding much more recourse than they did before to support the deal, Howard reported. Recourse is a manufacturer’s provision to be responsible for a certain percentage of the cost of the equipment in the event the purchaser defaults on the agreement.

Howard said there is less interest in financing equipment purchases today than there was a few years ago because the market has been bad. It’s starting to come back now, but banks traditionally don’t risk very much very often, he added.

“They occasionally have these flights of fancy, and they go into the market more aggressively and basically finance anybody, whether it’s housing or anything else,” Howard said. “But they do tighten up, and that’s what they’re doing now.”

Michael Urquhart, senior VP of People’s Capital & Leasing Corp., which is owned by People’s United Financial, said the firm finances equipment for various industries, including printing and packaging, which he oversees.

The recession caused an excess capacity of used printing equipment, and values have come down over time, Urquhart said.

If People’s was lending money on a printing press three years ago, he noted, it would have looked at the values of that press over the life of the loan. That would’ve helped determine how much they could lend against that press, based on its value over time.

Therefore, they’re less inclined to finance 100 percent of equipment costs on certain credits as they did three years ago, strictly because the value of the underlying equipment they’re financing has dropped.

“We’re just adjusting along with the values,” Urquhart said. “I don’t think banks in general are more restrictive or less inclined to lend. It’s just that the circumstances have changed.”

From the standpoint of looking at a printing company and their abilities, their cash flow capability to service loans, their liquidity, their leverage, all those financial ratios—Urquhart said they really don’t look at those things any differently than they did two or three years ago.

“I think the biggest factor on lending is the underlying value of the equipment we’re lending against,” he added.

Not all manufacturers negotiate recourse as part of purchase agreements.

Young said Heidelberg did not provide recourse to underwrite customers’ acquisition of equipment. “In our industry, the fallout from providing recourse commitments to customers that fail creates a lot of bad debt for businesses, and that’s not a good thing in our industry,” Young said.

One thing they are seeing change is the requirement for personal guarantees. “So if you are the owner of ABC Printing Company, you are also pledging your personal assets to support or subordinate that debt responsibility that you’re taking on,” Young said.

 

Let’s Make a Deal

Heidelberg’s Young thinks of contractual purchase agreements in terms of separate elements: legal, commercial, product, financial, and scheduling. “It’s a pretty inclusive topic when you look at all these different areas,” he said. “And they all can come into play, even with customers that we’ve sold equipment to over and over.”

The purchase and security agreements Heidelberg enters into with customers are designed to protect the rights, privileges, and interests of both parties in an equal way, Young added. “The Heidelberg philosophy is that we try and keep that document at, what I call, the 50-yard line, meaning it doesn’t favor either party more than the other.”

Ken Stobart, president of K&M Printing in Schaumburg, IL, said about 90 percent of his company’s presses are Heidelbergs. He said they determine what they would like to purchase in the next year and request bids from vendors for a bundle of equipment. By purchasing more than one piece of equipment at a time, K&M is able to negotiate a much better deal because the manufacturer is making a little margin on each of the items, Stobart said.

“Because of the size of the order, these big companies are able to bend a little bit more,” Stobart noted. “That’s how I’ve found negotiating to work the best for us.”

Clint Bolte, a printing consultant of more than 25 years, said effective negotiations come into play in two areas of equipment purchase agreements. It has little to do with the pricing offered, he said. There could be a little room there, but that’s not where the real value comes in.

“The real value comes in the accoutrements and after-sales service and parts,” Bolte said. “The more you can include these in the total package, and the more specific you can be about what you’re looking for, quite often you can end up with some real value in that regard.” One example is to negotiate for more ongoing training.

Another way in which Bolte said printers can maximize benefits in equipment acquisitions is by employing a third-party expert to help negotiate the financial package.

Bolte added that he is not one of these types of experts, and a printer’s regular attorney is not a financial expert either. “You need a third-party expert that really understands leases and that sort of thing to negotiate these things down to the ‘enth degree,” he said. “And it’s not the interest rate that you’re negotiating. There are probably 20, 30, or 40 different elements within a rental agreement or a lease agreement that you want to be negotiating, and these experts can do that for you.” PN

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