When asking equipment rental business owners how their business is doing, too many answer on the basis of how much cash is in the bank. However, this rarely if ever tells the whole picture. We discuss the top six rental market metrics to measure performance.
Gearflow sat with Dan Crowley, President of Peer Executive Groups, to talk about what separates the elite equipment rental businesses.
“Equipment rental businesses should look at their business like a baseball manager looks at his team” explains Crowley
“When faced with the decision on whether to bring in a pinch hitter, managers don’t just turn to the player on the bench who has the most hits. They look at data on the player, the match up, and the situation. Only then can they be truly confident in their decision.”
Most business owners are aware that they should be measuring and monitoring more metrics about their equipment rental business and the market, but what to measure and how to start are the biggest questions.
“Business owners become too dependent on their CPA to make financial decisions. However, financial accounting i.e. tax deferment is much different than managerial accounting.
Peer Executive Groups has been able to determine that there are six essential rental market metrics that elite companies excel in to compete.”
Peer Executive Groups aggregates data submitted by their 100+ members in order to come up with performance benchmarks and guidance for members. The members that fall in the top 25% against the 6 essential KPIs make up their “Top Gun” group.
1. Change in business value
Benchmark: greater than 10% growth year over year.
Calculation: Multiply EBITDA by 5
“Businesses must commit to this calculation” says Crowley.
“All the other stuff is nice, but your business’s value and the rate of change of that value is most important”
We will get into EBITDA later but of the market metrics analyzed, a multiplier of EBITDA is the primary baseline that equipment rental businesses are valued at prior to an acquisition. That multiplier can change depending on the business. The smaller businesses with a small footprint and client base are typically closer to 3x EBITDA whereas a more established business with larger footprint can be closer to 7-8x EBITDA.
2. Rental Sales Growth
Benchmark: greater than 10% year over year
Calculation: Divide the change in year over year revenue by the previous year’s total revenue.
“Understanding your Trailing Twelve Months (TTM) rental sales growth rate is far more telling than a top line revenue number” says Crowley.
“The S&P 500 is currently growing at around 10-12%. This is an indicator of the economy. If your business is falling far short of that, you need to look into why.”
Keeping a close eye on rental revenue growth rate as it relates to change in business value is important. For instance, if your value is not growing at the same rate as your rental sales growth rate, that’s OK. That simply means that you may be investing that revenue back into the business and expenses are growing linearly with revenue. This would cause EBITDA to remain the same despite the revenue increase. In this case, your next step is to look into your operational metrics to learn how to be smarter about where to invest your money.
3. Asset Utilization
Benchmark: greater than 50%
Calculation: divide Rental Revenue by Original Equipment Cost (OEC) as recommended by the ARA.
“Time utilization or dollar utilization? It doesn’t really matter, do one or the other or both” notes Crowley.
Asset utilization is different per equipment category so it is important to breakdown asset utilization by category to understand where your equipment falls in the below matrix. The sweet spot is in the 60-70% range and if you are falling outside of 40-80% adjustments should be made.
4. Debt To Asset Ratio
Benchmark: less than 30%
Calculation: divide your long term debt by your total original asset cost.
“This ratio may look different depending on the age of the rental equipment business but ultimately you want to work on keeping this number low” says Crowley.
For most rental equipment businesses that are just starting out, their assets will likely be highly leveraged with debt. The favorable financing options that OEMs offer to get businesses off the ground promote a lot of healthy start up activity and they should be taken advantage of. Many times, businesses don’t have any other options to acquire assets with 100% debt.
However, as the business grows, an effort should be made to keep the Debt To Asset Ratio low. Having more equity in the equipment versus long term debt gives the business more flexibility and leverage during favorable economic conditions and less pressure during a down turn in the economy.
5. Personnel Expenses as a % of Sales
Benchmark: less than 35%
Calculation: Wages, taxes, and benefits divided by revenue
“Personnel expense is the biggest cost to manage. Our Top Gun group averages under 30%. They are able to crank out revenue with a lean team.
This acts as a good measure for how you are managing your team. If the Overhead Wages percentage is increasing it means you either had a surge in hiring or more likely are getting less out of each employee. This metric can uncover truths about the effectiveness of your team, your management, and your locations” says Crowley.
Independent rental equipment businesses need to learn to do more with less in order to compete. Low overhead wages as a percentage of sales is indicative of an effective, lean team.
6. EBITDA
Benchmark: greater than 30% of revenue, greater than 10% year over year growth
Calculation: This is your net income before adding back Interest, Taxes, Depreciation, and Amortization
EBITDA is your measure of profitability and free cash flow. As mentioned earlier, EBITDA is what is typically used as a measure of your valuation. When calculating EBITDA, make sure to only look at operating expenses. Owner compensation or expenses beyond the business should not be taken into account.
If businesses focus on improving rental sales growth, asset utilization, debt to asset ratio, and overhead wages as a % of sales then EBITDA growth will surely follow.
Recap
Of course, there are many more metrics to measure the health, productivity, and value of your business. Quite frankly, the more data you measure the better. However, by starting with these 6 metrics you will have a great sense of the health of your business and what areas you can improve. Additionally, these KPIs don’t do much as standalone metrics. What’s important is to track trends and work the review of these metrics into your strategic decisions.
Make data informed decisions a habit and embed this into the culture of your company. This turns risk into calculated risk, panic into preparation, and gut decisions into strategic ones.
About Peer Executive Groups
Peer Executive Groups is the premier source for business analysis groups. Our comprehensive network of subject matter experts, facilitators, and industry vendors/suppliers makes us uniquely capable to create and deliver meetings for long-lasting groups of business owners. Because of our size, we negotiate the best possible rates and discounts to manage meeting expenses.
Good one.
Good insight from a business perspective. Thanks for your efforts.
Thanks for reading!
Great Read! Dan does a great job!