There is cash in used iron, and for most farm equipment dealers that pre-owned inventory represents the path to the overall health and lifeblood of their business.
Dr. Jim Weber, a 40-year veteran consultant and trainer in the farm and construction equipment industry, says an on-going survey of large volume dealers in Canada shows used equipment turn rates — and corresponding positive cashflow rates — have fallen by about a third since 2012 as many dealers have been busy selling new equipment, with wholegood transactions averaging 81-82% of their dealership’s total sales.
“The average margin on new equipment has averaged 7.75% since 1982,” Weber explains. “With much higher margins possible on used equipment, if you manage it correctly, you can see the negative effect of what happens when the mix of new and used equipment skews from an ideal 40% of wholegood sales down to 31%.
“When you sell more equipment at 7.75% and less at rates possible on used equipment, overall margins of the business suffer,” he explains. “In addition, while the dealers were selling the new equipment, they apparently didn’t mount the effort to continue selling trade-ins at the 2012 turn rate of 2.98 times, but allowed the turn to fall to 1.98 times in 2015.”
Speaking to Farm Equipment’s 2017 Dealership Mind Summit in Omaha, Weber told his audience the drop in the turn rate in the Canadian study also showed average cashflow went from $474,000 in 2012 to $163,000 in 2015, attributable mainly to the change in wholegoods mix and the collapse of the turn rate on used equipment.
“This business, as I have written continuously over the last 25 years, is not about the paper profits you generate. It is about the positive cashflow that you generate,” he explains. “If you are going to generate the cash you need to meet future obligations, you will have to do so by managing the used turn.”
Weber says dealers need to judge used sales not from a profit over assets standpoint, but from the view of net profit margin times the asset turn.
In explaining the importance of harvesting increased margins on used equipment, Weber uses a 20% figure and notes that 20% can be obtained by selling a piece of equipment one time for a margin of 20%. Or making two turns for a margin of 10%, or four turns for a margin of 5% or five turns at 4%, etc.
“Each set of transactions returns 20%, but more turns increases cash flowing into the business,” he says. “Now I’m not suggesting we’re going to have a 20% net profit or that we’re going to have a given number of turns per year, but I am urging you to look beyond the margin and profitability to focus on how quickly you are turning the asset.”
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Weber has developed a system of four categories to manage used equipment and he says adopting it usually means significant changes for many dealerships. The steps include:
- Prudent purchase of used equipment.
- Control reconditioning costs.
- Initiate a selling strategy.
- Compensate sales people.
1. Bought Right is Half Sold
Weber says many dealerships lose money by paying too much for trade-in equipment. Usually, he says, the cause is the product of a sales representative striving to sell new equipment and over estimating the value of the trade-in and under-estimating reconditioning costs during the sale.
“Determining an accurate value of a piece of equipment involves no genies or pixie dust, and admittedly, there is no ‘absolute’ number out there for a given piece of equipment,” Weber explains. “Still, there are tools to establish a fairly accurate figure.
“You look at historical sales from your own dealership; like items, like products. You’re going to look at the published Iron Solutions guides. You’re going to consult auction prices, whatever Big Iron and others are reporting, and you’re going to monitor iron jockeys for pricing clues,” he explains. “You take an amalgamation of that data and determine what the machine is worth today.”
The next question is: When can you sell it? Can you sell it in less than 45 days, 45-90 days, 91-180 days, etc.?
“Remember, we’re trying to improve the turn rate of used equipment, so the ‘when’ of selling helps determine what you should bid for trade-ins,” he says.
Fig. 1. Dr. Jim Weber says 20% margin can be obtained on used equipment by selling a unit one time for 20% margin, or turning it twice for 10% margin or 4 times for 5%.
“Take a tractor that we’re going say this is what it should sell for today (Fig. 1).
“If the salesman says he can sell it in 45 days, I will buy that unit for $97,500 (97.5% of the estimated value of the tractor). As the dealer principal or sales manager, I’ll pay $92,500 for the tractor, put $5,000 into it for reconditioning for a total cost of sale of $97,500. Then, I’ll sell the tractor for $100,000. I make a 2.5% margin.
“Now, if every unit I sold would sell on the 45th day, I’d have a turn rate of 8, or a 20% return, on my used equipment,” Weber says.
What if the salesperson says it will take 90 days to sell the tractor?
“Then, we buy it for 95%, less reconditioning. And if all goes well and it sells on the 90th day, that’s going to give me a 4 times turn with a 5% margin — giving me a return on used equipment of 20%.
“If we determine it may take 180 days to sell the machine, we buy it for 90% less reconditioning, to give us a 10% margin. Our turn is 2 and the return is 20% per year, and so on,” he explains.
Buying right, based on the time of potential sales in mind, is a sure way to improve margins on used equipment, Weber says.
“We have to start thinking along these lines,” he adds. “Don’t be holding equipment for 365 days. Never, ever let something have a birthday on your lot. Don’t be holding it 730 days, hoping and praying that someone’s going to come in to purchase it — someday.”
2. Reconditioning Decisions
Weber says most problems concerning reconditioning come from people buying equipment who are not trained in estimating equipment values or repairs. That, he says, and buying sight unseen. And, a dealership’s philosophy to make “better than new.”
“Others include charging internal rates lower than customer rates and having no way of stratifying used equipment,” he explains.
“The connections and camaraderie developed here has been a career-changing factor...”
– John Hoffmann, Ag Used Equipment Manager, Atlantic & Southern Equipment, Lake City, Ga.
“I’m going to segment my inventory by new, new-used or ‘pre-owned,’ and used/salvage,” he says. “I’m going to look at the buying motives of the people who buy new and pre-owned, and compare them with the motives of customers who buy used and salvage.”
Weber says those who buy used and salvage generally don’t plan their purchases, they have mechanical aptitude, they buy price, they buy impulsively, they buy in the dealership and brand is not important.
“I would never, ever, ever recondition those units. I just wouldn’t do it,” he says. “I would make certain these units start. I would put a new seat in them, and I would have four tires — all of the same brand — inflated properly.
“And when someone wants to buy them ‘field-ready at a used/salvage price, I’d point out what ‘field ready’ would cost, and then offer them a parts certificate if they will buy it for the asking price today.”
Weber says consider the automobile trade when you determine the difference between “pre-owned” and used/salvage.
“You know the difference. The cars that have been maintained, washed and cleaned, had their fluids changed regularly and have service records to back it up. Those are ‘pre-owned,’ and you know the people who have them,” he says. “I’m going to recondition equipment like that, probably for very little money, and I’ll make money when I sell it.”
Weber has these suggestions for managing reconditioning costs:
- Use a trained service technician to inspect equipment before it’s purchased.
- Inform the sales department when additional work is required on a trade-in.
- Establish an incentive system for accurate estimates of trade-in values.
- Prohibit the sales department from “sight unseen” purchases.
- Charge back underestimated expenses.
- Book reconditioning at the customer rate.
- Monitor salespeople and their purchases.
3. Setting Strategy
Weber says strategy is supported by goals and there should be one set of dealership goals and a complementary set of goals for salespeople.
“The first goal on the dealership is to replace order takers in the sales department with field marketers,” he says. “I segment sales forces bottom to top as: order takers, salesmen, retail sales consultants and finally, field marketers. Currently, the industry is equipped with about 80% order takers and about 2% field marketers.”
Weber says managers should look for the following traits in salespeople:
- Goal-oriented over achievers
- Competitive personality
- A service background
“As strange as it may seem, I prefer salespeople from a non-farming background, because many individuals who come from the farm have trouble determining the difference between sympathy and empathy and fall victim to the ‘Kindred Spirit Syndrome’ when dealing with customers. I want someone who thinks with their head and not their heart,” he explains.
Fig. 2. Dr. Jim Weber advises dealers to manage their wholegoods sales to aftermarket mix to 75% or less. At 75%, a 3 times turn on used equipment is needed. If wholegoods increases to 80%, turns must increase to 3.5.
The second dealership goal on Weber’s list is to manage the wholegoods sales mix to 75% or less (Fig. 2).
“Since 2000 the wholegoods percentage has averaged 75.02%, which is where it should be,” he says. “However, if you look at 2011-2014, that average nears 79-80%, so to get this mix in line, we must sell wisely and we have to sell fewer wholegoods and more parts and service.”
To maintain proper cashflow for a healthy business, the higher the wholegood fraction of the mix, the faster used equipment must be turned, he says.
“If I’m at 75%, I need to have at least a 3 times turn on used equipment. As I continue to ratchet up my sales mix to 77.5% I have to be at 3.75 used turn, etc.,” he explains. “Today, however, we’re at 75% and our used turn rate is 2.31. This can’t stand because it doesn’t give us the cash we need to sustain the operation.”
Weber says the third dealership goal is to manage the new/used sales mix until used sales are greater than 40% of the business.
“Since 2000, it has been 32%. So all we’re doing is making the major farm equipment manufacturers happy as we dig the hole deeper and deeper for ourselves,” he explains. “You have to slow the process down on new equipment and put the emphasis on the backside until you have at least 40% or more used.
“To do that, you have to resist market share demands, eliminate and minimize roll-overs and sell more used equipment. At the same time, we need to back-end load gross margin, so if your margin on new equipment is 3, we should be looking at 6 to 9 with a turn of 3 on used equipment. We also need to change the compensation system for our sales staff to accomplish this.”
On the sales side, he says there are three basic goals:
• Territory or account segmentation
• Customer contact
“As I’ve said, I want a money-motivated individual selling for me,” Weber says. “It is my responsibility to show that person there are only two ways to make more money — ratchet up sales and increase gross margins from those sales.
“Ultimately I have to show the salesman mathematically what he has to do to make X dollars,” he says.
Fig. 3. There are 3 levels of customers. ‘A’ customers should account for about 15% of your business and 60% of your volume.
Weber: Activities to Increase Used Turnover
- Discipline to “shut down” new sales.
- One person or team to “BUY” used.
- Initiate a “SYSTEM” for buying used.
- Prohibit trades taking place over the phone.
- Require a comprehensive appraisal.
- Consider using a service technician for inspection.
- Ensure timely reconditioning.
- Incentivize the service department.
- Never recondition used/salvage units.
- Ensure that units start and look good.
- Pre-sell all used units.
- Establish goals and incentives.
- Require sales team to spend 90% of their time on farms.
- Require weekly call schedule/report.
- Have 5 prospects for each used unit.
- Back-end load the gross margins.
- Eliminate/minimize “rollovers.”
- Update used inventory list daily.
- Discuss used turnover at sales meeting.
- Generate rolling 12 month turnover by manufacturer and product mix.
- Rotate lot monthly.
- Reassess used values every 90 days.
- Never, ever permit a unit to celebrate a 1 year anniversary.
Second, account segmentation is important to set priorities on where salespeople expend their time and energy (Fig. 3).
“Basically you have three levels of potential customers,” Weber explains. “We know ‘A’ customers will account for about 15% of our business and about 65% of the volume we do. ‘B’ customers will account for about 20% of our market area population, and they will generate about 20% of the volume.
“The ‘C’ customers, will provide only 15% of the business volume, so it’s obvious we need to be spending the bulk of our time with ‘A’ customers and those who have shown they do business with us.”
This segmentation allows management and sales staff a way to organize the 25-35 calls per week Weber says is necessary for a healthy sales effort and the third goal for the sales staff — a minimum number of farm calls per week.
4. Sales Staff Compensation
Part of the strategy to improve cashflow through improved used turn and accurate trade-in purchases involves incentives for salespeople to meet and exceed performance goals. (For more on sales compensation, see p. 38-53.)
“Over the past 2 years dealers have been asking me if they should change their compensation systems because of complaints from their sales staff. They don’t like the way they are compensated.
“I didn’t have one call like that during the 2009-12 period when they were making more money than they’d ever dreamed of,” Weber says. “The market is down now and they have to work harder to make the same money, but I wouldn’t drastically overhaul the compensation system.
“My response would be to pay them 10% of the gross margin on the front transaction of new equipment — which is going to be very little. Then, I’d pay them 40% of the margin on the back end, to improve the turn rate by encouraging them to sell used equipment.
“I’d also pay them 50% of everything over the market value of used equipment. Let’s say the salesperson sells the tractor listed for $105,000 for $102,000, rather than dropping the price to the $100,000. Then, I’d pay 50% on anything over $100,000. You get $102,000, I’ll pay a $1,000 bonus. I’d say ‘Thank you for hanging in there and getting just a little bit more.’”