Every dealership has its own unique way of dealing with trades. Some are aggressively pursuing acquisition of used equipment, viewing it as a profit source, and dealing in high volumes. That tendency usually goes with being in a non-row-crop area with smaller equipment and less risk of making mistakes.
Others, mostly in large tractor and combine country, are by necessity much more conservative. They’ve witnessed how large high dollar trades sink dealerships in a down market, so they spend a great deal of time assessing the benefits and risks of every transaction.
At Farm Equipment’s 2017 Dealership Minds Summit, two successful dealers, with two different schools of thought, revealed their approaches to making the process of trading equipment profitable.
Cory Forrester owns two New Holland dealerships, in Chambersburg and Somerset, Pa., and represented the small equipment side of the industry. Forrester admits to being “passionate” about used equipment, a major contributor to the company’s $20 million in annual sales. His grandfather was a Ford dealer in the days of the 9N’s and his dad “jockeyed” tractors out of England to sell. If you have a blue tractor on your lot with whiskers, he’d likely make a bid on it, he says.
Forrester’s used dollar volume may not be near the other dealer in this article — Butler Machinery — but the number of units he handles is high. He says, “We sell a couple hundred used pieces a year, probably appraising 3 times as many that we don’t get, so we can’t send salesmen out to look at every piece. We are not a football team. An NFL football team can go 15 and 1 and win the Super Bowl. If you’re only selling 16 pieces of used equipment a year, you should be winning 15 of them. Major league baseball teams play 162 games a year. There are baseball teams that won 55% of their games and won the World Series. I’m not expecting our dealership to just make money on trades 50% of the time; we want to do better. But at the end of the day, if we’re above 50% in our used equipment, we’re pretty happy.”
Forrester continues, “I hate selling new equipment; everybody’s piece of new equipment is the same and where we live, there are 60 dealers within 60 miles of me. So, when a customer prices a new tractor, I have 10 dealers that are pricing that exact same tractor. In our area, we’re making single digit margins. Where I can make double digit margins is on used.”
Balancing Out a Loss
Forrester relates examples of typical trades in his dealership. “The salesman comes to me with a John Deere 2840 with 6,000 hours, and wants to know a value and I have no idea. It’s too old for the Iron Solutions book. We try to locate comparable tractors online, but can’t find one. My opinion is the 2840 is the worst tractor Deere ever built; I don’t even want it.”
His salesman says the customer wants $8,000 for his tractor and Forrester contemplates his options. “I try to get close to that number and give my salesman the exact price to put into it — $6,000. We’re thinking a retail price of $8,900 to $9,900 without reconditioning.” Forrester makes the trade on the Deere 2840 he didn’t really want. “We put $6,000 in the tractor and sell it in a couple weeks for $8,900. We have a $2,900 profit there and margin-wise, it’s phenomenal.”
“The Dealership Minds Summit is a tremendous opportunity to talk openly with leaders of successful dealerships about successes and failures. Not having our manufacturers here opens up the communication between the colors and we can share similar problems and solutions...”
– Clint Schnoor, President, Agri-Service, Kimberley, Idaho
But there was some bad news with that particular example, Forrester admits. “When we sold the tractor, it had a small oil leak. My salesman volunteered to fix it for the customer. We took it to the shop and the work order was $2,900, so we broke even. That was one of the games I lost in the World Series run. What are you going to do in this situation?”
Forrester shrugged off the break-even deal to play the next game. “I have to get a win if I’m going to the World Series, so I look for a product on Auction Time, Iron Connect, Craigslist, eBay or New Holland’s repo site, Equipment Alley. I buy a lot of equipment there and, when I do that, I try to average my sale or get another win.”
Another example of Forrester’s baseball-style approach: “I was against Kubota and put $35,000 of real money into a TS115A tractor that was worth $35,000. I had it listed for $39,900, because I was sort of embarrassed that I put that much money into it. It was a conquest sale and I did not want that customer to buy a Kubota. To trade for this unit was important to me — sometimes it gets personal. After making a single digit margin on the new tractor, I went on Equipment Alley and found a similar tractor for just under $30,000. It came out of Arkansas and this tractor was a lot nicer than my trade-in. I put them both on the lot for $39,900. I sold the nice one for $39,900. If you look at my website now, the TS115, that I had the big money in, is now $34,900. So, I lowered the price on that used piece by buying another one at a lower price and averaging the prices out.”
Forrester admits, he’s in a different world than a lot of his peers. “I don’t have a combine on my lot. So when you’re talking about my baseball team, my losses and gains are in the hundreds or maybe a thousand dollars. I can’t talk about $20,000 work orders and losing $50,000 on a piece of equipment. The key to my success is getting equipment traded for the right price. So if you have a blue piece of equipment on your lot that you want to sell or if you have an appraisal you need help with, I’m going to give you my cell phone number, and I’m serious. If I’m really interested in the piece and need to average out something I’ve got too much money in, I can give you real money for it.”
Forrester says, “My dad always said, ‘There’s a butt for every seat; you’ve just got to find that butt.’ So, I traded for an off-brand 30 horsepower ‘orphan’ compact tractor and I put $15,000 in it and told my sales team that we were going to live with this tractor, because no one’s going to buy it. We put it on Craigslist for $18,900. We had 16 calls and sold it the next morning, as soon as the guy could get there with cash. So we found a profitable butt for the seat of our orphan.”
Butler Machinery: Ask the Right Questions
On the other side of the spectrum is Dusty Schulz. He’s worked in the Caterpillar/AGCO dealer network for 14 years in finance, sales, branch operations and management. He now handles used equipment evaluations for AGCO/Challenger dealer Butler Machinery Co., headquartered in Fargo, N.D. It’s a third generation family-owned business with 18 stores and 45 agricultural salespeople throughout North and South Dakota and Nebraska.
At his dealership, Schulz is part of a three person trade evaluation team that includes one other person who also handles advertising used machines and another service person, who administers work orders and reconditioning. Research is the key to their success. “We start with our past history,” Schulz says. “We track all the values that we give over time. What did we put into this thing 1, 2, 3 years ago? What is our current inventory level of similar machines? If we’re low, we’ll put a little more into these, maybe get inventory we can move. What prices are the units that we have? Those are the things that we weigh as we put a value on something. Then, we look at our own sales history. Where are our prices ending up and how recently were those transactions? So we have all that information as we look at where a trade evaluation should be.”
“The greatest value is fully commingling with other dealers for a day and a half. You just can’t do that in your day to day business at home...”
– Ron Ritchie, President, Ritchie Implement, Cobb, Wis.
Schulz says once these questions are answered, it’s then time to ask questions about the machine. “Is this thing 10 years old with 5,000 hours? What do we need to do to make it saleable on the lot? Will just a wash job be acceptable to the buyer of that piece of machinery? Do we need to do an oil change and a few other things to make it good enough for the customer who’s going to buy it? We use Iron Solutions Guide as a reference, as well as Tractor House and Fastline auction results. That will give us an idea of where we can be safely and make money.
“Having equipment in the yard for all the buyers who are going to show up is what we try to do,” Schulz says, “and that’s all based on the age of the machine, along with the number and types of buyers. You have do-it-yourself guys who want a bargain and are willing to take it ‘as-is’ with repairs to be made, other guys who want to buy it with warranty and no trouble for the first year, and all the guys in between.”
With multiple stores, controlling reconditioning costs is one of Schulz’s biggest challenges. “We cannot overspend. So when we look at the photos and description that the salesman gave us, we’ll estimate what we’re going to spend on reconditioning. That number is tracked in our system. We have an alert set up when we go over budget on work orders. One I looked at recently estimated $4,000, but we ended up at $5,000. The system is set up for notifications at 15% over budget, so I got an alert the next morning.”
A variety of factors can cause work orders to be larger than estimated. Schultz says, “It can be because the service department decided to add a couple extra segments that maybe we didn’t agree with. Those result in a call to the service manager saying, ‘We need full approval of these, so these may have to go to service goodwill because you decided to do these things.’ That keeps accountability there so the next time he’s calling us before he repairs a machine. You have to make sure the used inventory is not a blank check. If you’ve got a shop that’s slow or a parts department that wants to sell parts, that doesn’t mean you go out and grab a used piece and start wrenching on it. All trade work orders are opened by our used equipment department so we can stop those things from happening.”
Schulz tries to take emotion out of the trading process. “You have the new sales department pushing you, because they want to sell to a competitive owner or new customer. Also, they have the vendor pushing on them to order machines and we have too many in inventory. There’s pressure to put more in the trade to get deals, so they can build equipment. We can’t take full responsibility that whole reason we got a deal is because we overbooked the trade.”
“We need to have a conversation before those situations. We may need to talk with the vendor and request competitive bounty on trades to show more money on them. We might have to cut margin on the new sale to make it work. But we cannot just simply hide all the profit from a new sale on overbooked trade value that is going to ultimately be a loser down the road. Finding a balance is not easy. It means you’ve got to have conversations and good relationships with the people that you work with and it’s an ongoing task. We try to share the pain on the front end vs. all of it on the used side.”
Watching the age of used inventory in stock is a priority for Schulz.
“If something is over 6 months old, before we drop the price, we take a look at the market. Maybe it doesn’t need to be re-priced, if it’s a seasonal item, or maybe it was a machine that was overstocked and we’ve sold through the inventory, so we can hold our value,” he says. “Obviously, a lot of questions need to be asked, because every time you take $5,000-$20,000 out, it’s gone. Patience is a good thing, but so is understanding when we’re out of line and admitting defeat.”