A Sound Investment
I’ve got bad news for a lot of you. That new alignment rack you’ve been eyeing? You probably don’t need it. And even if you think you might need it, you’re probably not ready to make the investment.
See, just because you lost out on a couple sales that required a piece of equipment you don’t have, doesn’t mean now’s the time to make your move. Investing in new equipment is just as much about the right timing as it is about what you buy.
First and foremost, the right timing shouldn’t have anything to do with something new and shiny that just hit the market. I’ve mentioned it before, but I don’t think shop owners can hear it enough—your shop is not a toybox. Your equipment is a tool, not a toy, and the minute you start to look into a major purchase because it’s been marketed as the latest and greatest, it’s time to reevaluate why you’re actually looking to buy.
One of the biggest mistakes I see when it comes to equipment is shop owners who want to invest before their business is ready. If you’re looking to buy a brand new alignment rack and you’re not even hitting $30,000 per month, you don’t need that rack. Plenty of guys will buy the nicest tire machine they can find and then won’t push tires. You’ve got to be selling tires to need that machine. You’ve got to be bringing cars in to need that rack. Same thing goes for scan tools and any other equipment that catches your eye or attracts major buzz.
And chances are, if you’re not ready to take full advantage of those new tools, your finances probably aren’t ready either.
I know there are plenty of financial gurus out there who will tell shop owners to pay cash for their equipment in order to stay out of debt and I 100 percent agree. Staying out of debt is a good thing. But I try to limit debt load by keeping my commitments small, short, and avoiding any overlap on those debts (i.e. I’m going to pay off that new alignment rack completely before I invest in another machine). If you’ve got half of a million dollars sitting in the bank, sure, you can afford to pay cash on that new rack. But if you have less than $200,000, I’d opt for financing with a plan to pay it off as fast as possible—and by that I mean financing for five years, but paying it off in a year or two.
My rule of thumb goes like this: whatever the investment is, the moment you’ve decided you’re going to take the plunge, you need to set aside one third of the total cost in a savings account. Once you’ve got that third saved up, you can start financing the entire expense, and as soon as you’ve got your debt down to the final third you can pull your savings to pay it off in full. The reasoning? If I ever get into a situation where I need to sell that equipment and pay off that note fast, I’ll already have that third in the bank.
When shop owners tell me they don’t have time to save up or don’t think they can secure that one third, what I’m really hearing is they haven’t taken the time to do their due diligence. They haven’t prepared their business for the risk they’re taking on.
I know a lot of shops have this silver bullet mentality about equipment, like that next big investment is a safe bet that will pay for itself, but what happens when they spend $10,000 of the $15,000 they have in savings? Suddenly cash is dangerously low and should something go wrong (as it always seems to), now the bank doesn’t want to loan you money because your business isn’t doing well and you don’t have that $10,000 when you really needed it.
The key to that one third rule of thumb is it forces you to fully think through your investment and it keeps you cash-heavy. Murphy’s law only moves in when you build a spare bedroom, and when you’re a business owner you could lose half of your revenue overnight. Take it from me: it pays to slow down, show restraint and zero in on your ultimate strategy. That shiny new lift will do you no good when the waiting room’s sitting empty.