I’ve been handling rental industry business sales since 1995 when I started in the acquisition department for RSC Equipment Rental (now part of United Rentals). In 2000, I switched sides of the table and started representing primarily sellers of rental businesses. During that period, I have handled 145 transactions within the industry. I doubt that a year has gone by in the last 30 years that my wife hasn’t said something to the effect of “You need to diversify into another industry. You are going to run out of rental companies to sell.” Every year I assure her that there are plenty of rental companies out there left to sell. But, for the first time in those 30 years, I believe she may be (almost) right.
First, I should roughly define the characteristics of a “salable” rental company. Though we have seen some smaller transactions, the ideal company would have $5 million+ of total revenue (mostly rental and related) with a fleet of $10 million or more of OEC (original equipment cost.) The next criteria are 1) reasonable (market) price expectations of ownership, 2) a rental fleet with a median age of five years or less that presents a good appearance and 3) verifiable books and records including financial statements and fleet data. You may be surprised to learn that criteria 1), 2) and 3) above rules out more than half of the companies I talk to.
Post-Covid has probably been the most active period for acquisitions of equipment rental companies since the industry’s original consolidation “heyday” from 1995 to 2000. Exact industry figures are not available, but Sunbelt alone has completed 76 acquisitions in their last two fiscal years, not to mention the non-Sunbelt acquisitions. My company alone has handled 19 transactions post-Covid. I would estimate the overall number of acquisitions post-Covid would be well over 200, many of them among the market leaders in their trade area.
Many of these sales have been driven by what I call the “Gary” syndrome. Like me, most “Garys” out there are 55 to 75 years old, and many rental store owners fall into that category. If you have been around that long in the rental industry, you have seen some significant ups and downs. The last few years have been very good for most and the market to sell has been robust. Store owners of that age are leery of some of the current conditions and the potential for a downturn (or at least slowing of growth) in the near future. Rising interest rates, inflation driving up operating costs, 30 percent increases in equipment costs, increased competition from the nationals, and rental rates not keeping pace with these increased costs are all top of mind. Given these factors, many have decided to sell.
These same factors are creating a new, significant barrier for potential new entrants into the rental industry. In the past, I’ve seen steady “regeneration” each year of new rental companies entering the market. These new entities were often formed by industry veterans; some were former owners that had previous non-competes expire, some were relatives of former owners, and some were “refugees” of the nationals fed up with the bureaucracy and ready to call their own shots. Many new companies in this category were financed by proceeds from prior sales or funded by manufacturers or lenders willing to take a gamble on the new company. Ten years ago, you could likely get started with $1 million worth of equipment, a couple of employees, a $2,000 a month rented facility, and grow from there.
Most of the sellers I have dealt with in recent years are “done.” They have no interest in re-entering the rental business, risking their hard-earned sale proceeds by financing or starting a new rental venture that carries much more risk than when they started 20 years ago. Many of the new potential rental entrepreneurs try to pencil out the diminished returns of rental dollars vs. the acquisition cost, interest rates double that of just a few years ago, higher operating costs including a facility rent that may be exponentially higher than my $2,000 a month example (if they can even find appropriately zoned property) and decide these numbers just don’t merit the risk. If the potential owners don’t figure that out, often potential lenders and investors will.
I decided to take a look at the longevity of the businesses underlying my 19 transactions post-Covid. I had a couple of businesses that were only six or seven years old when sold; the average was roughly 20 years with one dating back 60 years. If the industry is losing long-standing and well-established rental businesses to consolidation and we are unable to “plant the seeds” of new and growing businesses, is the era of independent family-owned rental businesses over with?
Reading this article so far sounds pretty grim for the survival of independents. With all that said, I counted 15 independently owned rental businesses on the 2024 RER 100 (minimum $13.2 annual rental revenue and excluding several on the list that have been recently acquired). I am also pleasantly surprised when I encounter an independent rental company that would make the list but have chosen not to report their numbers; I’ve sold two of these “unicorns” in the last year and my guess is that at least another 15 are out there that do not report to RER.
Even taking into consideration this consolidation, the American Rental Association continues to have a net gain in membership, and it is estimated that there are approximately 6,000 independently owned tool and equipment rental business locations still in operation. That sounds like a lot, but my opinion is that the vast majority of these have annual revenues of $2 million or less. The path of least resistance for these independents are to offer smaller equipment that does not require a semi-truck, rented to smaller contractors and homeowners on a daily and weekly basis. We have seen this to be a consistent and moderately profitable model but these businesses often top out in the $1-to-$2 million annual revenue range. Theoretically, for these businesses to reach the $5 million revenue sale threshold, they would have to have multiple locations.
In 2024, the headlines have been that rental industry growth is slowing. Overall revenue predictions are not declining, just the rate of growth is projected at less than 5 percent. For the first time in recent memory, we have seen some of our clients showing a slight decline in revenue for 2024, though most are in that low-single-digit prediction for the industry. Gone (with some exceptions) are those companies showing 10-percent, 15-percent, and 20-percent+ growth we have become accustomed to seeing in recent years. One could make the argument that those high growth companies have been acquired but more likely it is a sure sign that overall rental growth is slowing.
What can independent rental companies do to keep themselves competitive?
I think the short answer for survival is that smaller rental companies are going to have to be more sophisticated, data driven, and innovative in their approach to fleet management, employees, and customers. My father had a saying “it’s hard to screw up a bowling ball.” Fundamentally, it’s a slick round ball that needs little maintenance and is effective for its purpose. Back in the 1990s and into the early 2000s, I saw a lot of rental businesses that were poorly run, neglected, or run by the seat of their pants. I was always surprised to see, despite the poor management, they were still financially successful. Fundamentally, the rental business required little maintenance and was an effective money-making machine even if management wasn’t very good. The recession of 2008-2011 exposed a lot of these companies but I still see many that are woefully inadequate in the professional management of their business.
The national companies have proven that a professional approach, applied across all locations and geographies, results in higher cash returns. With the issues of rising costs and stagnant or stubborn upward rental rate movement, rental store owners and managers must become more sophisticated in how to track and manage their business. Borrowing from some well-run independents, I have compiled some key points I believe are important for independent rental companies to remain competitive today and going forward:
Be highly visible and active in their community. This may take the form of sponsoring a local rodeo, assisting in the clean-up or relief efforts from storms, chipping in at food banks, etc. I’ve always said local contractors would prefer to deal with competent local rental companies. You live and work in your community and should know your market better than the nationals. Let local contractors know they are welcome regardless of the size of equipment and duration of the rental.
Embrace your employees. The word “team” is often overused especially by those who do nothing to nurture that work environment. Employees want to feel part of something bigger and that they truly can have an impact on the organization. Owners and managers should lead by example, reward hard work, and keep employees informed on their progress and the progress of the company. Give them a voice and listen to their input. Training and recruiting should be a high priority of management and ownership. Most rental store owners will say their employees are what makes the difference. That should be more than just a saying; treat them accordingly.
Embrace your customers. Establish a rapport beyond just taking orders. Have counter people call recent customers and thank them for orders. Make it easier for customers to do business with you electronically. Owners and managers should know the customers and take them to lunch. Ask them how you can better serve them, what equipment you don’t have that they may need. Some of the most successful rental companies I have seen have grown by following the lead of what their best customers were requesting.
Track your key metrics. This should be part of your daily routine, however, with some uncertainty in the air, it is more important now than ever. These metrics can be your “early warning system” for any potential downturn or slowdown in business. Revenue trends, OEC of equipment on rent, dollar utilization, and payroll as a percentage of revenue, among other key business metrics, should all be on your dashboard. Other balance sheet measures such as cash, receivables, delinquent receivables, accounts payable, and debt service should also be closely monitored.
Manage Your Rental Fleet. This is an area that I still see many owners defaulting to “gut feel” as opposed to empirical data. You should be relying on your rental software and tools such as Rouse Analytics to help manage and balance your fleet. I often see fleet decisions made off gut feel end up being 90 percent correct. however, if you have $20 million OEC of fleet that means $2 million is likely the wrong fleet. Post-Covid was a tumultuous time; orders were out a year or more, fleet decisions about brand and model were often made based solely on availability. Once the dam broke on availability, equipment came flooding in quickly. I believe many companies became over-fleeted during this period. Bloated inventories can result in either equipment sitting or rates being driven down. Any upcoming downturn could expose this further.
Create a “Never Say No” mentality. We have seen several very successful local companies who embrace this philosophy to create customer loyalty and in turn build market share that outpaces the local branches of national competitors. Never saying no may take the form of taking an order for 10 more light towers than you have in inventory, a large boom lift not in your fleet, or a specialty air tool not in your stock. Make sure the customers you do this for are the right ones; i.e., they have strong potential for current and future business that falls into your mainstream and that their payment history merits this “extra mile” treatment.
Look for Expansion Opportunities. Several independents on the RER 100 including Vandalia Rental, Rental Guys, and PDQ have expanded in recent years either via acquisition or the opening of new branches. There may be some smaller independents in your area that are ready to throw in the towel. I’ve found that many of the companies have “low hanging fruit” that can be immediately monetized by offering better or broader rental fleet that may already be in your inventory.
The above points are just a synopsis of what should be on your mind daily as an independent rental store owner. These are to just get you thinking; each one of these points is worthy of a full article in and of itself. Not all, however, is negative. Rental penetration, currently estimated at around 55 percent, continues to grow. Many believe that number will grow to 60 percent or more. With a total market estimated at $79 billion annually, each point of incremental rental penetration adds nearly $1 billion to the overall market. I also believe we will be seeing a one-to-two-point reduction in interest rates in the coming months which could stoke the fire of overall construction spending. Other positive signs include cooling of inflation and at a minimum a stabilization, if not a small reduction, in equipment acquisition costs.
There is an old saying “Hope for the Best, but Plan for the Worst.” I believe that there are enough uncertainties in the market right now where independent rental companies need to become more professional in how they run their operations. Independents have been the backbone of the rental industry for 60+ years. Don’t screw up the bowling ball.
__________________________
Gary Stansberry is the President of The Stansberry Firm, LLC and specializes in rental business sales and consulting with businesses to increase their value. Gary has handled the sale of 145 rental businesses with a transaction value of more than $2 billion. More information on the company can be found at www.thestansberryfirm.com. Gary can be reached at (817) 233-0922 or by email at [email protected].