Capitalizing for the Future: A Q&A with United Rentals co-founder John Milne

RER: First let’s catch up a little bit. What have you been doing the past few years?

Milne: Over the last eight or nine years, I’ve been working with private companies, doing consulting work, involved in everything from helping them with strategic acquisitions, capital-raising efforts, helping them build their infrastructure, putting in place systems, processes, financial reporting, really focused on being a strategic advisor to senior management as they’re trying to make their move into the growth phase and build their business. I’ve done that now for about a dozen private companies. 

I’ve covered a lot of new ground since leaving United Rentals. I’ve worked in industries ranging from scaffolding, veterinary hospitals, Internet businesses, for-profit schools, to restaurant businesses. A very diversified group. Over the past 18 months, I’ve re-emphasized my focus back into the rental space as I see more and more companies with great growth opportunities that are looking for assistance and advice in growing their business.

For readers who haven’t been around the industry that long, please tell us about your history with United Rentals, including your role in co-founding the company?

I love talking about United Rentals, it’s a joy every time I walk the streets of any city in North America, to look up on the horizon and see a United Rentals banner and know that the team Brad [Jacobs] and I put in place many years ago has continued to grow and thrive. So to give you a pretty broad history, for the last 25 years I’ve been building industry-leading companies, trying to execute strategically sound acquisition programs, bringing those private companies under the umbrella of a parent entity, integrating them effectively and just really building a strong core business that can then start to experience organic growth. I started with Brad [Jacobs] in the waste industry with United Waste which we grew from nothing to a $3 billion company. 

Then in September of ‘97 a group of us launched United Rentals. We went public in December of ’97 at $13.50 a share with six private companies that we acquired in October of ’97 and then between 1997 and 2001 we acquired roughly 200 companies. It was an amazing time in the industry, there was a lot of consolidation. It was a pretty hectic period. We were doing about one transaction a week for about three years straight. As a result of that and in particular as a result of the merger in 1998 with U.S. Rentals, which brought in about $600 million in revenue and essentially doubled our company at that time, we built what has come to be the largest company in the rental industry. 

Eventually you went on to become CFO.

In 2002 when the acquisition program slowed down, I stepped into the CFO role. There was a lot of integration that needed to be done – a lot of pieces to be pulled together to make sure we had a solid operation that from which we could grow to the next level. The Board asked me to take on that challenge and I really pride myself on how we were able to re-align the role and the definition of what the accounting and financial reporting group was at United Rentals. We re-defined our team to be a partner to the field operations team, helping give them the tools to make the right decisions as a financial partner in the field, as opposed to being just a reporting entity. It was a change in definition of how we ran the business and I think it helped build a stronger business at United Rentals. 

Unfortunately your tenure at United Rentals didn’t end so happily. Anything you’d like to share about that?

It was an unfortunate end that came about at United Rentals. There’s not too much to elaborate on, it’s all public information. I think the most important thing is what we accomplished while I was there and the phenomenal growth of the business we built and more importantly how I am using that total experience to bring perspective and knowledge to my clients today.

Let’s go on to the present. You are working with G.C. Andersen Partners in what capacity?

I’m an independent consultant and I do a number of different things. Some management teams I’ll be working with are not looking for financing, they’re not looking to sell, they’re not looking to buy, they’re merely dealing with the issue of getting control on their growth. They’re trying to get the house in order, putting in place information systems, HR systems, proper compensation plans, etc. So often times I’ll be doing management type consulting. But a lot of times those sorts of roles are leading up to a capital markets transaction. 

And so when companies are looking for financing or M&A advice that involve capital markets transactions, I have a relationship that dates back many years with G.C. Andersen. When there’s a transaction where I need that capital market expertise or at least my client needs that capital market expertise, I’ll often introduce them to G.C. Andersen and help them work together to get the deal done.

Growing

Do sometimes companies not really know what they need to do? “We need to grow, we need to change, but I’m not sure what it is?”

I have those conversations every day. I talk to people all the time that I’ve known, they either worked at United or I bought their father’s business or we knew each other as competitors, so I’m always engaged in those conversations and trying to help people form that strategy. Obviously I’m hopeful that those conversations end up in an outcome where I can add value around a transaction or a consulting arrangement, but those conversations happen all the time. 

I find the most critical question people are looking for the answer to is: “what’s my plan, what’s my direction, what’s my strategy, how am I going to grow and differentiate me and my company from the landscape of national and regional and small private companies that I’m competing against day to day?” That’s an important thing that every private company and every owner of a private company needs to be thinking about: what is my differentiation? An owner of a company needs to be able to explain that to anyone in a two-minute conversation. Because if they can’t then they can be sure that their customers don’t understand it, their employees don’t understand it, their bankers, the people who can provide them capital aren’t understanding it, and they could be heading their business into problems by getting distracted with things that are not core to their competency and success. 

I would say that with these good times that we’re all experiencing in the industry, it important for everyone to take pause and really try and find this answer. If they do, then they will be able to take advantage of the strength in the industry to execute on what they do well and build an even better and stronger business.

You played a major role in the $109 million refinancing of Acme Lift. Can you tell us about that funding project? 

I’ve known this company since the United Rentals days. At United Rentals we didn’t always consider them our allies, since they often were providing big booms to small rental companies, but it’s an amazing model and the team there has really built something unique. This business, with the new capital structure we helped put in place, is poised for some pretty significant growth over the next three to five years. 

It was a complicated deal in that the capital markets hadn’t seen this sort of rental business model before. So it was important to communicate effectively what the business did and how it differentiated itself in a sustainable business model from the rest of the rental industry. It just took a little more energy than normal to explain the nature of the business. I feel my history helped because when I was at United Rentals I had experienced Acme as both a customer and competitor. It really helped that I had seen Acme from many perspectives and could bridge the gap from the capital markets’ understanding of the rental industry, which was based on the traditional models like United Rentals/Sunbelt, etc., to the Acme version which is different in some very unique and differentiating ways. 

Anything unique about how the financing is structured with Acme?

The structure was not real unique overall, but there were many important nuances that needed to be put in place to get the best outcome. I’ve always found in any transaction that the devil is in the details. On these financings I often work with Scott Hadfield at G.C. Andersen. He is really talented at working with all the potential lenders to get the best structure for both the lenders and the companies, meaning the most flexible to allow them to grow or shrink depending on the economic environment. A good capital markets strategy for a capital-intensive business like a rental company involves good execution on the details of the financing and a good explanation of the business to the capital markets so that they can feel comfortable pushing as far as possible the flexibility of the capital structure. 

And that’s why I think G.C. Andersen and myself work effectively together; Scott knows what’s available in terms of flexibility in the terms and the capital structure and I know how to communicate the business to the lenders or investors in an effective way. 

Is this a good time for rental companies to be looking for capital? Is there a lot of capital available at affordable terms? 

Yes. It’s an important time for companies, particularly private rental companies, to be looking at their balance sheet for a number of reasons. Number one is access to capital right now; we’re seeing interest rates at almost all-time lows. So the cost of capital is low but the availability is high. But you don’t take capital just because it’s cheap. Equally importantly I believe now is a time when the business environment is strong, when the underlying cash flows from the business and the utilization of equipment, dollar utilization and time utilization, the pricing, across the board the rental industry is feeling pretty good right now. So in that environment it’s important to take the opportunity to optimize your balance sheet so that when the environment changes, which we know it will, you’re not caught off guard and you’re not caught without the ability to continue to grow or operate and generate good cash flow. 

So you’ve got two things really working for you. Number one: a strong capital market, and, number two, good performance on the earnings side. Overlying all of that, there is the known risk that the market will eventually take a dip. Being in a position to absorb that and manage through it is important. What I find is a lot of private companies have good access to capital but they haven’t really thought through the right way to structure their balance sheet. I can relate because at United Rentals, every quarter wasn’t a good quarter. We had some tough ones and maintaining the ability to be nimble and even make investments when the market was down was important. I try to help owners and the operators of these businesses understand why this is an important element of their strategy. 

So in summary I would say if you’re not looking at your balance sheet, you are doing yourself a great disservice and are running the risk of putting your business at risk when the downturn comes.

How about smaller rental companies that don’t have the level of equipment collateral as an Acme Lift, is capital still available for them?

We cover a pretty broad spectrum. I can’t name names obviously but I’m working right now with an equipment rental company with two locations, and its fleet is roughly $15 million to $20 million of OEC. These days if you’ve got $15 to $20 million of OEC there is access to capital markets that you should be looking at.

What about a smaller company with $3 million to $5 million? 

I never say never; there are always unique situations. It’s harder for the very small companies to access the best possible capital alternatives and I don’t necessarily bring a lot of value in that regard. However, I have conversations all the time with guys who have smaller businesses and we talk a lot about how to improve their businesses, what they should be thinking about doing in terms of buying companies or adding new branches, so from a consulting point of view, I’m happy to work with everyone because I’ve seen so many small businesses become large operations over time – not unlike United Rentals! 

Does a rental company need to be looking at significant growth or expansion to be thinking of looking for capital?

Not at all. The key here is getting your balance sheet in the best possible shape to give you maximum flexibility as you go through the cycles of the business, both the growth cycle and the down cycle. So it’s not just about funding growth, it’s putting the right structure in place to weather whatever conditions we see in the economic environment. A lot of guys got badly hurt in the downturn. And a lot of them had capital structures that had a very high fixed cost, they may have had term debt that was amortizing very aggressively, they may have had high price debt, and they never had the opportunity to re-finance out. The companies that grow and are successful through the downturn are the ones that have their balance sheet in a position to be flexible and accommodating through those swings in the business so I would say growth is not critical. It’s obviously something that everyone is looking for, and it’s a nice attribute to have but in terms of accessing capital, it’s not critical. 

Future-Proofing

Looking around the rental industry currently, what are your observations? Are rental companies typically under-capitalized? Do they typically have the kind of capital structure that will serve them well for growth?

I find is these days that people do have very good access to capital, institutions like to lend to the equipment area because the value of the assets is very resilient. So it’s not so much that people lack access to the capital to buy fleet or to grow the business, it’s that they don’t focus on putting the best optimum structure in place. They’ll take the capital that comes in the door versus thinking more strategically of getting the best terms and the best structure in place. We tend to focus on the fires that are burning when we’re running a business as an entrepreneur. You’re focused on customers, you’re focused on your fleet, you’re focused on your employees, you don’t have time day to day, week to week, month to month to be thinking about your capital structure. Yet when you think about what has killed companies, what has put companies on the rocks, it’s their balance sheet. It’s not been the customers, the employees, or the fleet; it’s been the balance sheet that has put them at risk. 

Are rental fleets as modern and up-to-date as they need to be? Many rental companies aged their fleets during the recession. Has there been enough fleet renewal in the rental industry to serve the current needs of the market?

As you know that’s all over the place depending on the company and the business, but I would say on balance from what I’ve seen there is a lot of older fleet that needs to be churned out over the next 24 months. Your average age is actually not too bad. And many private companies if you look at their average, they are probably younger on average than some of the historical standards. But often they will have a lot older fleet that has been sitting there for a while which they held on to during the downturn and have not had the opportunity to replace. Instead the new fleet that’s been bought over the last 18 months as the recovery has happened is growth fleet as opposed to replacement fleet. So it seems to me there is an opportunity and a need for a lot of companies to focus on flushing out some of that older stuff over the next 18 to 24 months while market conditions remain strong.

So what preparations should rental companies be making in case of an economic downturn?

We’ve touched on a number of them but just to wrap it in one package, I’d break it down into about four items. It starts with know what your differentiation is, the rental industry has a lot of participants, it remains very fragmented, so if you’re in the business of renting equipment, know what differentiates you from the other guy. That’s the strength that you should be leveraging in these stronger economic times. It’s the strength that allows you to build the culture, the customer base, the size, the geographic expansion of your business; it tells you where to grow, how to grow. So know what differentiates you and be able to explain that in very simple terms because if it’s complicated you probably don’t have it very well defined.

No. 2, always be ahead of your capital needs. We are in a very capital-intensive industry. Our people are critical but at the end of the day what is always the constraint or the problem is accessing capital for fleet. So always be ahead of your capital needs as you think about your business. Then I would say, No. 3, we’re in good times, we’re making good money, so it’s an easy time to delay or ignore all the difficult stuff, whether it’s putting in a new IT system, whether it’s getting in place tight financial reporting, dealing with HR issues, all this stuff we hate to do, but now is the time to do it. If you wait until tough times, it’s too late. Then you will be suffering the consequences of not doing it. Do it now, move it to the top of your list. If you’re not doing it, hire someone you trust to do it. 

And lastly one of the things that is critical to every entrepreneur as they’re building the business, you have to pay attention to the details. You will be doing everything right day to day and you think you’re on the path you’ve carved out for yourself in terms of the business, but unless you’re paying attention to the details or you have someone in your organization you trust at a very high level who’s paying attention to those details, it’s those things that will come up and bite you.

How do you find the middle ground between being too cautious out of fear of being overleveraged or being too reckless because you’re expanding too fast?

I always look at two components of debt on your balance sheet. One component of debt is financing your fleet. And if structured properly, that can ebb and flow up and down as you grow and as you face challenging times and if it’s got the right terms, the right payment terms, the right covenants, you can feel comfortable operating at pretty meaningful leverage levels if it’s tied to that fleet size. 

Where you have to be extra cautious is when you step beyond financing the fleet and you’re using debt to finance say an acquisition or some organic growth, a start-up because then you are effectively using debt to finance the equity of the business. It’s not a bad thing, it’s not an inappropriate thing and it’s used by every private equity firm in the country. But you just have to be very cautious about how much of that incremental debt you take and what you’re using it for so that you don’t let it be the cause of problems should there be a weakness in your business. It’s not about having too much or not enough debt, it’s about how you deploy the capital you use, how you deploy the capital you raise with the debt.