Three Factors to Consider When Purchasing Capital Equipment for Your Convenience Store
Chris Santy, President, Patriot Capital
Published in SIGMA IGM, April/June 2017
Choosing to invest in upgrading your business, whether it’s new gas pumps financed to grow your sales or upgrading underground storage tanks to meet updated EPA regulations, is an important decision. In making any investment decision, your first consideration should always be the return on your investment (ROI).
In determining your ROI, there are three components to consider:
- What is the cost of the equipment or investment?
- What will the equipment earn?
- What could happen to make the return on investment different than you expect?
Let’s take a quick look at each of these elements:
What is the total cost of equipment?
When making an investment, the easiest element to look at is the equipment cost. This is clearly spelled out in a quote from a distributor. It is important to also consider what is known as the total cost of ownership, or TCO. Factors to consider in TCO include:
- Length of warranty, and what is included in the warranty. For example, does the warranty include travel charges to and from your site, parts only or parts and installation, and any type of agreement on response time? For software such as point of sale, does the warranty also include software updates during the warranty term and help desk support?
- Service technician availability and reputation? How far away from your c-store are the authorized service technicians located? What is the service techs reputation for fixing items on the first call?
- What is the cost of financing the investment? If you choose to pay cash for equipment, it is important to understand the ‘opportunity cost’ of using cash rather than financing or borrowing. For example, could you use your cash to purchase another site that will make you a greater profit than the equipment you are buying? Many people consider it smart to use cash to purchase ‘strategic assets’, which are investments that grow in value rather than depreciate. With this approach, borrowing or financing is used to pay for depreciating assets, such as gas pumps or LED lights. This approach allows an entrepreneur to maximize their ROI by using a mix of debt and equity to invest in their business. If you could use your cash to earn the NACS average of 15% return on your investment, and instead use your cash to finance an underground storage tank upgrade, the tank upgrade is effectively costing you 15% per year.
What will your equipment earn?
Although this may seem like an easy question to answer, for many equipment investments it’s not so easy. Some factors to consider:
- What is the cost of doing nothing? In the case of upgrading your pumps to EMV, the costs include credit card fraud chargeback elimination, the negative impact on your sites image if you have a significant breach, and the potential loss of customers to nearby sites that are perceived as ‘safe’ to pay at. If you need to upgrade your storage tanks, the do nothing cost could be that your site is shut down or fined for not being compliant with the regulations.
- What business benefits will I gain? Investing is usually done for one of two reasons – to grow revenue or reduce costs. If you are adding new gas pumps or upgrading your brand image, you are likely expecting to gain gallons. These gallons and increased fueling traffic should also translate into increased inside sales. In addition to increased gas volumes, will your new pumps or image allow you to charge a higher price per gallon? Also consider what savings you will realize in reduced maintenance, not just during the warranty period but through the life of the equipment.
- If you are thinking of selling your site in the coming years, what will the modern equipment, regulatory compliance and increased sales mean to your valuation?
What could happen to create a different value for your investment?
With most investments, there is always the chance of an unexpected outcome. Some things that should be considered when making an equipment purchase and using financing are:
- What could change outside of my control? For example, what impact would a new site across the road have; and how likely is that to happen? Is there technology that could make my investment less valuable?
- Do you fully understand the terms of the purchase agreement? It is important to make sure that any agreement spells out all foreseeable costs related to installation, equipment commissioning, removal of old equipment, freight, taxes and any other costs.
- What constitutes the equipment being fully installed and ready for service?
- If you are financing your equipment, ensure that you receive clarity on all payments, including payments to commence the loan, any payments at the end of the loan, and any additional payments or costs. Confirm that the quoted interest rate is similar to the actual interest rate when all payments are considered.
Making an investment in capital equipment for your convenience store or fueling operation is a big decision. When making a large investment, the lowest cost is not always the cheapest cost, short or long term. It’s important that you do your homework in researching the track record of your equipment manufacturer, the authorized distributor and installer, and others that will help you invest in your business.
About Patriot Capital
Patriot Capital, a division of State Bank and Trust Company, specializes in enabling entrepreneurs to succeed by providing hassle free equipment financing to retailers in the convenience store and commercial fueling industry and other retail and manufacturing industries. Patriot has been recognized as Best in U.S. by the PMAA, Petroleum Marketers Association of America.
Patriot Capital is the leading provider of capital equipment financing and leasing to NACS (National Association of Convenience Stores), PMAA and SIGMA (Society of Independent Gasoline Marketers of America) members. State Bank is a Member FDIC.