To Sell or Not to Sell
April 11th, 2017 by Sue O'Reilly
When dealing with plant, machinery, fleets and equipment, it is important to determine if owning the asset makes sense for the company from a financial standpoint. It is a simpler decision if utilisation is low or assets at end of life however for all assets the ongoing ownership cost of equipment should also be assessed. Ongoing ownership costs include the financial and operating expenses it involves. This assessment can be extended further if you consider the lost opportunity cost of keeping underperforming assets.
There are also cases where non-monetary factors are important in asset ownership decisions; for instance, old equipment can create the perception of poor quality or low reliability, even if it is operating correctly and has been subject to proper maintenance. This can have a negative impact on your company or product brand in the market. Growth businesses tend to invest for success.
The Financial Costs of Owning Equipment
All assets lose value over time, as it wears down and newer technologies render it obsolete.
The environment ensures asset depreciation is a daily occurrence. It has the effect of reducing the value of company assets each year.
Technological evolution makes equipment less valuable over time; even if the basic operating principle doesn’t change, newer versions of equipment tend to operate more efficiently and often include automation features. In cases where a disruptive technology reaches the market, some equipment can become obsolete instantly.
Holding non-performing assets should be considered against potential gains from investing this money into other investment opportunities.
Another risk associated with owning more equipment than necessary is that companies become more vulnerable to economic downturns. This is experienced by many mining companies, for example, when commodity prices are low; pieces of equipment are often sold at prices significantly lower than their book value, as companies are shedding assets to increase their capital reserves and weather the downturn.
There is also an escalated risk if the company is holding debt or finance against these assets. You may find a case of negative equity relative to the associated debt. Further ongoing interest or lease payments on underperforming assets can accumulate losses quickly and affects the critical cash flow of a business.
A final consideration most businesses undertake is the effect any disposition will have on the end of financial year accounts. Dependent on the status of the business this may not be an option and for most only a case of a delay in action. Asset values always goes down over the medium to long term so there is a compelling reason to act sooner rather than later.
The Operating Costs of Owning Equipment
Most of the ownership cost of equipment consists of operating expenses and maintenance expenses. In many cases, owning old or underutilised equipment is more expensive than upgrading, renting or leasing, respectively, once the total cost of ownership is evaluated.
Operating expenses, which include energy consumption and operator wages, are generally unavoidable. However, older equipment tends to require more energy and labour for a given task, and it may be possible to reduce the cost of ownership by selling and upgrading it, even after considering the additional capital expenditures. The service life of equipment must also be considered; manufacturers typically provide a rated service life, and waiting until a piece of equipment fails completely is likely to disrupt business operations.
Rent is also an important consideration for underperforming assets. It may be the case the business could operate efficiently from a smaller thus lower cost or better located site.
Maintenance expenses are often by themselves a strong enough reason to sell old or underutilised equipment. For example, there are pieces of equipment that deteriorate faster when used intermittently; in other words, maintenance expenses increase when this equipment is underutilised, and it may be more cost-effective to rent it as required instead of owning it. The same can be said of old equipment, which tends to have higher maintenance expenses due to accumulated wear and a higher chance a major part will fail.
There are several factors contributing to the decision to dispose of assets. However, at the end of the day if the asset is underutilised or costly to operate it is likely a sale is the best option. It is then prudent to act and achieve a sale for these assets otherwise value is lost as they depreciate become obsolete and are subject to a sudden change in the economy circumstance.
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