A number of articles have been written with regards to the preparation, evaluation and process of selling a portable storage company. In this article I am going to address the process of buying or selling a smaller standalone rental fleet. I often get questions from our readers about how to value a fleet that is being offered for sale, and with fleet, I mean a quantity of 50-200 containers. A fleet of containers that is large enough to represent a substantial amount of money for a single site operator but too small to represent an entire portable storage business or comes with the intangibles assets involved in a sale of a going concern.
Here are some of the key factors to consider:
Type, size and age of containers
This should be pretty easy but it cannot be reiterated too many times that it is critical to think of how the fleet to be acquired fits into the fleet the buyer already has or how it matches with the typical demand in the local market place. For example, if you are in an urban area, it is likely that your primary product is small containers. You should think twice before buying a fleet of large containers even if they have been out on rent for a long time and there is no expectation of them being returned soon.
Quality and improvements, including painting, markings and lock boxing of the containers
Make sure the containers you consider buying match your existing fleet or take into consideration the cost of bringing them to the standard of your fleet when negotiating the price. It is very difficult to have more than one standard of quality in a fleet primarily from a customer expectation prospective. For example, if a customer sees one of your standard good looking containers out and about and calls the phone number on the container for a rental, he expects the same quality and appearance of the container that is delivered to him.
Location of the containers
Think of how the fleet you are about to acquire will impact the logistics of your business. One of the keys to control the profitability of transportation is to have the fleet as geographically concentrated fleet as possible. That means shorter distances between your yard and the customer. Furthermore, it gives you the occasional opportunity to pick up from one customer and deliver to another without passing through the yard but charging for one pick up and one delivery. Having a few containers on rent far away from your yard means challenges with servicing existing and new customers. You know that visibility of the containers creates new business and if the fleet you acquire is outside of your service area you’ll be faced with the challenge of accepting new customers in a new area. You then have to make the decisions, shall I service this area or shall I turn down an opportunity to rent more containers?
The origin of the containers
Make sure you understand how the containers have been acquired by the seller. You want to make sure that the containers are his to sell. If, for instance, the seller has financed the containers with a finance or container leasing company, there may be restrictions on how they can be sold. Having the standard clause of “free of any liens and encumbrances” will give you comfort, but there if they aren’t, and you acquire them, you may still be dragged into a costly legal dispute.
Customer categories and behavior
Do your homework on the customers; make sure you understand the customers, their industries and seasonal behavior. Make sure you understand the customer types so that you are prepared to deal with them. We all know that there is a big difference between servicing residential customers versus commercial customers, but there is also differences within each of these segments and a difference between how the seller services his customers and how you, the buyer, service yours.
Terms of the rental agreements
Make sure you understand the terms of the rental agreements. Some of the pitfalls are security deposits, prepaid pickups and rent to own clauses. If the rental customers have paid security deposits or prepaid pickups the liability that comes with the fleet can be substantial and the amount should be credited to the buyer. In a rent to own situation the container(s) should excluded from the sale. The rent to own agreement is technically an account receivable. Also match up the accounts receivables for each unit so you understand which customers are problem customers and how they are dealt with. Secondly, you need to understand if the customers you are about to acquire pay in the same fashion as your existing customers or if the seller has operated in a way that makes their behavior different.
Rental rates and billing cycles
How do the rates of the fleet you are about to acquire compare to yours and how do they compare to the market place? How are the customers billed? Are they on the same terms as your customers? In other words, if you bill on a 28 day cycle, is that how the seller has billed his customers? Are the customers billed in advance or in arrears? Is billing done on an anniversary basis or are all bills sent out at one time to all customers. How are credit card billings dealt with? If you haven’t done that before and the customer base you are about to acquire expects to pay with credit cards, you must learn how this process works as well as understand the rules and regulations for reoccurring credit card charges.
Find out why the seller is looking to sell. It can be for a number of reasons. Some of them put the buyer in a strong position and some of them, the opposite. Make sure you understand what happens post sale. Is the seller giving you a non-compete or will he continue to compete in the same area? If the containers have the seller’s name and phone number on them, will that be removed? If so, when in the process will this be done and who pays for it? If not, will you get the phone number as a part of the deal?
These points may seem trivial, but if you don’t have a good handle on them, what looks like a good acquisition can become a headache.
Now on to the valuation of the rental fleet. Contrary to buying a business this is a purchase of a number of containers and I think there are two very simple methods that one can use to arrive at a price that makes sense for both buyer and seller.
The replacement value method
In other words, what would it cost to purchase the same amount of containers and bring them to the same condition as those in the rental fleet? The costs to look at are the types of containers, the volume of containers, the cost from point of sale to your yard, the repair and upfit cost (painting, lock boxing and decaling).
In addition, one needs to consider the inherent rental revenue obtained from the containers in the acquired fleet. My suggestion is that the value of the inherent rental income is the periodical rental rate times the average rental term. The reason I suggest that one uses half the average rental term is that theoretically some containers can be returned the first day you own the fleet and some will stay on hire for a very long time. This calculation works in the normal situation when the customers rent one rental period at a time. If there are minimal rental terms in the agreements then one should make an adjustment for that. To arrive at the number using this method one must know the total rental revenue of the fleet as well as have the historic data of the average rental terms. The latter requires the cooperation of the seller and you better make sure you have an idea of what that number is early in the purchasing process.
Return on investment method
Decide what return you want on your investment. Despite the customers of the fleet you are about to acquire being somewhat flexible, customers come and go, you should have a good idea of the rental revenues it generates now as well as when under your future ownership. With that at hand and the return on investment goal you set for yourself, you can come up with a value. For example, if your return on investment goal is 25%, then the price of the fleet should be four times the rental revenue.
Seal the deal
To close the transaction you need to come up with a price that works for you as well as for the seller. Using the numbers from the two different methods is a good way to start the discussions. The numbers from the two methods will hardly ever be equal so there is always an element of negotiation involved. Take a look at the tables below and see how the two methods compare in what I consider today’s market environment.
|Container Type||40 Cargo Worthy|
|28 Day Rental Rate||$95|
|Average Rental Periods||8|
|Replacement Value Method|
|Transport to market||$250|
|Equipment Replacement Value||$3365|
|Discounted Rental Income||$380|
|Unit Replacement Value||$3754|
|Return on Invetment Value Method|
|Annual Rental Revenue||$1235||(13 x $95)|
|Net Annual Revenue||$926|
|Unit Value||$3705||(4 x $926)|
In a transaction like this, the buyer is taking the risks by acquiring the revenue generating containers and the seller is trading opportunity for certainty. To have a successful negotiation the buyer must feel that he buys a reasonable opportunity and the seller must feel that he gets reasonable value for what he sells.
When you acquire a fleet of containers on hire make sure you understand the equipment, the customers and the market as well as the pricing. Understand why the seller is selling and understand that a successful negotiation is when both parties feel like their objectives have been met and the deal is fair.