Too often, we see businesses in equipment-intensive industries making purchases just to have shiny new equipment. Often, they purchase equipment before understanding the return on investment (ROI), i.e., how much money they will make using that item. A better plan is for tree-service companies to acquire new equipment with the goal of maximizing profit margins.
With this goal in mind, let’s consider a few key questions owners or operators should ask when considering new-equipment buys.
1. Will the equipment streamline operations?
Before answering this question, it’s helpful to clearly define the tree business’s niche and target services. Different niches require different equipment – type, age, appearance and function – to have the most impact on margin per job.
For example, the tree care business may decide its focus is storm-damage cleanup. This niche is an emergency service, and the customer is probably less concerned with collateral damage to their lawn or landscape. They just want the tree off their house or to be able to use their driveway again. Another example is a high-end, residential tree care and plant-health-care company that needs to present itself – both equipment and employees – with a certain image.
In addition to aligning new equipment with the defined niche, match new equipment to how the business operates. Some tree services, for example, rely primarily on climbers and ropes to do technical removals. Others are bucket truck heavy. Chris Mehalic, owner of Tree Masters in Charlotte, North Carolina, recently started utilizing tracked, compact lifts.
“A lot of our business is residential removals and pruning, often working on trees simply inaccessible to our bucket trucks because of slope, access, surrounding trees, structures, etcetera. The tracked lifts have been a game changer. They not only improve safety by getting the climber out of the tree, but also (improve) quality and job times by having almost limitless options for angles and positioning at the press of a lever,” says Mehalic.
Buying equipment that enhances how the business already operates leverages experience and maximizes margins.
Identify core services
After defining the niche, identify the parts of your core service operations ripe for streamlining. Nathan Morrison of Arborscapes, a nine-year TCIA member company based in Pineville, N.C., felt his crews were spending too much time dealing with big-diameter logs left over after the canopy had been chipped and removed. He decided to invest in a grapple truck when operations didn’t improve.
Says Morrison, “We decided to play it safe and invest in a used grapple truck, but couldn’t gain the efficiencies we expected.”
After selling the old truck and looking at the situation objectively, Morrison decided the repairs and downtime had killed any benefit. They decided to double (or triple) down and buy a new grapple truck. “The new truck has a warranty and very few operating costs for repairs and breakdowns, and that justified the much higher price tag,” says Morrison.
Now Arborscapes is finally realizing the return from the investment in a grapple truck.
Here is the basic question about equipment purchases that tree companies should apply to any new purchases: “Will this get my crews to the next job faster, with minimized downtime and reduced risk?”
As with the grapple truck, Arborscapes found they were spending an inordinate amount of money on repairs for other equipment as well, and that downtime was a silent killer to its margins.
“When we saw the thousands of dollars spent on repairs, we realized the ‘savings’ of having paid-for equipment was really costing us,” says Morrison. “Our CFO helped us with a financial plan to refresh our fleet so all our essential equipment is under warranty, trading or selling any equipment once the dealer-
covered maintenance plan expires. Our downtime has shrunk along with our maintenance costs, while our cash outlay for the equipment payment is much more predictable.”
2. Does the new equipment purchase warrant raising prices?
To maximize margins, consider increasing pricing where professional equipment increases the perceived value of the services to the customer – or is necessary to ensure profitability.
For example, a high-end residential tree care business may be able to charge more for services that leave a yard and property in great condition. Mehalic recently lost a job with one of his longest and most loyal customers to a competitor who brought in a specialized piece of equipment, one that Tree Masters didn’t have in its fleet. Mehalic says, “I’m OK losing a job here and there to another company that charged more than I quoted and offered a special service I can’t provide at this time.”
This might mean investing in a crane instead of relying on a rental service. Others may buy a grapple-saw truck. This is a significant investment and comes with a steep learning curve for both the operator and the operations team.
For a business focused on storm cleanup, leaving the property in perfect condition may matter less – as the property often is found in already less-than-ideal condition. These companies also probably won’t rely heavily on climbers, as much of the work is dealing with downed trees. Likewise, a customer may not care about fitting a compact lift through a gate if a larger, more efficient piece of equipment can get into the backyard and get the job done more quickly at the cost of one more section of fence.
For the storm-damage niche, equipment that speeds removal and cleanup should be considered to maximize margins. A grapple-saw truck, for example, gives crews the ability to quickly remove and haul away large logs without relying on climbers or cutting the logs into smaller pieces. That may be a good investment for a company focused on storm work.
Businesses may choose to buy new equipment with the primary goal of diversifying services.
3. Does the equipment open new income streams or diversify services?
New equipment purchases may open new income streams or diversify services, which can contribute to improved margins.
In some cases, the equipment may be needed for a core service but easily can be repurposed. A skid steer, for example, is used day to day by many tree care companies for carrying brush and logs to a chipper. But it also can be outfitted with attachments, such as a firewood processor. Albeit, selling firewood may only be profitable in certain climates or areas, but that would be part of determining the niche before making any decisions.
In other cases – and in these we suggest evaluating extra carefully – businesses may choose to buy new equipment with the primary goal of diversifying services. To ensure the new services are truly a good fit, due diligence is critical. Otherwise, they may prove unprofitable, bog down the business and detract from established core services.
For example, Arborscapes got into the firewood business using log splitters. What looked like a great revenue stream coming from a waste product didn’t work for Arborscapes’ business model. It was too labor intensive, and because it wasn’t something the business specialized in, they received non-stop customer complaints, e.g., wrong size, didn’t stack right, didn’t burn well, etc.
Establishing the right niche
However, Damon Barron, of Carolina Urban Lumber in Charlotte, N.C., made a big investment and is solidly in the firewood business. Carolina Urban Lumber identified the right niche and processes to make it profitable for them, due in part to their long-standing relationship with Arborscapes.
“After hearing Arborscapes’ story, I realized the typical residential customer was probably not my niche. We focused on the high-volume users: wood-fired-oven restaurants, bulk deliveries, event venues and packaged pallet deliveries to area stores for resale,” says Barron.
While the firewood business didn’t work out for Arborscapes, the business did successfully establish a partnership upcycling high-value logs to furniture makers like Carolina Urban Lumber and other buyers. To do this, Arborscapes bought a full-size excavator solely to organize their log pile and sort out the marketable timber for resale. This investment not only generated additional revenue for the company, but also reduced storage and disposal costs for what had been a waste product for their business.
4. Do the jobs fit the equipment?
Too often we see tree care businesses using the equipment they have to do the jobs they sell. While this may sound like a “duh” comment, it’s usually not the best way to generate high margins. Instead of buying the new, cool piece of equipment and looking for jobs it can do, try analyzing the jobs the company is good or OK at, and then see if an investment in better or new equipment could make those jobs more efficient and more profitable.
For example, Arborscapes bought a grapple-saw truck. They had to invest about a year before they figured out how to use it profitably in their operations. The operator had the controls figured out in a matter of months. But it took the sales and scheduling teams a while to figure out how to quote the right jobs for that piece of equipment instead of defaulting to the thinking, “Well, we have it here, might as well use it for X, Y and Z jobs this week,” says Morrison.
Mehalic agrees with the goal of right-sizing his fleet. “Even with expensive tree equipment, we know our people are by far the most valuable assets. That was our thinking when we issued crews mini skid steers with log-grapple attachments that reduce cutting and hand carrying,” he says. “When we can invest in equipment to make the job safer, more efficient and, honestly, more fun, we see happier crews, which results in better production, better retention and happier customers.” All of these factors will naturally increase margins as well.
Acquiring new equipment, which often comes with a high price tag, is a big decision, especially for smaller tree-service businesses. If the business does not have a resource on staff experienced with performing cost-benefit analysis, they should find a professional financial resource to help make the call. An outsourced CFO service can be an affordable way to get help with this type of financial decision-making, and can give the business greater confidence that the equipment will increase margins in the long run.
The tips mentioned here can help point tree services in the right direction and prevent some businesses from making a decision they might regret.
Jeff Heybruck is the founder and CFO of Lucrum Consulting Inc., based in Charlotte,
N.C. (www.lucrumconsulting.com) He has more than 15 years of accounting experience and strategic financial expertise working with the tree care industry. Heybruck holds a Master of Accounting degree from UNC-Charlotte.