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Technology Focus

Capital Equipment - When Should I Buy?

by Jeff Peterson

August-September, 1999
Most graphic finishing business owners will tell you the most complex, excruciating decisions that they must ponder are those involved with the purchasing of new capital equipment. Will the market support it? Will the economy stay good? Can I afford to add more debt? Should I sell existing equipment? These questions, and many more, go through the minds of trade finishing operations on a daily basis. We'll explore the ins and outs of adding that new foil stamper, die cutter, folder/gluer, etc., and the type of questions you should ask before making a purchasing decision.

Analyze the Need Carefully

Before a finisher wastes any time researching the specific model or manufacturer of the type of equipment they think they need, he or she should first do a careful analysis on the feasibility of adding new equipment. As many know, you can end up spending a great deal of time attending trade shows or talking with salespeople when you might think you are in the market for a new machine. This can be wasted time if you later find out you cannot afford the equipment or your particular market won't support it. "The bottom line is that you must analyze the market and make sure you can get a return on investment," stated Todd Amar, of DynoPress, Minneapolis, MN. How do you do this? Amar suggests first asking yourself if your current customer base will support the additional capacity. If not, you must decide if you will have the capability to expand your market either locally or farther out geographically. Find out if your competition offers this service already. If so, you must decide if the machine you purchase will produce better product or run at faster speeds. If they do not offer the service, it may make your decision easy, based on a belief that there is a market for the additional equipment.

Mark Ersek, of MGM Converters Inc., Cerritos, CA, told InsideFinishing that the growth rate of their business over the previous couple of years, and where the growth has occurred, has a major impact on their decision to purchase new capital equipment and what type of equipment they will consider. "We look at how the various revenue channels have grown, whether it is foil stamping, die cutting, gluing, etc.," stated Ersek. "Based on this information, we will analyze our customer base and determine how much potential growth we can achieve from them and then how much growth we can achieve from any new customers at we may target during the upcoming year." MGM also looks at the overall economy when considering new equipment as well, and will look even more specifically at the economic projections for the printing industry both regionally and nationally. Statistics compiled and available from the Printing Industries of America is a main source for this information.

Many times finishers look at purchasing new equipment when they receive a specific contract for a specified amount of time. Contract work can justify new equipment, but there are many factors to consider. First and foremost is the duration of the contract. It is extremely difficult to justify new capital equipment if the contract work does not cross over into your main business focus, especially if the contract is for only one to two years. If the contract is set up for multiple years with options to extend it even further, then it becomes easier to justify the capital expenditure.

The marketability of the equipment is another important factor when considering a new machine. This can be especially true if you are looking at new equipment for a specific contract or if you are looking at entering a new market altogether. "It is always worthwhile to check the resale value of the machines you are considering," stated Kevin Cullen of Apex Die, San Francisco, CA. "Some equipment will historically depreciate rapidly while other machines can hold their value quite nicely."

Checking with some of the used equipment dealers on their thoughts of the resale value is a good idea as well. If the new equipment that you are considering fits well with the current services you offer, and you do not predict a need to resell it at all, then the long-term marketability of the machine may not be as strong a factor.

Which Equipment Should I Buy?

Once you have determined that you are definitely in the market for a new press, folder/gluer, coater, etc., you now must take the second step and decide which particular machine to buy. Amar recommends researching the potential equipment vendors for the type of machine you are considering and then identify what you need-fast makeready times, running speeds, registration accuracy, etc. "Create a list of what you are looking for and specific questions to ask your sales representative," stated Amar. Once you have narrowed your choices to machines that look to be the best on the surface, the next step is to get a list of installations and references. "Always check as many references as possible," says Cullen. "Ask questions on equipment reliability, service, parts availability, warranty issues, etc."

It is also recommended to visit the handful of manufacturing facilities that you have narrowed your choice to. "This is a step that a lot of people don't pursue that I strongly recommend." "Trade shows can disguise how professional a company really is, and parts inventory is the one area that can be easily misrepresented," added Amar. An on-site visit can clear up any gray areas or last questions you might have. If the equipment manufacturer hesitates, then this might be a red flag before going any further.

Lastly, a pre-delivery inspection of the equipment you are purchasing is always wise. Before the machine leaves the factory, an actual production test of the type of product(s) you will be running should be done. It is recommended to use the actual stock, dies, glues, coatings, etc., that you know will be used in your plant to verify that the machine functions to your satisfaction. "This will allow you and the manufacturer to have peace of mind that the guarantees that are being made are realistic and can be met long term," concluded Amar,

Financing Options

Okay, you have determined that you need a machine and now you have chosen the one you want.

The last step is to finance it. There are several options involved with financing new equipment. Are you going to borrow money from your bank? Will you use a financial company familiar with the industry? Are you going to buy or lease the equipment? These are some of the basic questions you must consider.

If you have decided to borrow the money with a standard loan, you are most likely going to finance the equipment with your local banker or a finance company that works in the printing/finishing industry. This is certainly a personal choice. However, in many situations, a bank is not familiar with the graphics arts industry and will expect you to secure the loan with other assets within the company. A finance company within the industry will usually use the machine itself as collateral. This is possible because of their knowledge of the industry and the network available to them to help them sell use d equipment.

Another advantage of working with a separate finance company is the flexibility of looking at other financing options that may not be available with a bank. These include a loan that has step up payments over the first few months as the business increases on the new equipment. This is especially helpful if you are expanding your business with services you never have offered in the past, like the addition of a new UV coating machine. It will take awhile to educate your customers that you now have this service available if you have never offered it in the past. You can also negotiate a balloon payment at the end of the loan that, again, can help keep the payments down as you increase the work on the new equipment.

The other option available to you is the possibility of leasing the machine. Leasing provides an enormous amount of flexibility. You can look at options as we discussed above that include low payments at the beginning which increase throughout the term of the lease, balloon payments, and even seasonal payments where you pay more during the time period when the equipment is being used the most. This may apply with contract work that hits one or two times during the year. Leasing also allows a very small amount of cash outlay. In most cases, there is no down payment necessary as there is with a loan. In addition, if the lease is structured properly, you may be able to deduct the lease payment as a current operating expense for income tax purposes. The major disadvantage of equipment leasing is that in the long run the overall cost of a lease can be more expensive than other types of financing. Secondly, because you are basically renting the machine, you do not build equity with the asset as you would with purchasing the machine outright.

There are many steps involved when considering the addition of new capital equipment. This is especially true in the graphic finishing industry where most of the equipment is in the hundreds of thousands and sometimes millions of dollars. Analyze your need for the equipment, carefully research the manufacturers and/or distributors, and choose a financing package that is right for you. Follow these guidelines and most likely your purchase will be a successful one.

InsideFinishing would like to thank Jeff Shaner of American Capital Resources, Todd Amar of Dynopress, Inc., Mark Ersek of MGM Converters, and Kevin Cullen of Apex Die for their assistance with this article.