Equipment and vehicles: checking what you're buying

In many small companies, the trucks, vans and machines are a big part of what you're paying for. They're also a big part of what you'll spend after you own it. A fleet that looks fine on a walk-through can need replacing all at once, and that money comes out of your earnings, not the seller's.

Checking equipment isn't complicated. It takes a good list, a careful look, some records and a little arithmetic.

Start with a complete list

Ask the seller for a list of every piece of equipment and every vehicle the company uses. For each one, you want:

• a description, make, model and serial number (the VIN for vehicles);
• its age, and miles or hours of use;
• what it cost and when it was bought;
• whether the company owns it outright, owes money on it, or leases it;
• where it's kept and who uses it.

Then compare the list with two other records. The depreciation schedule behind the tax return lists the equipment the company has claimed, and the balance sheet shows what it carries on its books (see reading a balance sheet). Anything that appears on one record but not the others needs an explanation.

Watch for what's missing, too. A truck titled to the owner personally, a trailer parked at the owner's house, or a machine owned by the owner's other company may be used every day. It still isn't part of the sale unless you agree in writing that it is.

See it running

A list tells you what should be there. Only a visit tells you what is. When you tour the company, match serial numbers and VINs to the list, and ask to see each major item running. Your first visit with the owner is a good time to start noticing.

For anything that matters, get a professional opinion:

• Vehicles: a mechanic who works on commercial vehicles, especially for trucks with high miles.
• Specialized machines: an independent technician, or a dealer's service department for that brand.
• High-value equipment: an equipment appraiser, who can also estimate what it's worth.

What to look for: rust (salt air and humidity are hard on metal in much of Florida), leaks, worn tires and brakes, cracked hoses, missing safety guards, and anything held together with tape. Ask about breakdowns in the past year.

If the owner agrees, talk to the people who use the equipment every day. A technician knows which van won't start after a rainstorm and which machine needs a kick.

Ask for the maintenance records

Service logs, repair invoices and inspection reports show how the equipment has been treated. Regular servicing and documented repairs are a good sign. A thin file doesn't mean the equipment is bad, but your inspection has to do more of the work.

Some equipment needs regular inspections or certifications, from a government agency or from the company's insurer. Ask which apply, and see the latest reports.

Also look at what the company spent on equipment in each of the last three years. An owner planning to sell may stop replacing things, which makes profit look higher for a while. That isn't a saving. It's a bill handed to the next owner.

Check for liens and leases

A lien is a lender's legal claim on property. If the seller borrowed against the equipment, that loan has to be paid off at closing so the equipment comes to you free and clear.

• Equipment. A lender usually records its claim on business equipment by filing a notice called a financing statement. In Florida, these are filed with the Florida Secured Transaction Registry, the filing office named in Florida law (a claim on fixtures, things attached to a building, can instead be filed with the county's clerk of court). Search under the company's exact legal name, and under the owner's name if the owner ever ran the business in their own name.
• Vehicles. Liens on Florida-titled vehicles are noted on the title. Ask to see each title, check that the company is the owner, and confirm any liens will be released at closing.
• Leases. Leased equipment isn't the seller's to sell. You may need the leasing company's consent to take over a lease, and the payments become your cost.

Your attorney and your lender will usually run their own lien searches before closing, but an early look can save you a surprise.

Work out what you'll need to replace

This is the step that turns an inspection into money. For each major item, estimate how many years of use it has left and what a replacement would cost today. Get quotes from dealers rather than guessing.

Here's a hypothetical. Say you're looking at an HVAC company with 8 service vans. Suppose a van lasts about 10 years in this work, and a new one, fitted out with shelves and racks, costs about $60,000. On average, the company needs to replace about 0.8 vans a year, roughly $48,000 a year.

Vans	Age	Miles	Condition
1 to 3	10 to 12 years	180,000 to 230,000	Worn, frequent repairs
4 and 5	7 years	about 140,000	Fair
6 to 8	2 to 4 years	30,000 to 70,000	Good

The average hides the timing. With three vans already past 10 years, you're looking at about $180,000 of vans in your first two or three years, at the same time you're making loan payments.

Two things follow:

• Count it in the earnings. When you work out owner earnings (profit plus what the owner pays themselves, before loan payments and taxes), subtract a realistic yearly cost of replacing equipment. A seller's figures may add back all of the depreciation as if nothing ever wore out.
• Plan the cash. Know where the money for the first replacements will come from: the company's cash flow, a reserve, or equipment financing.

Use what you find

Old or neglected equipment isn't automatically a reason to walk away. It's information. You can ask for a lower price, a credit at closing, or for the seller to repair or replace specific items before closing. Be specific and show your numbers. "Vans 1 to 3 need replacing within two years, at about $60,000 each, based on these quotes" starts a conversation. "Your equipment is old" starts an argument.

Lenders look at the equipment too, since it's usually collateral for the loan. See personal guarantees and collateral for how that works.

What to do this week

• Make a blank equipment list with the columns above, ready to send to a seller.
• Find a commercial mechanic and, for your industry, an equipment technician you could call for an inspection.
• Get current replacement prices for the two or three most expensive items in the kind of company you want.
• For a company you're considering, build a simple replacement schedule: item, age, years left, replacement cost, and the year you'd expect to pay it.