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Ask a printer under normal circumstances how to sensibly conduct due diligence on a new kit purchase, and they will have no trouble telling you all about the checks and research they would undertake before signing on the dotted line. However, put the same printer in front of a row of shiny new machines at Ipex, and these best intentions can go out the window. A quick glimpse at print's history reveals a long list of failed companies that have been sunk (at least partially) by poor purchasing decisions.
And so, with Ipex around the corner, perhaps it's time for a refresher in the basics of capital expenditure based around three questions: Do you need it, do you know which ‘it' is best for your company, and most importantly, can you afford it?
The first question is the big one. While the UK may have heaved itself out of recession, the economy is not exactly thriving and the media is filled with warnings of a possible ‘double-dip' recession. Printers, therefore, could be forgiven for wanting to keep their wallets tightly closed.
However, Phil McCabe of the Forum for Private Business (FPB) says that this is the wrong approach: now is the time to look at raising the funds you will need to grow your way out of recession. "Historically, more firms are forced to close coming out of recession than during it, because they don't have the funds to invest in the equipment to meet the renewed demand for services," he argues.
But that's not an invitation to go splashing the cash. You still need to take a detailed look at your books and business plan to ensure that a kit purchase is really the best decision for your company. Spending tens of thousands or even a few million off the back of a bumper April, when March was a washout, might not be the wisest decision.
The right investment
It is something Spencer Chapman, partner at auctioneers King Sturge, knows a thing or two about. "I often walk into failed printers and see large quantities of state-of-the-art machinery, which I can't help but think would need an awful lot of work to justify and often it doesn't seem in keeping with the company's last quoted turnover figures. You can't assume that when you buy a machine the work will just appear. Make sure that the demand is there before and that you can keep that investment working and making money."
While this advice works for investing in additional capacity, it's less useful when you're thinking about replacing existing kit. Knowing when to swap an old machine for a new one can have a massive impact on your productivity and efficiency. It's something Bishops Printers have managed to get down to a very workable situation.
Operations director Nick Murphy explains: "We aim to replace our kit every 18 months or so. We are a 24/7 operation and so our machines are put through an extremely high amount of work. Despite the maintenance structures, they do break down as you put more mileage on them and so you are not getting the use out of it and you are not getting the efficiencies you need as a business.
"You then have a choice: do you spend money refurbishing the machine or is it time to buy a new one? Buying a new machine may give you added benefits and access to the latest technology, both of which can give more productivity and efficiencies - key drivers of our business."
Added to this debate is the fact that the longer you run an old machine, the more its value depreciates and so the less money you will get for it secondhand or in part-exchange.
Basil Bannayi, managing director of Close Print Finance, recommends you take advantage of the value of your older presses while they still have some. "Waiting until a press is so old that you have to sell it means you don't get much money for it," he argues. "It is much better to part-exchange kit while it still has some life in it as that way you get a good price."
So, you do your homework and you find, yes, there is cause to invest in a new machine and, yes, there are benefits to trading in your old one for one with lots of exciting new features that will add value to your services.
Bingo. Stage one completed.
Next, you have to try and work out what exactly you're going to invest in. This is often not as straightforward as it might seem, as Tim Hill, managing director of Speedscreen, explains: "The most important criterion is getting the best fit for your company within a set budget. For us, that meant searching over a two-year period, going to all the trade shows and having demos and building our own set of data before we felt truly confident of making the right choice.
"You have to be aware of the marketing speak dished out by the suppliers. The one thing you can check out properly is the claimed productivity for a given quality - take along the same job each time and use a stopwatch. The manufacturer's claims are usually woefully adrift from reality."
Hill is not advocating that you question every word the manufacturer says, rather that the research you apply to the first stage of the buying process be extended to the second. Find out for yourself what a machine is capable of and then you can compare them accurately as to which is a better fit for your business.
The whole package
And it is not just about the kit, as Bishops Printers' Murphy explains. "You are not just buying the machine, but the whole package of service and support that comes with it," he says. "We operate 24/7 and if a machine goes down Sunday tea time, it's no good to me if I can't get an engineer out until Wednesday. I need someone there on site Sunday night. So I need a package that gives me that."
You will notice that neither Hill nor Murphy suggests that the price of the kit itself should be the key factor; the industry may have had to do some significant belt tightening over the past few years, but when it comes to equipment, both men argue that price is less a factor than getting the right machine.
"I could easily go out there and replace all my presses with cheaper equipment," says Murphy. "But will I get the reliability? Do I get the residuals when I want to trade that kit in? Do I get the service and support from that manufacturer? It's all very well having a nice 10-colour press that is £500,000 cheaper than the leading brand, but if I don't get positive answers to the above then it's worthless to me."
That said, if you're looking for a good deal and cash really is short, there is always the secondhand option. Chapman and Bannayi both advocate this course of action. They say that the quality of secondhand machines available both at auction or as repossessions can be of very good quality and, in the current climate, they're often relatively new.
"Due to the recent recession, it's inevitable that there will be bargains to be picked up. There are going to be companies failing in the current conditions and as a result there are some very good, very new machines on the repossessions market." says Bannayi.
In the end, you need to buy what fits your company best. It doesn't matter if that's a brand new press or a secondhand folder. As long as it does what you need it to do and what it claims to do, and you are satisfied that the full package suits your needs, then stage two is completed. You have identified your target. Now you have to find the money to purchase it.
And this is where, for many, the whole business of investing in a press or any other high-value kit falls down. This is mainly because there are a fair few myths circulating about the role finance agreements can have in the ultimate failure of a business. Bannayi is eager to set the record straight.
"Companies don't fail because of finance agreements," he states. "Typically, people will ring up and say they have a problem and we will reduce their payments and we will carry on. More often than not, a customer will be up-to-date and we will get a call saying they have gone under due to a bad debt."
Fine, some printers may argue, but it is impossible to get finance in the first place. According to Speedscreen's Hill, this is not entirely true, although he admits it has got tougher.
"We purchased a Durst 800 last July," he says. "Finance was much harder to arrange this time round. We had to really work hard with spreadsheets and presentations to prove the investment was viable. Even though our figures were strong and we had equity within the company, the underwriters took much longer to reach a decision. The upshot is that you end up being grateful and agreeing to far less favourable terms than was the case a couple of years ago."
If this puts you off ever even considering a major kit purchase, fear not, because the internet is home to a number of helpful websites, according to the FPB's McCabe.
"There is a wealth of free online information available that helps companies present and prepare more thorough financial projections and business management reports that they can take to banks and prove their abilities," he says.
Rate expectations
And on the point about unfavourable rates, Bannayi argues that things are not as bad as people think. He admits that as the base rate is so low, the borrowing rates seem high. However, he says that if you take the base rate out of the equation, then the borrowing rates are actually around the same level they have always been. He warns, as well, at falling into the trap of looking purely at the interest rate offered.
"If I was offering a deal at 3% interest rate with a 30% deposit and a two-year term, it might be a very cheap finance rate, but it might not be practical in cashflow terms to pay out that amount each month," he argues. "You could end up charging out work to clients at an uncompetitive rate to make up for it. It may be better to finance at a more normal interest rate with a lower deposit and for a longer monthly term."
You may have to work harder for it, then, and it could arguably cost you more than it perhaps did five years ago, but finance is out there for the taking if you look hard enough. Lenders have obviously reined in the no-questions-asked lending, but this may actually work in a business's favour; the preparation you put in in order to convince your lender will also ensure that you don't deceive yourself.
So although the parlous state of the economy may have the industry complaining, it has had the benefit of forcing printers back to school in terms of the rules of capital expenditure. The three ‘its' may appear to be common sense suggestions, but they can too easily be forgotten in the panic of recession or the excitement of a major exhibition. Not buying at all or making the wrong choice can cause irreparable damage to a business, but buying right at the right price can transform it into something better.
HOW TO FUND A PURCHASE...
There are many ways of funding a purchase – too many variables to list here – and so choosing a finance package can be a bit of a minefield for printers. Knowing your asset finance deal from your invoice finance deal isn’t exactly common knowledge.
Hence, talking to financial advisors and lenders is the best route to finding the best fit for your purchase. They will be able to suggest the most affordable and the most appropriate course of action for you to pursue, whether you’re buying a million-pound press or a making a more modest investment. It may be that the answer is a mixture of the range of different options available.
Steve Box, Managing Director of HSBC Invoice Finance (UK), has the following advice on kit spends: Funding a new press or print equipment can be an expensive undertaking, so rather than eating into your cashflow it can be worthwhile exploring different funding options. Avoid tying up your personal wealth and overdrafts in long-term purchases; it may make more sense to use asset finance and leave your cash free for short-term requirements.
Talk to your bank about how best to fund the acquisition. There are a range of options out there to provide access to funding which includes invoice finance, hire purchase, leasing and loans. These services, or a combined package of them, can be the key to structuring finances to support not only the acquisition of new assets, but also to optimise working capital as the business grows.
