(This post originally appeared on Entrepreneur)
Want to buy a car or a piece of equipment for your business? Some of my smartest clients would never dream of buying new. For them, it just doesn’t make sense. Why? Because used equipment — in many cases — simply makes for a better return on investment.
A lot of farmers already know that. Running an agricultural business is very capital intensive. To keep their costs low, a growing number of farmers are buying used equipment, particularly older tractors. Really old tractors. Like 40-year-old tractors! These are smart business people and they have good reasons for doing so.
“It’s a trend that’s been building,” Greg Peterson, the founder of Machinery Pete, a farm equipment data company in Rochester, Minnesota told Minnesota’s Star Tribune. “It’s been interesting in the last couple of years, which have been difficult for ag, to see the trend accelerate.” Peterson says that a lot of the older tractors on the market today are “basically bulletproof.” Parts are still very much available and repairs are easier (and less expensive) to make than new, more complicated machines.
Buy new or buy used?
As business owners, we’re faced with this issue all the time. Do we buy a piece of equipment new or used? Should we upgrade that older computer? Install the latest software? Trade-in the old truck for a new one?
Of course, newer equipment comes with better technology. John Deere’s new tractor models, for example, offer better comfort, multiple speeds, hundreds of attachments and software that alerts the drivers of potential safety or maintenance issues. Updated computer hardware and software from Dell, Microsoft and Apple always have better security and more automation features. Newer forklifts or manufacturing equipment pretty much guarantees better safety options.
But today’s manufacturers of capital equipment and vehicles are also taking away something else from their customers: control. Most of these products – as advanced as they are — are becoming increasingly difficult to repair, without the manufacturer’s assistance and a monthly service contract.
“Which is in turn part of the larger economic shift from selling primarily commodities to selling primarily services,” one commenter wrote on the economics blog Marginal Revolution. “It isn’t hard to imagine a future in which the initial car/tractor/whatever is free but the company has a monopoly on all service/maintenance/upgrades. Many businesses have exactly that model (though not yet for items as large as tractors).”
Eventually, these older machines are going to die out. But who knows how long that will take? The machinery that works the elevators in my building is more than 100 years old. Maybe those same tractors will be around in the next century too.
It’s all about ROI
When you run a small business, your capital budget is limited. It’s why many of my clients avoid upgrading their computer systems because – despite security risks — their current systems are doing the job satisfactorily. It’s also why a growing number of farmers in Minnesota are opting to buy older — yet simpler — tractors and equipment that gives them more control and has a lower initial investment and ongoing maintenance costs. Get the spreadsheet out and do the math. This stuff may not be pretty. But if it gets the job done, and leaves extra cash to use for other purposes then who’s better off?
“The main reason we do this is to make money,” one farmer said. “Older equipment is a way to reduce your cost per bushel to become more profitable.”