Kevin Appleton Column: what can we learn from small rental companies?

By Kevin Appleton and Murray Pollok26 July 2012

Kevin Appleton, IRN columnist and former CEO of Lavendon Group.

Kevin Appleton, IRN columnist and former CEO of Lavendon Group.

Do large rental companies have something to learn from the way that small, family-owned rental businesses are run? Kevin Appleton says the answer is yes.

One of the risks of writing an opinion piece like this, in a publication like International Rental News is that you can become over fixated on the role and importance of the large national and international companies. In truth they are only half of the story, as in most parts of Europe the non-national rental company makes up at least half of the overall market.

I really like smaller companies (or at least most of the ones I've come into contact with), and I've come to appreciate them more and more over the past few years. In a period when we have seen the devastating effect that building up debt and over-stretching company (and personal) balance sheets can have on the world economy, (most) smaller companies just carry on doing their thing.

What makes smaller companies attractive is that they generally have a very clear financial and moral purpose. They are trying to deliver a durable, long-term living for their owners (often a family group) and they are trying to achieve that within a manageable profile of risk.

No big bets on a new strategy, just steady growth based on making reasonable profits at reasonable prices from a core of loyal customers, many of whom have become friends over the years. If the profit stream takes a dip for one, two or five years they are prepared to adapt their expectations and lifestyles accordingly and continue to work at providing great service for the best price they can get.

If we look at where the problems of the last few years came from, smaller businesses have often been innocent bystanders to the root causes of the financial crisis. They are not driven towards rapid expansion so that they can sell their business on and make a one-off profit for their owners as some MBO and/or private equity backed businesses might be. Neither are they driven by the immediate requirements of the stock markets, in whichever country, to drive ever-increasing profit performance out of a business irrespective of conditions. Both of these pressures can lead to a build-up of debt and risk and, as we are all now experiencing, the historic acquisition of debt and risk is a major anchor to growth.

On the contrary, smaller companies will tend to accept reduced performance in tough economic times because a) they can, because they have no outside shareholders and b) they prefer to hold on to their people's skills and talent in the knowledge that better times will come along sometime. Indeed, it is often small companies that are able to benefit from the downsizing of the larger ones and hire good, experienced people even in difficult times.

The German economic model is, or should be, a great example to us all. They have a wide industrial base; indeed the German rental market is one of the most fragmented in Europe. Private German companies are in general very debt-averse and have business models which can be flexed to generate cash in bad times and support modest investment when times are better. There is an acceptance of moderate levels of return and a relative reluctance to fire experienced people compared to US or UK standards. But who is now performing the best of the three economies? Indeed, were it not for Germany's obligations through the Euro to some less well managed economies, they would be in a uniquely strong position right now.

We can't, of course, change the behaviour of investors and consequent risks of moral and economic hazard overnight, but I think we should be honest about what we have seen over the last few years.

The greedy, heavily leveraged style of capitalism aimed only at developing businesses for sale and not at developing them for the longer term, brings massive risks. Running a business you want to hand on to your grandchildren is altogether less of a risk for society. We can now see the results of the different paths; as Warren Buffet said, "it's only when the tide goes out you can see who's been swimming naked."

Kevin Appleton is a former chief executive of Lavendon Group and now executive chairman of Travis Perkins' £1.5 billion builders merchants division in the UK. Kevin is happy to get readers' views and feedback on his articles. If you have any comments, please e-mail: IRNfeedback@khl.com

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