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SMART TOOL PURCHASING: WEIGHING NEED VS. WANT BY SAM BELL If you make your living with your hands, it’s hard not to have an emotional attachment to your tools. Attempts to deny this can complicate matters when tool purchasing decisions must be made.
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H
ello. My name is Sam, and I’m a toolaholic.” Even after 35-plus years as a working tech, I still find tools I want and don’t have. Most of them, in fact, I don’t need, but knowing that doesn’t really do much to alleviate the desire. Like most working technicians, I’ve acquired a lot of tools over the years, including some I’ve never used for their intended purposes. This article will explore my thoughts about how to tell whether or not a contemplated tool purchase is a good idea. Simple return on investment calculations have to be augmented by the probability of losing a good customer for life if you turn away certain jobs for want of a particular tool. And, of course, there’s always the coolness factor. As I said at the top, I’m a toolaholic. And I’ve got work to do, work that requires tools. Like most addicts, I know several dealers. Some come to me every week in their rolling candy stores. Some I seek out in the darker alleys of the internet. Either way, I get my fix.
Will You Ever Use It?
Photo: Thinkstock
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This is a tough question, but one we should probably at least pretend to consider before each new tool purchase. For example, I have a very cool set of belt/pulley alignment tools in a kit from Gates. Bought mostly for coolness— hey, there’s an included laser!—it’s turned out to be useful on several occasions, allowing me to solve problems other shops couldn’t or didn’t. I also have two long rails of quartermillimeter incremented turbo sockets, from a tiny 4.25mm to a larger 12.00mm. I had originally thought they’d be used mostly for rounded-off bolt heads, but found they were also very helpful for stripped-out Philips, Torx, Allen, etc., not to mention the occasional snapped stud. Then there’s that Cadillac water pump tool, which sat unused in a lower drawer in my box for over a decade. I finally wound up using it on an Olds . . . once. But it’s not a total loss; it’s also turned out to be useful for pressing some rear control arm bushings on one of the Euros, though I no longer remember the specific make or model.
Would you ever throw that out? Don’t be daft. Once you’ve got it, you’ll keep it. Otherwise, you’ll probably wind up replacing it the next week. The real issue with the Cadillac pump tool, of course, was that they (Cadillacs) are not my target market, so I don’t see very many. Beyond that, failure rates for Cadillac water pumps are not terribly high. First replacement mileages in my geographical area cluster upwards of 100,000 miles. By way of contrast, my camshaft seal removal and installation tools for Hondas and Toyotas are wellused, though they, too, are not usually deployed until about 100,000 miles. At the time I bought the tool, I figured there should be one in the shop in case it was needed. Since water pump failures are often emergency events, being caught without the necessary tool could leave me in an unpleasant situation and no clear way out. Plus, I didn’t already have one, so this was a good way to feed my habit for the week. Like the turbo sockets and the Caddy water pump tool, many tools turn out to be at least as useful for applications other than those for which they were originally designed. For instance, my old drum gauge, designed to aid in setting the original shoe adjustment in older domestic cars, has found new life as the easiest way to measure rotor diameter, an increasingly commonly required procedure on Euro cars, some of which may offer four or more choices often no more than a few millimeters apart. This easy gauge avoids the problem of parallax as you try to sight down from a tape measure that has to be several inches away from the actual rotor surface because of the protruding axle. We’ve all got screwdrivers and wrenches that we’ve heated up and bent to give us access to some well-hidden fastener. In that vein, I have a few sockets that I’ve modified for special applications. Tip: High heat changes steel’s internal grain structure and hardness, so retempering or heat-treating may be required if you’re hoping to use your homemade tools more than once. This is particularly true in medium- to high-torque openend wrench applications or for anything you intend to strike with a hammer. Then there’s the coolness factor. MOTOR’S annual Top 20 Tools Awards
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competition recognizes cool tools that also have the potential to improve your bottom line. Among my recent favorites that meet both criteria are a set of Subaru ball joint removal tools by Snap-on that let you extract the ball joint from the knuckle to which it may have become too attached, the No. 688 True RMS Low Current Clamp Meter from Electronic Specialties with its realworld-sized but milli-scale accurate inductive amp clamp and the MuellerKueps No. 486-022 Universal Brake Piston Reset Discs Kit with its self-adjusting spacing. Doubtless this year’s crop of nominees will include other toys I never knew existed but now have to have.
Productivity Enhancers Besides the rather obvious power tools such as impact guns and air or cordless electric ratchets, this category includes such things as a wide range of wobble extensions, swivel-sockets and flex-sockets. Generally, ball-type flex sockets allow greater torque throughput for recalcitrant fasteners, while universal-joint type swivels allow more acute angles. If I had to choose between them, I’d probably go for the ball-type first, though that may say more about the road-salt in my area than about anything else. Low-profile sockets and drivers can
Photos: Sam Bell
SMART TOOL PURCHASING: WEIGHING NEED VS. WANT
These “turbo sockets” were designed and bought in anticipation of removing rounded nuts and bolts. Their fine gradation of sizes from 4.25 to 12.00mm in .25mm increments has opened up unforeseen new applications, including removing a variety of “round-head” fasteners such as Phillips and Allen, slot-head screws, even snapped studs and more.
also save time, but are not generally quite as strong as their “regular size” counterparts. Ball-end (Cardan-principle) Allen sockets make it possible to work around certain obstructions more easily. They are, of course, somewhat more prone to breakage, so make sure your fingers escape unscathed. Speaking of safety, some tool purchases simply shouldn’t be optional. You need to have and use proper footwear, safety glasses and hearing protection. Depending on the type of jobs you do, you may also need a respirator, leather jacket, gloves and/or apron. If you do any sort of roadside service, you need
some Class 2 or Class 3 high-visibility safety wear. I count my cheap, high-connectivity generic scanner with its data recording function and battery capacitance tester as among the most productive tools I own. And it’s hard to beat a professional quality DMM, especially with the LOADpro Dynamic Test Leads. I also like my Mac Tools ratcheting screwdriver with interchangeable bits. Its 4:1 gearing makes it quick once the fastener has broken free. Very few things are more helpful than a collection of magnetic parts trays, though you must be careful in certain applications. (Some manufacturers forbid their use for valvetrain fasteners and components in most applications. In fact, on some models, even using interchangeable magnetic bits on the valve adjusting screws is strictly verboten.) For those just starting out, perhaps the best advice is to buy what you find yourself borrowing most frequently. This ensures that you’ll have the tools you actually need for the work you actually do. In some shops this will mean more brake tools, while in others it will justify interior clip tools, hose hooks or specialty belt tools. Even your local tool truck driver will tell you you don’t need to buy a scope to do brakes.
ROI Calculations This old drum gauge has found new life measuring rotor diameter. Because it can contact the circumference directly, it makes precise measurements much easier, an increasingly important function on many late-model (mostly European) cars where rotor diameters may vary by as little as 4mm. On some applications, you can even measure without removing the wheel.
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Before your eyes glaze over, I must tell you there are some numbers ahead. Take your time as you read. It’s not critical that you know what the needed equations are, but it’s important that
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SMART TOOL PURCHASING: WEIGHING NEED VS. WANT you understand that there are equations that can guide you as you consider various tool-purchasing scenarios. Let’s look at an example or two. Suppose you have a new customer with a Volvo S60. You’ve done an oil change and front pads and rotors for him, but now he’ll need a set of rear pads the next time he comes in. His car is equipped with an integral electronic rear parking brake system. You know that you don’t have a bidirectional scan tool that’s compatible with this system. You could buy a standalone electronic unit that works only on Volvos for $295. You currently have only one other Volvo customer with an electronic parking brake system; her rear brakes have at least 70% life remaining. You occasionally see some other Volvos on the road locally, and guess that about 25% of them are likely to have the same system. The nearest Volvo dealership is 30 miles away. Based on vehicle population, it’s unlikely that any of the other independent shops or chains in your area has the requisite tool. You figure that every time you use the tool, you can charge an extra $50 in labor and that you stand to make an additional $120 in parts profits vs. not doing the job at all. Your shop is currently at about 85% capacity, so being able to offer this service will not displace an opportunity to do something else that would be equally or more profitable. The gain from this investment would be $170 per job; the cost of the investment is $295, one time. If you can do two jobs, things swing into the black . . . eventually. Here’s the math: ($170 x 2)/$295 = $340/$295 = 1.15, or 15% return on investment (ROI). This is not a terrible rate of return over, say, two
Fig. 1: Internal Rate of Return Year
Expense
Income
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2016 . . . . . .⫺$500 . . . . . . .$1800 . . . .⫺$400 . . . . .⫺10%/2 yrs. = ⫺5% annual simple 2017 . . . . . .⫺$500 . . . . . . .$1800 . . . . . .$900 . . . . . . .20%/3 yrs. = 6.6% 2018 . . . . . .⫺$500 . . . . . . .$1800 . . . . . .$2200 . . . . . .44%/4 yrs. = 11% 2019 . . . . . .⫺$500 . . . . . . .$1800 . . . . . .$3500 . . . . . .63%/5 yrs. = 12.7% 2020 . . . . . .⫺$500 . . . . . . .$1800 . . . . . .$4800 . . . . . .80%/6 yrs. = 13.3% 2021 . . . . . .⫺$500 . . . . . . .$1800 . . . . . .$6100 . . . . . .93.8%/7 yrs. = 13.4% To tal s . . . . .⫺ ⫺$6500 . . . . .$$12,600 . . . .$$6100 . . . . . .1 3.4 % le ss tha n t he projected discount rate Adjusted Value
$6897 if invested @3%APR
$11,551 current value (2015)
years, where it would amount to something a bit under a 7.5% APR return. But if it was over a three-year period, it would be a pretty poor investment on the face of it. On the other hand, if you were to finance the tool over that same period at even 10% interest, you’d still be in the red. Should you buy this tool? We’ll come back to that question, but first let’s look at another example. Suppose your scanner dies. You have lots of choices, but none of them includes going without some sort of scan tool. You could opt for anything from a simple code and data reader, even as a smartphone app with Bluetooth adapter from less than $20, up to a closet full of OE scan tools covering every vehicle
Expense
Income
Cumulative Net
Internal Rate of Return
$8423
$9818
$4753
7.85%
What you’d have gotten from the bank
Current value of total income
Current value of raw cumulative net
Effective compound average annual rate of return after figuring in cost of capital
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Internal Raw Rate of Return
2015 . . . . . .⫺$3500 . . . . . .$1800 . . . .⫺$1700 . . . .⫺48.57%
Fig. 2: Internal Rate of Return (Recalculated)
Total
Cumulative Net
$5310.47 current value (2015)
10.99% annual net average rate of return after all adjustments (noncompounded)
make you service, usually at a cost of $1500 or more each, plus, in many cases, a dedicated laptop and a software/access license. Or you may decide to purchase a high-level professional scan tool compatible with many makes, models and systems, including, hopefully, those which will actually appear in your bays. At this point, we may need an additional measure beyond ROI. Called internal rate of return (IRR), this measure allows us to compare proposed purchases of almost any sort with one another, regardless of magnitude. Let’s look at an example. You’re thinking of buying an updated scanner for $3500 in cash on top of the minimal trade-in allowance for your old tool. It requires annual updates at $500 per year. You plan to charge $10 every time you hook it up and estimate that, realistically, will be 15 times a month. You figure it will last seven years before needing replacement. (You may think these income figures are too conservative, but at most shops they’re more likely than other overly optimistic scenarios.) Fig. 1 above is a table of how that might play out. The boldface italicized entry in the last column in the next to last row, showing an internal raw rate of return less
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SMART TOOL PURCHASING: WEIGHING NEED VS. WANT What about financing? If you aren’t paying cash, factor in the cost of borrowing money. Be realistic about how long it will take you to pay the loan off. Check whether there are any early payment penalties. If you’re habitually late paying your bills, find out what the penalties for late payments are. If you can get free financing, often in the form of 30/60/90days-same-as-cash, for example, it’s always better than paying interest. If you financed the scanner in our example at 12% annual interest over three years, you’d give up over 11% of the raw cumulative net returns. But if 30/60/90-day financing is available, and you can afford to pay cash, ask to see what kind of discount you can get by paying cash today. Most mobile tool dealers offer limited free financing, usually allowing you to
Photos: Sam Bell
than the projected discount rate, is critical. How much do you think that $100 today will be worth next year? If we use a very conservative estimate of $103, we’re looking at a discount rate of 3%. Applying that to the initial $3500 and compounding it over the seven-year life of the scan tool, our initial capital cost in 2021 dollars is $4179. And each $500 annual subscription needs to be adjusted on the same basis. I did the math for you as shown in the bottom row of the table. What do the bottom row numbers look like if we change the scenario a bit? In the table in Fig. 2 on page 24, I recalculated the bottom row for the same scanner purchase, but this time using an increasingly higher rate of inflation: 3% for the first year, then an extra half of 1% for each additional year,
From time to time you may need to customize an existing tool for a particular job. Here are a few that have served me well over the years (l. to r.): a 1962 Mercedes tailshaft socket, a 1970s’80s Saab ignition nut socket and a 7⁄16-in. female square 1951 Rolls Royce brake adjuster.
so that by the last year, the rate has crept up to 5.5%. You’ll see the substantial effect this change of assumptions makes in the outcome—a drop of over 40% in the effective rate of return, from nearly 11% in the first example to below 8% in the second. As in the example in Fig. 2, it’s important that you always factor in design life and product update cycles. Factor in the present value of future dollars, plus available interest rates if parking cash elsewhere. The formula for determining present value is: PV = FV/(1 ⫹ r)n, where PV is present value, FV is future value, r is the effective annual interest rate and n is the number of years.
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spread your payments over ten weeks. For higher amounts or longer terms, you may need to pay some sort of financing charges. In some instances, these can be very favorable terms—better than you might get elsewhere.
What’s a Customer Worth? Remember the Volvo brake tool mentioned on page 24? Should you buy it? Can you afford not to take care of this customer? The sad reality is that if you send a customer elsewhere because you don’t have the necessary tools, you may never see him again . . . unless you’re able to make him see that as a benefit that helps him by keeping your
prices affordable, or by making you more accessible. An obvious example is recalls. You can come out looking good. This is often the case with dealer referrals as well. The potential downside is that the dealership will try to convince your customer that you simply don’t have the expertise and up-to-the-minute training required. Your best bet here is to prep your customer first. In our hypothetical Volvo example, the 30-mile distance between you and the dealer probably means that your customer will keep coming back to you as a matter of convenience even if you do send him to the dealership for that work, but there’s no guarantee. So, how much is a new or existing customer worth to your shop, and over what period of time? There are a number of ways to calculate it. One method is to multiply the annual net profit from an average new customer by the number of years an average customer spends with you, then reduce that amount to its present value by comparing it to the amount of money you’d have to invest today and withdraw over the same period of time to give you the same total. For example, if you usually make an astonishing $500 of net profit per customer per year, and they normally stay with you for ten years, that’s $5000. Then, to calculate the present value, you have to discount that by an appropriate percentage, since not all of that money is available today, and will come in spurts over the next ten years. So you might figure that if you had, say, $3500 of cash to invest today, you’d come out about even over our ten-year period. Economists and accountants looking at this example would say it’s a discount equivalent to an annual interest rate of about 3.6%. Of course, as they say, your results may vary! Perhaps you’re more likely to make a profit that’s much lower or much higher, depending on a myriad of factors in your local market. Remember, we’re talking here about net profit, which is your profit after all costs. Andy Fiffick, president of RadAir, a growing franchise operation in my area, prefers to look at this question in terms of total gross sales (cash flow) attributable to a new client. For older
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SMART TOOL PURCHASING: WEIGHING NEED VS. WANT cars, this might amount to roughly $5000 over a five-year relationship, but perhaps only about half that amount for a later model, more reliable car. Related and equally important, he cautions, is the cost of procuring a new customer. With 12 RadAir locations, Fiffick tracks this number very carefully, reporting that it ranges from $120 to $180 per customer, just for the direct mailings he does. This is roughly 3% to 6% of the total eventual cash flow attributable to that new customer, and is incurred as a present (up-front) expense. This figure does not include money spent on internet, radio or TV advertising. His customers’ average tenure of five years reflects an annual churn rate of 18% to 21% as existing clients move away, buy new vehicles or otherwise drop off his active customer list. The important point here is that losing an existing customer is always a hit to your bottom line, so it’s not something to take lightly.
A Co-Op Solution? Sometimes it may not pay to make certain investments in tools and equipment if you don’t have enough potential customers to justify it. It’s often worth talking to fellow technicians and shop owners to explore the idea of forming an ad hoc consortium to buy such a tool. Following is an example involving several shops in my area.
Several years ago, a number of us felt the need for a better Volvo interface that would allow access to nonpowertrain modules, better powertrain data acquisition, module coding, etc. At the time, the most affordable solution was a unit that could also be configured for serial data from most existing Bosch engine management and ABS systems, as well as enhanced capabilities for Audi, VW, BMW, Mercedes and some other applications. A half-dozen shops each kicked in a bit less than $1000 to purchase the tool, adapters, cartridges, etc. So far, we’ve never had any significant time conflicts. The hardest thing is to remember what’s where. Sometimes whoever needs the machine has to call round robin to find it. Was it a worthwhile investment? All of us thought so at the time, and all but one still think so. If you pursue such an option, it’s important to remember to insure the equipment properly; an inland marine policy is usually the best bet, as it covers the stuff wherever it is and whoever’s using it. Be sure to consult with your insurance advisor, since details may vary by state. There’s often little or no extra charge for such a rider, but each item must be enumerated specifically. Your group will have to designate one shop as the primary owner for insurance purposes. You should also decide in advance what happens if any of the shops goes out of business or wants to withdraw from the group. Likewise, if updates or maintenance fees are a possibility, your group needs to decide in advance how to handle them. For instance, if one of the original purchasers decides not to pay for a future update, will he still be allowed to use the tool? It’s a good idea to write down all such questions and answers at the outset, make copies and give one to each member. This helps to avoid future squabbles. Now back to the question at hand: Should you buy the Volvo brake tool? If you can find even two other shops that are willing to go in on it with you, none of you should hesitate. Just be sure to work out all the details as mentioned above, along with any other concerns any of you might have. Like any business venture, make sure you’re comfortable dealing with all of the partners involved in the arrangement. If no one else wants to partner with you, you can still buy it and spread the word in your local area that you have it and will be willing to let other shops use it for a fee. But if you go this route, you should first sit down with your Volvo customer and explain to him that this is an investment you’re making in your relationship. Ask him to help you by mentioning it if and when he runs into other Volvo drivers— at the store, a local park, his kid’s school, etc. Most customers will be happy to try to help, and it can cement your relationship. You can even offer him some token of your appreciation, such as a small discount on his next bill for each new Volvo customer he sends your way.
Sourcing, Reviews
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MOTOR readers are, of course, familiar with our annual Top 20 Tools feature and with the many advertisements for tools offered in our pages. Additional reviews and descriptions are often available from sources as diverse as iATN’s Tool & Equipment Forum and a host of online sources, including, in many instances, YouTube videos that allow you to see the tool in action.
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When deciding where to buy tools and equipment, there are obvious advantages to buying from the truck that comes to your shop each week—convenience, warranty, easy credit and tech support. On the flip side is the disadvantage of buying from your mobile tool dealer—the convenience of easy credit. While sometimes you have to spend money to make money, as the adage says, there are smarter and dumber ways to go about it. For example, if I go online to buy a new scope for $3000 and finance it on my credit card at an 18% APR (annual percentage rate) for two years, I’ll pay out $149.77 a month. The total interest will be $594.54. And if I finance it at 24%, I’ll spend $158.61 a month, racking up interest to the tune of $806.72. If I buy the same scope from my local mobile tool truck, I may pay $3200, but he’ll help me impose a 10- or 12week payment discipline of $266.67 to $320 a week. If this is not a tool I must have today, I could save myself some dough by saving up all or most of the cost in advance. Depending on the tool in question, I might also be able to buy it used instead. For used professional quality name-brand hand tools, asking prices seem to average about 70% of new. Scanners and electronic devices seem to offer somewhat deeper discounts, but may no longer be up to date or eligible for warranty service. When in doubt, check first. Used electronic gizmos are generally sold as-is, with no warranty of any kind, so be sure to verify their functionality before completing the transaction. As I mentioned, many tools are also available from online sources. As always, make sure you’re dealing with a reputable seller. Horror stories of socalled knock-off scanners abound. Some have led to disastrous consequences, including fried PCMs and wiring harnesses. As usual, any deal that sounds too good to be true probably is.
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niques such as ROI and IRR for evaluating proposed tool purchases, and some criteria you may want to adopt, especially if you’re a toolaholic. It’s possible (if somewhat difficult) to strike an appropriate balance between need and want, between impulse buying and rational decision-making even as these relate to our
shared addiction. The equations and tables in this article can be adapted for use as templates to help you evaluate proposed tool purchases. Good luck! This article can be found online at www.motormagazine.com.
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Conclusion Tools help us earn our livelihoods. Before buying a new tool, we should ask ourselves: Is this something I need, or just something I want? If I need it, do I need it now, or can I wait? I have outlined a few simple tech-
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