Getting Your Lease Right

If you manage the copier fleet at your organization, pay attention. There are a few things you should consider before entering any lease agreement, because once the document is executed there is little you can do.

First and foremost, read your lease prior to signing it. This may seem obvious, but nine out of 10 customers never read a lease agreement before they sign it. You may find a host of items you never thought would be included in such an agreement. The most important things to look for are end-of-term clauses, price increase clauses, automatic renewal clauses, and what your lease includes.

If you don’t have the time to read all of this information please read this: Never — and I mean never — include service and supplies in your lease agreement. The simplest way to compare this is, if you were buying or leasing a car would you buy all the gas (your toner) and all the oil changes (your maintenance) up front? Of course you wouldn’t, so why would you do it with a piece of office equipment? Below are a few reasons why this is a bad idea.

ABC Co. has a five-year lease agreement with a local office equipment company. The agreement includes service, supplies and requires a minimum amount of monthly copies/prints. They are not happy with the service and wish to either upgrade or have another local authorized dealer assume the service. The only way to do this is to pay both vendors for the service because they have already committed legally to a monthly payment, which includes service, supplies, and a certain amount of copies/prints. The leasing company isn’t concerned about the service; similar to borrowing money for a car, they just want their payment.

You can protect yourself by requesting that the service and supplies be invoiced directly from the dealer on a monthly or annual basis. Avoid signing any service and supply agreements for more than one year.

Including service and supplies in your lease could affect your buyout. Often, the buyout is a percentage of the original amount financed. If the amount financed was $5,000 for equipment only, your typical fair market value buyout should be somewhere around $900, which equates to about 18% at the end of term. But if you’ve included the service and supplies for $3,000 (estimated) you have now financed $8,000, making your new buyout $1,440 at the same 18% rate.

Tough Questions to Raise

You can have some fun with this one. The next time an office equipment company puts a lease agreement in front of you that includes all the service and supplies, look them right in the eyes and ask the following questions. Which crystal ball did you use to know we would produce X amount of copies/prints over the next five years? What happens if we are not satisfied with your service in a year or two? Can we leave you? Does this affect my buyout? What happens if I don’t produce that amount of copies/prints? Do you credit me? What if your company goes out of business in year three?

You will be amazed at the bewildered looks on their faces. With scanning, computers, and other systems/software many companies’ copy/print volumes are dramatically reduced from previous years. That is why it is critical the service and supplies are invoiced separately and not included in the lease agreement.

We recently discovered a similar situation with a major account. The customer was two years into a five-year cost-per-copy lease. They were paying $.019 per copy for several machines. They were generously allowed and agreed to a guaranteed minimum of 1 million copies/prints per month. That equates to $19,000 per month.

The problem was, after close evaluation, their actual copies/prints per month were about 600,000. That now turned their cost per copy/print into $.032 because the minimum amount was not met and now $7,600 per month was being wasted. The current vendor’s salesperson continued to tell them their cost per copy/print was $.019, which it was not. Unfortunately, that customer is going to have to wait until the end of the term to get more competitive proposals and get out of the lease. Worst of all they are going to pay for millions of copies/prints they never actually produced, unless they demand it be modified.

Option to Purchase

Most leases today are written with a fair market value purchase option at the end of the term. This means the leasing company will offer it to you at the end of lease for the fair market value. This value may be hard to anticipate considering the lease may be for five years. Most reputable office equipment dealers will request caps by the leasing company they deal with in regards to “fair market value.” A reasonable fair market value should be somewhere between 10-20% of the original price of the equipment and depends on the term of the agreement. Unfortunately, we have encountered competitive fair market value buyouts as high as 50%.

Office equipment prices and values continue to decline and you may be able to negotiate a reasonable buyout with the leasing company. Always negotiate with the leasing company, not the copier vendor. Many leasing companies may try to force you back to the vendor; you can remind them that the agreement exists only between you and them, and they have a fiduciary responsibility of providing that information. Request the buyout via fax or email and give them a time table in which you expect to see it.

A quick overview of the different buyout options: 10% buyouts are based upon 10% of the original amount financed, and $1 buyouts are exactly what they say. Generally, fair market value leases will give you the lowest monthly payment, and $1 buyout leases will have the highest monthly payment. Interest rates on leases can be much higher than loans from your bank. Rates may be hard to determine on fair market value leases because they only apply if you purchase the equipment at the end of term.

Monthly Minimums

If you are going to acquire multiple machines, have the vendor consolidate the volume as a whole, which should avoid monthly minimums on any units in your organization. You should also be sure to get in writing a guaranteed service and supplies cost per page for a minimum of five years.

Generally, office equipment companies should be able to guarantee the same price for the first three years, and in the fourth and fifth years the increase should be no higher than about 5-7%. Some dealers will propose extremely low prices up front only to increase their prices every year as much as 10-20%, making their original quote less attractive than other vendors you may have considered. We have witnessed dealer salespeople who said they were not able to guarantee any prices or percentages for service and supplies for five years. If this is your prospective dealer, thank them for their time and show them the door.

Price Increase Clauses

You have now entered the second year of your lease agreement only to find out that your monthly payment has increased as much as 10%. Leases that include service and supplies often have price increase clauses that allow the office equipment vendor to raise your service and supplies cost by as much as 10% every year even if your monthly volume has decreased. If you didn’t include the service and supplies you wouldn’t be in this situation. If the office equipment vendor raises your prices in the second year and you kept it separate you will have the flexibility of doing business with a more competitive service provider.

Some organizations will never see the end of a five-year lease. Most office equipment salespeople are pushed to aggressively upgrade equipment in the third year of a five-year lease. The most common tactics are: “I can give you all new equipment cheaper” (remember, equipment prices are plummeting); or “We need to upgrade the equipment due to your volume.”

Well, first of all, copiers are rated way higher than you would expect. With that being said, you really shouldn’t exceed more than about 50% of the manufacturer’s recommended volume. Know the manufacturer’s recommended monthly volume and you can let them know you’re going to keep it and give them the option of repairing or removing it.

Secondly, you can mention they should have never placed you in such a machine if it was incapable of handling your volume, which they were aware of from the initial sales call. You should receive a minimum five-year guarantee on any piece of equipment from the dealer prior to purchasing it, which will avoid these problems. Reasonable early upgrades are three or fewer months prior to lease expiration. Anything earlier is merely an attempt to prevent you from competitively shopping. If you are unsure if they are rolling over remaining payments, get a competitive quote on a similar machine.

At the end of your lease agreement you are responsible for sending the unit back to the leasing company. They still own it, and they almost always want it. If you are upgrading with the same vendor they will often buy it or take care of shipping it back at no cost to you. The cost to do so should be approximately $300 to $500 per machine. Be sure to insure the device since you don’t own it.

Competitive Analysis Made Easy

1. Request a purchase price and a lease price based upon 36, 48, and 60 months for equipment only.
2. Ask for the service and supplies costs for the next five years as long as your volume remains the same.
3. Ask for a five-year guarantee on the equipment you are purchasing or leasing.
4. Review or ask for any references that you may contact regarding their service.
5. Ask for a copy of the lease so you may review and compare it to others.
6. Make sure they understand you will not pay for minimum monthly volumes.
7. Never take for granted the salesperson’s word. If in doubt, get it in writing from the company.

By following the above practices you will receive competitive quotes that are easy to compare and will quite possibly prevent unpleasant future implications.