Two Factors to Consider
In life, there are people that gauge the temperature of a pool with the big toe first, slowly submerging, allowing the mind to convince the rest of the body that the reward is worth the effort. Others seem to take no care at all; rushing to the pool’s edge with reckless abandon, intent to create the largest splash possible.
Small Business owners’ decisions about asset acquisition are similar.
Choose the big toe method, and both time and opportunity will pass you by. More prepared and flexible competitors will leap ahead. Choose the no care approach, and the cold plunge shocks the system and leaves you grasping for breath. Thoughtful and calculated planners move ahead.
As with most decisions, success demands a combination of deliberation and agile accommodation. There are two key factors that deliver quick and confident decisions.
1). Buffer. Asset Acquisition can be capital intensive and requires knowledge of your company margin and capacity to borrow money. Your “buffer”, which is set asides escrowed for rainy days, R&D, unforeseen costs and reduced demand, will help determine the way forward.
2). Benefit. This refers to your evaluation of the acquisition using a Costs/Benefits analysis and plotting on a sliding scale. You must weigh multiple factors simultaneously, keeping in mind your business plan and the ever-changing environment.
Let me be clear. If the assets you are considering are not part of your previously planned design, do NOT move forward. This will only distract from the progress you’ve already made. Stick to the timeline and focus of your current plan.
If the asset acquisition is part of your business plan, use these two questions as a guide to help make your decision.
Question #1 Is your Buffer equal to or greater than the calculus below?
B >= (DP + 12(MP+MI+MMR))
Asset acquisition: Truck Purchase Price = $75,000
B(Buffer) = $45,000 Operation Capital Reserves
(DP) Down Payment = $7500
(MP) Monthly Payment = $2100 (7.5% int – 4-year note)
(MI) Monthly GL Insurance Premium = $525
(MMR) Monthly Maintenance & Repair = $500
The calculation above returns a “YES” when the Buffer is at $45,000 or more.
Question #2 Does the acquisition significantly Benefit the company? In other words, do the Benefits of Asset Acquisition outweigh the associated costs?
One weighs a variety of key indicators, matching performances on those indicators to business objectives, creating a weighted value for each. A point of equilibrium between costs and benefits is not enough to produce business success.
The calculation is dependent on your company vision and unique path forward. It will typically include several key indicators, which can be assigned a value between -10 and +10, then divided by the total number of indicators. A calculated average value of 0 on this scale would be considered a balanced evaluation. But balance is not the objective here; Benefit is. A positive number is required to reflect a true benefit to your company for acquisition.
Beware that too positive of a final value will often result in difficult variables to control. Everyone loves a home run. But there are a lot of strike outs that go along with those. In business singles and doubles are what’s needed for stability and longevity. The sweet spot of the value scale is between 3 and 6. Anything near this becomes a “YES” to the proposed question.
Here are a few examples key indicators that can be assigned value and used to help define your Benefit Equation.
- Adherence to the Mission of your company
- Contribution to the “rolling average” of margin per transaction each month as opposed to increased incremental costs
- Contribution to the projected value of your division or company
- Ability to focus on or diverge from marketing your core competencies.
If you answer “YES” to both questions, then asset acquisition makes good sense, and you are well on your way to an invigorating swim!