Structuring Asset Acquisitions To Meet Your Individual Business Needs

by Royce Belcher, CPA

As a business owner, one is constantly faced with a balancing act between the seemingly unending need to acquire new property and equipment while sustaining the business' cash flow. By determining the company's true asset needs and properly structuring the acquisition, the business owner will be in a better position for the acquisition and for continuing to meet ongoing operating needs. When selecting the assets that are right for any company, the following questions must be addressed:

Will the equipment allow the company to remain competitive and expand into new markets?
Will the equipment increase the efficiency and productivity of the work force?
What resources are available to aid in asset decisions?
What is the outlook for technological advances in the industry?
What are the acceptable financing alternatives available?

Competitive Influences

The purchase of property and equipment directly influences profitability and, potentially, competitiveness in today's markets. A company that is unable to remain current with the demands of clients and customers can be certain its competitors will step in to provide the needed products or services. However, the need to remain competitive does not mean business owners should rush out and acquire the highest priced location and the newest or best equipment on the market. One must evaluate the overall situation of where the company is now and where it wants to be. Competitiveness is more than simply being able to deliver a comparable product at a reasonable price. In today's business environment, a company must not only be able to compete in price, but also in timeliness and quality. If current equipment is incapable of producing a product that adheres to the technical standards or restraints a customer has demanded, the company will be unable to compete. In determining needs, careful consideration should be given not only to immediate needs but also to future growth and expansion. For example, in determining facility needs for a manufacturing operation, business owners would not simply select a site that only provides the space necessary for today's operations, but one which would also accommodate future growth and expansion. This point of view should be taken with respect to any potential asset acquisition.

Workforce Considerations

In initiating the analysis of the proposed acquisition, the workforce's productivity, job performance and ability in meeting demands should be carefully considered. If the acquisition of new or updated assets will allow current workers to meet increased demand, an acquisition may present a better financial alternative than employee additions or the payment of overtime required to complete deadlines with existing equipment. Let's face it, the cost of equipment is incredible, but when viewing the alternatives associated with increasing a company's production, new assets may be less expensive than the addition of new workers.

Informational Resources

In pondering the many options available in acquiring new assets, questions are often asked such as: Is the location right? Will the asset match employee training? Will the asset be serviced timely? Are claims made by sales representatives accurate? Probably one of the best sources available for evaluating sales representative claims is someone already using the equipment. Most business owners know others engaged in the same industry or business and usually talk "shop" regarding equipment and operating problems. Also, ask representatives for references or possible contacts of others already using the equipment. Most references are willing to disclose problems encountered, delays and the accuracy of the representative's claims. Above all, do not hesitate to consult your certified public accountant concerning the information available before a final decision is made.

Industry Technology

A key factor in evaluating any asset or equipment need is technology related to the industry. With technological advances being rapidly made, equipment manufacturers are hard pressed to keep pace. Depending on each company's individual situation, one may be forced to acquire equipment in order to maintain a competitive position. However, simply because new equipment is available does not mean that the equipment is needed. Carefully consider the direction of the industry, whether the equipment is needed to compete or if the company should wait until additional advances are made or the problems have been resolved in the equipment. From a long-term financial perspective, the acquisition of property or facilities that can be adapted to accommodate continued growth, customer demands and technological changes is a better decision than equipment which may become obsolete in the near future.

Financing Options

Once the decision has been made to acquire property or equipment, the next issue is determining how to finance the acquisition. The options available for financing new assets are seemingly endless. From cash, long-term debts, mortgages and short-term lines of credit, to lease purchase agreements and straight leases, the alternatives are at times confusing. Key factors to consider in accessing financing needs include the type of asset, long-term business needs and the company's overall financial situation.

Cash

Of course, cash is always an acceptable method of acquiring needed business assets. However, cash is usually not a practical solution for many small businesses. Depleting working capital may threaten the business' ability to continue covering ongoing operating activities. Most businesses, large and small, rely on other financing alternatives to acquire needed assets.

Debt-Servicing Programs

One of the most readily available sources for obtaining financing for new assets is the bank. Financial institutions can assist in structuring needed financing for additional equipment and facilities. Depending on the type of asset and certain financial goals, financial institutions can provide mortgages, lines of credit and both long-term and short-term notes for the acquisition of assets. Bankers have a financial interest in the success of companies and usually can structure a debt-servicing program that will provide for both expansion and cash flow obligations.

Capital Leases

Capital leases have become an attractive method of acquiring new assets. Most manufacturers have formed alliances with leasing companies that allow businesses to lease needed assets at an interest rate comparable to a bank. Whether the need is for computers or precision machining equipment, a capital lease may be available. Most capital leases provide ownership of the leased equipment at lease termination for a nominal amount. One advantage of capital leases over bank borrowings is the fact that leases do not require advances against available credit at the financial institution. Most lenders have a predetermined limit they are willing to extend to a given company and once the limit is reached, the extension of additional monies is cautionary.

Operating Leases

Another financing option is simply to lease the equipment or facilities needed under an operating lease. The term of the lease can be structured to fit individual needs. For example, in the excavation industry, additional equipment may be leased during peak periods without having it sit idle during the winter months. An operating lease may allow one to determine the true need for an asset before encumbering capital. At the conclusion of an operating lease, the ownership remains with the lessor.

Conclusion

Planning and analysis is a critical part of determining assets needed to maintain a company's competitiveness. No amount of sales pitches from manufacturer representatives will replace time spent in evaluating the asset and its blend with operations. After deciding on the asset, financing becomes a major area of concern. It is important to carefully review all of the options related to the acquisition, and select the option that most closely fits the company's situation. As each option has tax and accounting implications, your certified public accountant is in a position to assist you in selecting the solution that can meet the company's individual needs.

About the Author

Royce A. Belcher, CPA, is an individual practitioner in Lebanon, Tenn.. Belcher is a member of the Tennessee Society of Certified Public Accountants,, the state professional organization for more than 8,000 CPAs in government, education, industry, business and public practice and its Nashville Chapter. TSCPA's Nashville Chapter is one of eight chapters across the state with more than 2,900 members in 20 counties. For more information on small business issues, visit the Tennessee Society of CPAs' Small Business Resource Center on the Web at www.tscpa.com.