Large companies continually change the composition of their balance sheets to use their capital as efficiently as possible and to maximize their profitability. While small business owners can’t issue billion dollar bonds at 2% interest, there are a few things that small businesses can structure their assets.
Sale or Lease
Often times, a business owner acquire over time, large, capital intensive goods – real estate, machinery, software systems. Often times owning these assets ties up large sums of money, and may require you to staff manage them – for example having a property manager, or being responsible for mechanical maintenance on machinery. In many cases, owning these assets can become almost another business – or a distraction from your core business. As such, in many situations, but not always it makes sense to lease instead of own. This frees up the capital required to own the assets to be redeployed into other areas that may be more profitable for the business.
Debt is not the enemy for large, established businesses. Many small business owners have a desire not to have any debt, but borrowing costs are currently very low. A business which is well capitalized can often borrow some money, hopefully from a bank, and reinvest those assets into the business – into hiring, into acquisitions, or into expanding production. The return on investments for these uses of the money can often be higher than the interest on the debt, and spark a growth in the long term value of the business. At the same time, while debt can be useful, it is important not to be too aggressive in taking on debt.
Acquiring businesses can always help you increase your value. However, there are a number of ways acquirers get into trouble with acquisitions. When you are looking into acquiring another business, make sure you understand, and understand well what their underlying business model and risks are. Make sure you can run their business, or you have someone in place who can – many acquirers will acquire a business thinking their success as a manager or management team qualify them to run the new business and get into trouble when they uncover that the actual day-to-day operations of the firm they’re acquiring are actually different from those of the firm they currently manage. As always, working with an experienced M&A advisor or team will help you avoid pitfalls.