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It can be a source of stress when deciding to buy a major asset when you are a new or small business. You may not have a considerable amount of spare capital or cash. So, investing in a major asset like machinery, a vehicle, or a building can be a pivotal decision in the life of your business. While it will ultimately be a decision about the specific circumstances of your business at one point in time, there are some general tips when going about the process of purchasing a major asset in those circumstances. This article sets out three tips for doing so, including:

  • understanding where the money is coming from for the purchase; 
  • thinking through the strategic implications of the new asset; and 
  • doing your due diligence.

Understanding Where the Money Is Coming From

Buying a major asset is often a big deal for a young business, not least because of the considerable cost involved. Examples of major assets include: 

  • land and buildings;
  • other property; 
  • plant or other machinery used for production; or
  • vehicles.

These examples can involve vast sums of money, from tens of thousands to millions of dollars. The first thing to be clear about when considering this purchase is to know your finances. Where is the money coming from to buy the asset? If your business has the cash on hand, that may seem straightforward, but there will be an opportunity cost? If your business did not spend the money on the new asset, is there another way you could use the finances? 

Your business might not have the cash on hand for the purchase. Consequently, you may be relying on external finance such as a loan from the bank. Therefore, a vital component of your decision-making must be the terms of that finance. You should understand the liability that your business will be facing and key details such as the interest rate chargeable for the loan. These factors should all come into consideration when you weigh up the purchase.

It is common to treat these financial aspects as mere details compared to the business case for the asset. In actual fact, they will often decide whether the asset is a ‘good’ purchase or not.

Think Through the Strategic Implications of the Major Asset

Given your business is at an early stage, it is unlikely you will have the capital or cash for regular purchases of major assets. The purchase will likely represent a significant outlay for your young business. Hence, you should have a clear picture of the asset’s strategic implications and how it fits your medium and long-term plan for the business. 

While tempting, investing in a new piece of machinery to solve a short-term problem can be a bad decision. For instance, buying a company car to travel to a new client for three months is not a smart decision. The need for that asset will likely decline in the medium or long-term. 

Additionally, you should resist the temptation of jumping at the opportunity to buy an asset when it is offered to you for a discount or under generous terms. Even at a reduced price, a major asset will still represent a significant investment from your business. Hence, you should still be able to justify why the asset will return value to the business over the long term. 

Do Your Due Diligence

Finally, it is always a good idea to conduct due diligence on an asset, particularly when buying second-hand or from a source that is not entirely trustworthy. If a friendly supplier or client offers you machinery that they are laying off, for instance, you should take the time to check it over before agreeing to buy it. You need to make sure that the asset works as described and that your business can actually use it. 

Even if the asset is in working order, due diligence should also cover the logistical aspects of integrating the new asset. It is a problem if you do not have staff who can operate the new asset or have nowhere to store it. Doing your due diligence will help your business avoid these issues ahead of time. 

Key Takeaways

Buying a major asset is an exciting and often nerve-wracking decision for a new business. You will be balancing the asset’s cost and the potential liability versus the possible benefits for your business over the short, medium and long term. Ideally, a major asset will return value to your business for a long time. To help ensure that this occurs, you should do your due diligence when purchasing and have a clear picture of where the money is coming from to pay for the asset. You should also be able to detail how the asset fits into the broader picture of your business, including into the future. 

If you would like more information about purchasing major assets, contact LegalVision’s startup lawyers on 0800 005 570 or complete the form on this page.

Frequently Asked Questions

Are major assets the same as fixed assets?

Major assets are often fixed assets but do not have to be. A ‘major asset’ is a loose concept that will differ from business to business.

Is it a mistake to get a loan from a bank to pay for a new business asset?

No, not necessarily. If a new asset has the potential, or is required, to drive revenue and growth for your business, investing in it at an early stage can make sense. However, you need to have a clear picture of the benefits. Also, it is vital to wholly understand the details of the loan, such as precisely what liability it imposes on your business.

What due diligence should a business do when buying a new major asset?

It depends on what the nature of the asset is. Still, at a high level, the business should ensure that the asset works as described, that there are no technical issues (this may involve an expert check), and that the business itself can technically and logistically take the asset and operate it.

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