Many business leaders have to choose between buying and leasing when investing in capital equipment, whether that is plant and machinery, a building or vehicles.
In the early stages of a business, the decision is often made for you,. You can’t afford the cash commitment to complete the outright purchase so you have no choice but to take on the lease.
That might also be the case later in the business when the investment is really substantial.
However, when the choice is not obvious, it is worth considering the strategic, non-financial implications of your decisions.
Very often when I am helping an owner manager plan for the sale of his/her business I find that at some point the business has purchased the building from which it operates. That purchase may well have been an appropriate decision when it was made, but from the buyer’s perspective it is just a restriction. The buyer might want to consolidate operations, or perhaps significantly expand the business – yet they are constrained by the premises.
The buyer also has to fund the purchase of the property, at a time when it is possible their finances are already stretched to the limit to fund the purchase of the business.
I’ll usually suggest that the vending owner puts the property into their pension fund, which will then lease it to the business. The buyer has a problem or barrier removed.
It’s a similar story with plant and equipment. If it has been leased rather than bought, the barrier for you as the business leader to keeping up to date with the latest kit is much, much lower. If you buy a piece of machinery, that’s a significant capital investment. You will run it for several years to make sure you get full return for your money, but then you know it is time to replace it or more likely upgrade it. That may come at a time when business is not so good, when there are other demands on your resources….
Typically, if you lease over a 3 or a 5 year term, you can extend that lease (should you chose to do so) for a much smaller monthly lease amount. Upgrading the kit is not so painful, you just keep on paying the lease.
From the business buyer’s perspective, they don’t want to have to invest in capital equipment the day after they buy the business. You will be much more attractive if your plant and machinery is up to date.
It’s a similar story with vehicles. It’s tempting to buy the fleet, knowing that you can get an extra year or so from the vehicles, but there nothing worse than having your company name on a battered and tired fleet in 5 years time.
Buy versus lease? It is not a tactical decision, but a part of your strategy.