I’m sure you have asked yourself the question or, you have already gone and acquired an asset at some stage in your life. This could be property, a business, shares or anything that you would generally expect to increase in value.

Dean is an qualified CPA accountant and the CFO of a large privately owned business that operates in most States of Australia. Dean has been kind enough to give some of his views on how to go about making that Asset purchase a success and avoid some of the pitfalls.

So You Want To Buy An Asset…

Through my experience as a professional accountant, most people that undertake a transaction of this nature tend to take short cuts to try and save a few dollars. This often leads to a negative experience where they felt like they got ripped off or the experience left them with a bad taste in their mouth. Ultimately, they have ended up being the owner of an asset that is underperforming or actually losing money and not meeting their expectations.

Like most things the more you do it, the better you get at it. And, like many things we do in life, getting it right from the start is very important.

The following sets out some very methodical and simple rules that will help you end up in a much better position to make an informed and balanced decision and hopefully stop you from burning up your hard earned cash along the way. Follow these and you should come up with the right answer.

• Know your budget; – Don’t over extend yourself.

• Know why you want to acquire the asset. Is it for tax purposes (what are the tax implications) or short\long term investment purposes? It’s important not to confuse these as it can go terribly wrong.

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For example, do you want capital growth or a revenue stream? Or a mixture of both?

• Do your due diligence to understand what it is you are actually acquiring, in layman’s terms do your research. Try a Strength, Weakness, Opportunities and Threats (S.W.O.T) analysis or Porters Five Forces for larger acquisitions.

• Make sure it is what they say it is!! The Sydney Harbour Bridge isn’t for sale at a bargain price!! If it’s too good to be true it probably is.

A wise man once said to me. “Don’t believe anything you hear and only half of what you see”. There is always someone with plenty of “pub talk” experience willing to offer their advice which should be taken with a grain of salt.

Seek professional advice, a few dollars spent upfront can save thousands down the track.

Once you understand what it is you are buying, figure out how you will finance the acquisition:

• Should I go into debt or if you are fortunate enough, pay cash for the asset or, a mixture of both.

• Work out how feasible the asset purchase will be by applying some simple financial management tools such as:

Prepare a cashflow forecast/budget;

• • If your outflows are greater than your inflows then there will be a negative cashflow that requires you to fund the shortfall on a regular basis.

  • Can your existing cashflow cover this shortfall and ask yourself if you are able to sustain this position as you will need to meet debt repayment (if you borrow) and any associated holding cost. Also bear in mind that you may need to weather some hard times down the track.

  • Or, are there positive cashflows to pay back the asset and are the future positive cashflows greater than the capital cost of your asset.

  • If so, how long will it take to pay the asset off.

  • Risk v Reward: What is my personal risk profile?

  • What is the risk profile of the asset?

  • Make it a calculated risk decision. There is no reward without risk but try and align the two profiles by asking “What do I want my return on investment to be” and compare against similar investments over a similar payback term. If you like your sleep, don’t buy a racehorse!

  • Take into consideration the time value of money in relation to your future cash flows. This simply means that a dollar today is worth more than it would be in five or ten years. Bearing in mind the value of any asset is the net present value of its future cash flows.

If all the above stack up and the numbers are telling you it’s a good thing and a contract is involved then again, have a professional go through the contract to ensure there are no hidden nasties. Remember once the contract is signed by the relevant parties you are legally committed. Again, a few dollars spent at this stage could save you thousands down the track.

Once your asset is up and running, monitor its performance. If it turns out to be a dud then you may want to consider cutting your losses and get rid of it. Too many investors have lived in hope that the declining value of their asset will improve over time, only to have it bring them to the brink of financial disaster. If it’s a good thing then enjoy the spoils of your decision.

To sum it up, do your due diligence and don’t take shortcuts, know your financial limits and listen to what the numbers are saying. Remember, it’s your money and there’s always a level of risk involved but if you get the starting point right in your decision making process and follow some simple rules then the rewards are there to be had. – Dean

Disclaimer: The above is not to be taken as advice and you should always seek independent professional advice regarding your financial affairs.

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