Risky business

risky-business560

 

I wish I could tell you this was a story about a Tom Cruise movie.

 

Instead, this is about two guys named Brad and John. They ran a very busy manufacturing plant and were finding it hard to keep up with the orders. They calculated that a new machine on the floor would be kept busy at least 50% of the time and pay for itself within 3 years.

Their banker was not as excited about the idea. He calculated that the seven digit purchase was impractical at this time and sent them back to the drawing board. 
 

Did you ever know someone that got tunnel-vision when getting a new car? So in love with the model, year, and color that price, features, and terms didn't seem to matter?
If one will not take the time to investigate what else is available, one runs the risk of making painful decisions.

So it was with Brad and John. Their answer was to buy this latest-model machine. Instead of finding other machine options -- they found other finance options.

In the end, the boys rationalized this purchase through a non-traditional funding source that charged more interest over a shorter period of time which made the whole deal much less attractive - but they could make it work. This machine became a "must have" for the boys even if the finance terms were poor and the deal more risky.

So the bad deal was sealed at almost double the favorable bank interest rate and amortized over a shorter period forcing the company to run losses where they never had before and worry that if anything happened to a primary customer, they could be in real trouble financially.

Fast forwarding three years and you find that Brad and John had to give up substantial ownership to secure a partner when the shop slowed and they could not maintain the high monthly payments on equipment that was now running only 25% of the time.
 
As it turned out, there were three used machines in the regional market for considerably less money and a several troubled shops operating with that same or similar equipment that would have entertained an offer for equipment, partnering or outright acquisition. The latter choice could have brought Brad and John customers, orders, cash flow and hard to find machine operators.

How do I know this? 

The partner that got a big piece of Brad and John's company for a song? Well, he had hired the Packard Group to help him fill in some of their gaps in manufacturing capabilities. Not strategizing significant purchases can be terribly expensive. The cost of planning is always a rounding error when weighed against significant purchases.
 
Risky business indeed.