The 2020 Mid-Year Economic Update_long

3 Considerations for Using Debt to Fund Growth

Many distributors dont have enough debt, author Brent Grover says.
Angela

3M (NYSE: MMM) expects to have around $12 billion in cash available to deploy in 2013, according to CFO David Meline. Of that, 3M has earmarked about $850 million for organic growth-related projects and another $1 billion-$2 billion to fuel acquisitions, Meline said during 3M's 2013 Outlook Meeting.

Cash is one way to fund strategic growth initiatives. Increasing debt is another and an option that too many companies don’t take full advantage of. Brent Grover of Evergreen Consulting offers three considerations to keep in mind when looking at debt to fund growth in The Little Black Book of Strategic Planning for Distributors:

  1. Consider the benefits of leverage. “One of the principles of strategic planning is that many companies don’t have enough debt,” Grover says. Leverage can magnify return on investment. See The Little Black Book of Strategic Planning for a strategic profit model that demonstrates the effects of leverage on ROI.
     
  2. Understand owners’ priorities. Fast-growing privately owned distribution businesses often face a conflict between owners who want to invest in growth versus those who want to distribute profits to working or non-working owners. The strategic planning team must also consider that shareholders’ and managers’ risk tolerance may fail to align with growth strategies that involve increasing debt.
     
  3. Dissect your balance sheet. Heavily leveraged assets make it more difficult to secure a loan and may affect loan terms. Grover says a conservative balance sheet “has no more than $2 of debt for every $1 of equity (2:1 debt-to-equity ratio).”

How much leverage is too much depends on several factors. For more guidance, see Chapter 6 in The Little Black Book of Strategic Planning. Don’t have your copy yet? Order a print copy and receive free shipping, or purchase an electronic copy for your iPad or Nook. The book is also available on the Kindle.

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