Hire Purchase
Categories: Company Management
If installment plans and rent-to-own contracts hooked up and had a British baby, its name would be “hire purchase.” It’s a weird name, we admit, but no weirder than some modern celeb baby names out there today.
Anyway, to illustrate the concept of the hire purchase, let’s talk refrigerators. They’re expensive, people; those fancy-schmancy ones with the French doors and the wifi can cost upwards of four grand, and no, we’re not exaggerating. For many of us, that’s not a comfortable purchase to make all at once, so we might sign up for some kind of payment plan. In a hire purchase scenario, we’d take delivery of our space-age fridge and make payments on it, but we wouldn’t actually own it until the last payment is made. We’ll probably end up paying more in interest this way, and there’s a good chance we’ll lose a bunch of money on the deal if we decide to return the fridge for some reason.
Businesses can also use hire purchase agreements, and they work the same way. The good news is that this process allows them to buy expensive items (like machinery and office equipment) on credit. The bad news is that, just like renting-to-own a TV costs a whole lot more than just buying the TV and making payments, companies can end up paying a lot more through hire purchases than they would otherwise.
But hey, needs must when the devil drives, or something...so if companies don’t have a lot of working capital at their disposal but they need stuff now, hire purchase agreements just might be their best bet.
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Finance: What are the economics of a goo...2 Views
Finance allah shmoop what are the economics of ah good
merger Well you have a baby and they cost a
fortune You know food clothing diapers school await a different
kind of merger Sorry moving on In a purely financial
sense a merger is the coming together of two companies
such that in theory at least the sum of the
one plus thie Other one will be more than two
And there are a few perspectives that outlined the strategy
behind a good merger Let's start with market share or
market leadership to home coffee roaster making companies combine each
owned about twenty percent of the market before the merger
And together we'll now together Yeah together they own forty
percent instead of rivalrous lee competing against each other for
shelf space and marketing keywords on google in suppliers of
boilers Now the two companies air now the undeniable leader
and that vaunted position gets them a bunch of quote
freebies unquote freebies free They're free and they're not competing
against each other anymore They're a team like they don't
undercut each other on price right So immediately they could
raise prices Yeah so think super friends in this and
how good the coffee must be at the hall of
justice So what are these freebies they get just by
being big Aii the market leader in revenues and our
units sold Well what do they get for being the
big kid on the block Well one freebie is that
whenever a journalist writes a story about a coffee roaster
for home use often in the starbucks haters gazette that
journalist almost has to get a quote from mega brew
inc You know or that journalist story really isn't validated
It would be like writing a story on internet search
and not getting a quote from google So lots of
free press comes their way like you know free marketing
and as part of the process in being vey brand
While the company likely raises the ceiling on pricing Before
the merger one product was six hundred ninety nine ninety
five and the other was maybe six hundred forty nine
ninety five and claimed we do what there's does for
five pounds of raw coffee les or something like that
Yeah we didn't write this loving but now instead of
competing against each other on price or why not just
raze overall prices of everything to seven hundred forty nine
ninety five Who's going to stop Yeah you're the market
leader the big dog So now with the exact same
cost structure the company has fifty to one hundred bucks
more per unit in a pretty much immediate profit And
if before the unit profit was something like seventy eighty
ninety hundred bucks while profits just gone up dramatically So
that's the story on the revenues side What about on
the expensive side Well a couple of biggie stand out
immediately Kwan is the cost of supplies like if combined
they were each ordering one hundred thousand five hundred fifty
degree blowing many easy bake oven units and paying the
maker of those units one hundred fifteen dollars a unit
now under the scale of an order of two hundred
thousand units Well taken likely get a price break of
ten maybe twenty bucks a unit and those savings happen
all the way down the whole building Materials from the
power cord to the glass shields to the plastic form
factors to the little rotating spinny wheel thing that has
the beings going round and round So in a set
of unit costs of say two hundred fifty bucks a
unit for the hardware A new home coffee roaster might
under the combined company's cost them more like two hundred
bucks Then there's the cost of shelf space or distribution
Or if you want to think about it kind of
marketing When the two twenty percenters were competing against each
other well they'd negotiate for the prime shelf space at
upscale coffee bars gourmet kitchen retailers and amazon for that
physical or virtual shelf space Right And they'd negotiate on
how much of their revenues they were willing to give
up in order to get that premiere shelf space Well
that was with the two of them living in a
world where switching from one brand to the other was
pushed there about equal But now there's only one dominant
brand and it's the one everyone who roasts at home
wants So instead of giving up fifty percent of revenues
for distribution well now they only have to give up
forty percent So think about the cascade effect here The
average retail price used to be say six hundred eighty
bucks a unit How'd we get that number And we
what kind of an average of that Six forty nine
six ninety nine Numbers so on that 6:80 the company
kept in half or three hundred forty and that three
forty was enough to cover their costs but not leave
a whole lot of cash left over By the time
everything i'ii operating cost marketing lawyers insurance rent lawyers was
done and paid for But now average retail prices have
gone to seven hundred fifty dollars And instead of keeping
half the combined company now keep sixty percent of the
retail price or four hundred fifty bucks Huge swing here
That's an incremental keep or take or profit set of
one hundred ten dollars in the form of higher prices
and splits and then another fifty bucks in cost savings
per unit for an incremental total contribution of another hundred
sixty dollars a unit And in a world where each
unit contributed maybe forty bucks in the past this is
a massive game for shareholders of mega brew and just
like their commercial says But wait there's more In addition
to these units savings and values added the company should
they need it can probably get debt cheaper All else
being equal as a market leader They in theory at
least carry less risk They certainly have more have to
be able to borrow money And a bigger scale in
a borrowing of say twenty five million dollars would mean
less to them is a combined company than would a
borrow of twenty five million work if each company were
separate and still competing against each other and the same
scale benefits happened for duplicate jobs were taken likely fire
a third or more of their workforce and negotiate for
better per square foot prices from their landlords and better
insurance and better lawyer rates And so on Well it
all adds up to make this merger a you know 00:05:36.102 --> [endTime] special kind of blend