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The establishment and further development of a company require a far-sighted capital strategy from the outset. At its core, it's about the trade-off between securing business operations through investment and maintaining financial flexibility.
Asset-Light Strategy: How to Optimize Your Capital in the Long Term
Changed challenges due to increasing digitalization and growing competitive pressure from globalization place additional demands on flexibility. Last but not least, economic crises (this article was written during the global Corona pandemic in 2020) show us the high importance of secured liquidity in order to remain capable of acting.
What is behind the Asset Light strategy?
A question that every company deals with is where and to what extent ownership of assets is necessary and makes sense for a company. There is no binding "right" or "wrong" answer. Rather, the optimal ratio of own assets to outsourced assets depends on the business model and can vary depending on the industry. In recent years, however, there has been a clear trend towards the so-called asset-light approach.
Definition - What is Asset-Light?
"Asset Light" is essentially a business model strategy and the question of how a company sets up and optimizes its balance sheet. A company is therefore "Asset Light" if it has (relatively) little ownership of assets, i.e. only a small amount of fixed assets in its balance sheet. The asset-light strategy is particularly common among companies in the service sector that generally require little capital for business operations. The best-known examples include well-known companies such as Airbnb and Uber or providers of co-working spaces such as WeWork.
Another very well-known example of the asset-light approach is the company Apple, which outsources numerous areas that cause high investments (production facilities, personnel) to third parties.
Comparison: Asset Light vs. Asset Heavy
More ownership of assets (asset heavy approach), e.g. production facilities, gives a company more control over these assets, which prevents knowledge ("intellectual property") from being passed on to external parties. On the other hand, such ownership ties up the company's capital ("working capital") on a massive scale, which consequently cannot be used for other purposes.
The asset-light concept developed from this circumstance. Companies with reduced working capital are usually much more financially flexible and can react more quickly to changes. In addition, secured liquidity is necessary to bridge times of crisis.
In addition, the asset-light approach offers a number of other advantages compared to the asset-heavy approach:
Scalability
When using own assets, production can only be increased up to the capacity limit. Further growth is only possible through extensive investments in production facilities and infrastructure, which in turn increases fixed costs and ties up capital. Provided that the external partner guarantees the increase in capacity at all times, the company's turnover can be increased (scaled) as required if it is outsourced. A corresponding contract design and entrepreneurial foresight are essential. However, this also enables financial protection in critical times, as variable production capacities can be flexibly reduced as a variable cost component.
Profit distribution
Scalable business models also offer growing profitability with increasing turnover. They are therefore of particular interest to investors, as increasing profitability also means increasing profit distribution.
Knowledge aggregation
Asset-light companies focus solely on their core business and outsource non-core activities to external partners. As a result, they also benefit from external expertise in many non-core areas, which the company itself would not be able to achieve to the same extent in these areas.
How does my company become asset-light?
In general, the transformation from asset-heavy to asset-light means that companies replace tied-up capital (long-term fixed assets or Capital Expenditures – CAPEX) with flexible, ongoing operating expenses (Operating Expenditures – OPEX). These operating expenses can be quickly adjusted (reduced or increased) and are 100% tax deductible. With CAPEX, only the depreciation is tax deductible, which is often less than the corresponding OPEX). In a crisis, these are also difficult to liquidate and the tied-up capital made available.
Why a shift from CapEx to OpEx is worthwhile for your company!
What asset-light models are available?
If you want to switch to a (partial) asset-light strategy, the question arises as to how a transformation is possible. The advantages and disadvantages of 3 common models are explained below.
1. Leasing
Classic leasing avoids high initial investments through long-term financing. Instead, the assets are financed over several years with fixed monthly installments.
- The advantage of leasing is that companies 1.) avoid tying up a lot of capital through investments and 2.) spread the financial burden over a long-term period.
- A disadvantage, however, is the lack of flexibility in the contract design. Leasing contracts have a fixed term and the lessee has no flexible option for early termination. This means that a company cannot react flexibly to its own requirements or economic conditions, e.g. crises. In addition, the leased items must be capitalized in the balance sheet and only the depreciation (the loss in value) can be claimed for tax purposes. Strictly speaking, leasing is therefore more of a financing vehicle than asset-light financing in the true sense of the word.
2. Sale-and-lease-back
Sale-and-lease-back is a sophisticated variant of leasing. In this approach, the company's own assets (e.g. buildings, production facilities) are sold. The buyer then becomes the leasing provider, from whom the assets are leased back over several years.
- The major advantage here, also compared to normal leasing, is a high one-time cash inflow from the sale, which initially leads to increased liquidity. The lease installments are financed over a long period of time - depending on the asset - and keep the financial burden constantly at a lower level.
- The disadvantage remains that – analogous to the simple leasing approach – ownership of the leased object is transferred to the lessee, who is then considered the owner. This model only benefits you if you already own assets that you can sell and then lease back. Instead of real flexibility, this approach is more of a financing approach and less of a measure to really become asset-light.
3. Rent
Although renting is well known in the business environment, it is usually limited to premises and real estate. You pay a usage fee (usually monthly) to the owner in return for the use of the rented property. In recent years, there has been a clear trend towards the rental model becoming established in many other areas of application. Renting is a very effective way of making your own business model asset-light.
The advantages of the rental model are quite diverse:
- Investment avoidance: Even with renting, high initial investments can be avoided. Expensive systems and equipment can be provided cost-effectively and promptly.
- Low financial burden: Instead, regular installments are to be paid for the use of the assets, which means that the cash flow is only slightly burdened on a monthly basis.
- Maximum flexibility: As a rule, there is also the option of flexibly terminating the lease and thus reacting quickly to growing or decreasing demand. Leased assets are not property, which is why no activation in the balance sheet is required.
- Tax advantages: The rents paid can be claimed as operating expenses for tax purposes at 100%. In many cases, these are more relevant than any depreciation, which, according to AfA tables, can be divided linearly over 13 years for furniture, for example, and claimed.
However, depending on strategic importance or availability, it can be a disadvantage that the tenant does not acquire legal ownership of the assets. Consequently, there is no control over the goods beyond the agreed purpose of use.
Which assets are suitable for the asset-light strategy?
A company-wide asset-light strategy is not suitable for every industry. For telecommunications companies, for example, extensive ownership of assets is essential, as operating the network infrastructure is their core business and a driver of profitability. Nevertheless, it is possible to reduce the proportion of owned assets in individual areas.
To answer the question of which assets a company should and should not own, the experts at BCG have developed two simple guiding questions to help select the right assets:
Translated, this means that goods and assets that are essential for securing competitive advantages should generally be owned by a company itself. These are usually an integral part of the core business and ownership can therefore be important here to minimize business risks. The same applies to goods that are rare and therefore difficult to procure. If the answer to both of these questions is ", an asset-light strategy is possible and makes sense.
Example: Office equipment
A clear example of assets in companies that are neither strategic nor difficult to procure are items of office equipment. Unless the company is active in the office furniture market, furniture and IT equipment for employees are essential for the business, but not strategically valuable and also easy to procure. In addition, the purchase of new equipment initially involves high investments.
Renting furniture is a suitable way to implement such an asset-light strategy with regard to office equipment.
Scenario 1: A startup from Berlin buys new workstations for its 100 employees and pays 2,000 euros per employee for this furniture. This means that the company spends 200,000 euros in one fell swoop.
Scenario 2: The same startup rents the office furniture and thus spreads the costs over a period of two years. The company only pays 100 euros per employee per month.
Very high initial investments (scenario 1) are offset by low monthly rental expenses (scenario 2), which can be covered by the monthly income. On day one of the decision, the company has liquid funds of € 198,000, which can be used to increase the core business.
For many companies, the asset-light approach is the right decision. Companies become more flexible, can increase their sales, and secure liquidity even in times of crisis – crucial advantages in an increasingly competitive global market.