Not every question has a definitive answer, especially in the world of business.
Sometimes the answer can change, depending upon when it's asked. Sometimes there simply is no good answer. And sometimes the answer depends on the business executive.
Consider this example: A CEO has an offer on the table to sell his business for $50 million. The CEO is thinking about accepting that deal, but he's also debating whether to borrow $30 million to fund an acquisition - then turning around a couple years later and trying to sell the business for $100 million. That ultimately would net an extra $20 million in profit.
What is the right decision?
The answer is that it's completely up to the CEO, who must think about the risk taken and the goals tied to that risk.
In other words, it's a matter of individual risk tolerance.
There's nothing wrong in taking the offer on the table. It's money in the bank so to speak, the executive avoids risk and can happily walk away. Depending upon the CEO's stage in life, he or she might be set for retirement.
Now let's think about what happens if the CEO decides to take the loan and go for the bigger prize. That sounds like a line out of a TV game show, and there actually are a lot of similarities. How often have you seen contestants forgo a smaller award to go for the grand prize? How often do they succeed? And how often do they walk away with a consolation prize of a year's worth of Rice-A-Roni?
Ponder the various risks.
The acquisition itself might not work out as expected. The company might experience unrelated problems. The market could crash. Your business sector could fall out favor - and so on.
Granted, a sharp executive will be able to sense potential pitfalls and include them in an overall risk assessment, but as we've said many times before, nothing is guaranteed.
Given that the executive is comfortable with the use of leverage - something we find isn't as common as you'd expect - it's not surprising he or she is willing to take a chance on a financial windfall. More likely than not, this executive is a serial entrepreneur who is in the prime of his or her career or simply has no plans to retire.
Even if the risky plan doesn't succeed, the executive probably believes the failure won't be a total one, leaving some cards to play for a next move.
So, what's the moral to our story?
Always think about how your decision compares to your personal situation - and your ability to stomach risk.