VP of Investor Relations at Boron Capital, a private investment firm serving diverse segments of the population.
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According to a recent report from McKinsey, 1.4 to 2.1 million (25 to 36%) of American small businesses are at risk of closing permanently due to the pandemic. With economic stimulus at a standstill, many businesses may close sooner rather than later. This presents a substantial opportunity for investors seeking tangible assets that also have the potential to generate considerable cash flow, by acquiring both the business and the real estate on which it operates.
During uncertain times like the present, generating cash income is crucial. At the same time, investors also want to own tangible assets. The Federal Reserve has committed to keeping interest rates at historic lows over the coming years; this combined with increasing inflation (which naturally increases asset value) makes tangible acquisitions even more desirable. In the coming months, more investors may adopt this multidimensional investment strategy.
Tangible Assets
Putting cash to work in good, quality, tangible assets can not only create a hedge to protect against potential downturns (where there’s sufficient collateral to protect the investor’s principal capital); it also puts investors in the position to capture great appreciation while producing revenue quickly upon acquisition and for the life of the investment.
The uncertainty created by the pandemic has reinforced the value of tried and true investments. These include businesses that are service-related necessities, which people continue to utilize regardless of the speed at which society completely reopens, and more necessity-driven real estate, such as warehouses, mobile home parks and self-storage facilities.
Agile Strategies
Investing in quality real estate means that while its long-term value may remain stable, its utilization can be changed and adapted. While those invested in the public market incur a substantial level of exposure to market fluctuations driven by public sentiment, those invested in private real estate may be more insulated.
The monumental number of American small businesses going out of business due to a global pandemic will likely give rise to more agile investment strategies that establish contingencies to survive the worst case scenario. Investors will not only need to understand what type of business they’re buying but what that business could be worth to them based on their own unique utilization and operational capacity.
Now more than ever, it’s necessary for people to seek additional layers of control in their investments. It’s important to think about both protection and production. Seeking control of tangible real estate with an operational component should be higher on people’s priority list.
Ask the question “What control or influence do I (or my team/partners) have over the success of this investment?” and err on the side of more control and influence. This strategy offers more downside protection, while putting investors in a position to directly influence the top-end potential and production.
Sustainable Synergies
Acquiring a business isn’t just about what the business was worth to the previous owner but what it could be worth to an investor with synergistic expenses and operations. A business that generates $1,000,000 a year might generate a 25-50% increase in net profit for an investor who is already operating similar businesses with the right synergistic resources such as regional management, warehouse space, etc.
This immediate increase in the bottom line not only puts more cash in an investor’s pocket; it also immediately increases the valuation of the business as a whole. Assume an investor’s valuation is a multiple of 8x the cash flow. This would mean that, upon acquisition, the business would be worth $8 million. However, through synergies, the investor is able to reduce expenses by 25% and, in turn, add $250,000 to the bottom line. Now, at that same multiple of 8x, the business is worth $10 million with an extra $250,000 in free cash flow.
Investors will be looking to fortify their portfolios by leveraging opportunities for both horizontal and vertical integration. Whether you’re buying competitors that are going out of business or businesses that complement existing operations, aligning with the right partners is fundamentally important.
In a post-pandemic world, sustainability is key. Integration reduces expenses, boosts economies of scale and consequently creates a better and more comprehensive customer experience. Ultimately, the goal will be to control the market and smart investors will move not only to participate in but to dominate their space.
Due Diligence For The Individual Investor
Generating long-term, sustainable wealth is about protecting yourself while putting yourself in the most advantageous place to grow consistently over time. Historically, however, investors have been almost completely removed from their own investment strategy. Most people can’t name the companies in the Dow Jones and, according to one recent poll, 63% of Americans don’t understand how a 401(k) plan works.
Post-pandemic, however, more investors may take the reins by doing their own due diligence to understand what they’re investing in and whether or not the status quo works for them. The uncertainty fueled by Covid-19 may mean investors will need to rely less on historical data and more on what is happening right now to predict the future. They may also look to gain control of private investments instead of trying to get a leg up in the public market.
Investing in the public market using principles such as dollar cost averaging has allowed investors to be almost completely removed from the process by relying on antiquated rules or theories. However, rules that have worked in the past may not always remain appropriate moving forward. Investors may start to question their assumptions and plan to pivot, adjust and add different layers of protection as the market changes.
Buckminster Fuller said, “Don’t fight forces, use them.” With all the changes in the market, investors must learn from past mistakes and now use these changes for the most good moving forward.
The information provided here is not investment, tax, or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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