Monday, August 10, 2020

Lesson #329: Leverage Market Downturns as Investment Opportunities

Posted By: George Deeb - 8/10/2020


& Comment

Chaos followed for most businesses in the wake of the Coronavirus:  the stock markets crashed, product demand fell and unexpected losses started to build up.  Most businesses did everything they could to batten down the hatches to help them best weather the storm, including stopping all discretionary investments.  But, should they have?  Most great investors, like Warren Buffett, have been quoted as saying their highest return investments were made during the middle of economic downturns.  So, theoretically, your highest return investments could be made right now, during the peak of the negative economic impact coming out of COVID-19.  So, instead of retreating right now, you may be best served long term by accelerating your long term investment efforts, if you have the capital to do so.  Allow me to explain.

Your Vendors Are Typically More Flexible During Downturns

You are not the only one whose business may be suffering from lower demand right now; most businesses are suffering from lower demand during downturns.  Which means they too are struggling to generate revenues.  And, when that happens, that is when they start to discount their prices, to try and drum up more demand and revenues.  So, if you were normally going to spend $1MM on things for your business, you could now be able to buy those exact same items for $800,000, as an example.  That is like adding $200,000 to your bottom line!!

There is Typically an Over-Supply of Good Talent During Downturns

In the last couple months, over 40 million people have lost their jobs in the wake of Coronavirus.  Most of them are really talented people that just happened to be in the wrong place at the wrong time.  Which is great for you!  These people are now looking for new jobs, and there is an undersupply of job openings.  Which means a couple things for you: (i) you should have the “pick of the litter” of resumes to choose from; and (ii) those candidates may be able to work for lower salaries than they would normally have worked, because they need a job.  So, your chance to “land the whale” in terms of great people at a great price will never be better than right now.

There is Typically Less Competition During Downturns

Many undercapitalized companies will not be able to survive an economic downturn.  Which means, instead of competing against 10 major competitors, you may only now be competing against 7 major competitors.  That 30% of revenues is now up for grabs, between you and your other surviving businesses.  If you get an equal share of that, your revenues will rise 30%.  If you aggressively market your business to taken an even bigger share of that, you could position your business to quadruple your revenues, taking the accounts of four companies instead of your one company.

Advertising Costs are Typically More Affordable During Downturns

The combination of companies going out of business and companies cutting their marketing efforts during downturns means, you should be able to see materially better returns on your marketing spend during downturns.  I know that is true for my Restaurant Furniture Plus portfolio company; that business has seen its cost of acquiring a new customer cut in half in the wake of Coronavirus.  Which means on the same marketing spend, I should be able to convert twice as many customers!

M&A Targets Are Typically More Affordable During Downturns

The same “bargains” can be had in the mergers and acquisitions world, so this would be a great time to try and roll-up a bunch of your competitors at lower than normal valuations.  As an example, let’s say a business that used to be generating $2MM of cash flow would have been valued at 6x cash flow for $12,000,000.  But, today, they are only doing $1MM of cash flow, and that business may only be worth 4x cash flow, or $4,000,000.  That is like buying a business at a 67% discount, when you know the demand and profits should return to historical levels as soon as the market conditions recover.  So, now could be the best time to try and find businesses to acquire to scale your business long term, at low valuations today.

Concluding Thoughts

As you can see, there are a lot of potential reasons you should be accelerating your business investment efforts right now, not reducing them.  Hopefully, you have some capital set aside to make these investments a reality.  But, if you don’t, this could be a good time to raise some capital, with a clear pitch to your investors that this is the perfect time to be “buying low” and “selling high” at a later time down the road, after the markets improve.  A smart investor should understand this concept of turning “lemons” handed to you by the market conditions into “lemonade”!!

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