Understanding Asset Light Business Models

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Put up less capital upfront where business is extremely sticky.

Returns on capital are terrific, but is it too good to be true?

Today, we cover:

  • What are Asset-Light Businesses?

  • Why is it a fit for small-to-mid sized PE?

  • Drawbacks


What are Asset-Light Businesses?

Operators and Investors view businesses based on the returns on capital they generate.

Asset-Light businesses don’t need a ton of capex upfront to grow or maintain these returns on capital.

However, they do require working capital (inventory, receivables, etc.) at a minimal ratio to grow.

This makes risk-return attractive when run well.


Why is it a fit for small-to-mid sized PE?

Asset-Light businesses are usually small shops that are overlooked.

An example could be a specialty auto repair shop.

The opportunity really lies in roll-up acquisitions.

How many people are out acquiring specialty auto shops in a city?

These businesses are highly cash generative due to the minimal capex required to fund and run it.

Canceled out by the big and overlooked by the small.


Drawbacks of Asset-light business model

The thing PE hates seeing: multiple contraction.

We know that Asset-Light businesses have a low capex.

Thus, they have fewer assets on their balance sheet.

If the business goes sideways, you have no collateral to fall back on.

This brings me to an important point: Overpaying is a loss regardless of the business quality.

The business generates a lot of cash, so it might have a short run-way of growth.

But, that’s taken care of with:

  • Roll-ups

  • Dividend Policy

Find your Asset-Light business.

See you next week!