The Digital Assets Portfolio Approach
One of my goals over the coming months and years is to build a digital asset portfolio of businesses that earn from anywhere in the world and don’t require “active” management.
By active management, I simply mean they do not need to be looked at every day to ensure profitability and the business to run normally.
To do this effectively we’ll need to focus on one “active edge”. In other words, what makes you effective at this.
In our case it’s on the Amazon marketing/management side of things.
Product development/sourcing is a large weakness internally, but buying a business that already does £5k/month and improving this to reach 8/9/10k/month will be fairly straight forward as it’s something we’ve done multiple times before.
What really helps this process is that once you have the initial assets (say 2-3 business doing £10k/month profit combined)
You can leverage these to get asset financing to go on to purchase new digital assets themselves.
And this simply scales in the same way a property portfolio does.
The reason property portfolios do so well (even having spoken to some people who do not know really what they are doing) is that everything comes down to the fact that the appreciation vs interest is on the side of the buyer.
So if you buy a house for £500,000 and get a mortgage at 6% (AVG over 25 years). After 25 years your house will be worth more than the difference in the interest you’ve paid.
Everyone already knows this, but when you have multiple houses, especially if you’ve paid off some of the mortgage/higher deposits already, this process works even more in your favour.
Switching back to business.
Why don’t people do the same thing?
3 main reasons.
Skill - I do not know how to build/buy/grow a business because the skills were not learned.
Risk - I can lose 100% of a business that I buy for 500,000 but it’s pretty much impossible to lose a larger than 50% chunk of a house in any one year and impossible to lose more than 20% after 25 years! (Albeit when adjusted for inflation this is not true).
Interest & Loans - It’s more difficult to get a business loan for £500,000 to purchase a digital business than a £500,000 mortgage to purchase a house.
But if you have the skills and you can get over the risk side of things, how does this actually look financially?
Obviously the interest rates and timelines you get on business loans are a higher (and timelines lower) than you get on mortgages, but the maths works out.
All this is assuming you’ve found the right business, within your skillset and edge, at a good price that passes all due diligence tests…. Which takes a while.
But assuming all that, this is how it works out.
You can get a small digital business from anywhere between 25-45x net monthly earnings.
The bigger and better the business, the higher the multiple, as you’d expect.
If we’re starting with a smaller deal we should be able to get something around the 30X multiple mark. SO let’s assume it’s a £330,000 business that earns £10k/month.
One of the important sidebars is down to working capital, cashflow and inventory costs. In-short, you need to have a fair amount of excess cash to cover these 3 things, especially in the first 3 months of a new business you buy.
This is where having this already in place, usually at least 20% of the deal size, is needed, so when you are looking for your loan you don’t need to take out even more (closer to £400k) to cover these costs too. If you have £100k liquid to cover all these expenses that will streamline the process massively.
Next let’s say we want to finance £300,000 for this deal. Our £100k liquid covers the additional £30k + cash flow for inventory, working capital etc.
Even at a fairly poor interest rate of 12% and a loan repayment period of 5 years, our monthly outgoings are; £6,600.
If you can get 5 year rates in the 9-10% range, you’ll add another £500 to the bottom line straight away, but we’re planning for worst case.
Also on the worst case front, obviously the business could go bust instantly the day you buy it but in reality, one of the worst case scenarios is simply you can’t improve and add 50% or double the business like you first thought.
So let’s say despite all your skills/marketing edges, the business never grows and sticks at that £10k/month profit mark.
So you earn £10k-6.6k = £3.4k/month profit.
Not bad, but what really makes this approach stand-out is if you can get growth in the business and you look to buy 1, maybe 2 businesses a year with this mentality.
Usually as you get better at buying and growing these assets, the process will get better and better itself, resulting in more profit.
The key is very similar to the key in property management, don’t take on too much debt, but at the same time ensure you benefit from the bigger numbers.
Although its counter-intuitive, running a business that does £10k/month is actually more work than running one that does £100k/month.
The reason is because the team will be in place for a business doing 1.2M/year profit, but for something doing just £100k, it’s probably just pieced together.
What’s also obvious is that after that 5 year period, assuming the business didn’t change (which is the least likely outcome), you’d jump back up to that £10k/month mark with no debt.
This is why I like the taking the longer term approach to this and thinking around a 10 year timeline.
In this way you can very easily get to £100k+/month without having to do anything crazy creative, you just buy a business, work to grow this, if it goes well and the business grows quickly, continue to invest into that one as well as look for another good deal and do the same thing.
If for whatever reason it goes slowly, don’t look for another deal until you have the cashflow to cover the outgoings, then repeat the process. It’ll look something like this (for me at least because I have the liquidity and the assets separately to live off).
The 3 important points are:
Reach scale.
Play to your skill strengths (ensure you grow/manage the business well).
Think longer term
Below is how the cash flow looks when applying this logic out. Of course this is assuming 2 main things (and a million others): 1.) Business earnings stay the same. 2.) Debt rates stay the same.
