Forecast how the assets might be made to work harder

I have made a lot of money out of buying businesses where the current owners were either underestimating the value of their assets or, more likely, overestimating the value of their assets.  In the first case some owners do not think sufficiently outside the box to realize that their assets could be worth a lot more if, for example, their customer database were combined with another customer database or enhanced with the addition of another line of products.  If I can realize the potential of the undervalued assets, then it makes good business sense to buy them for a price that reflects their current owner’s lower valuation.  The seller is valuing their assets on a stand-alone basis; I am seeing them in the context of what I can make them worth if I bring the business into my portfolio.  The trick is to realize what the assets of two or more businesses will look like if you put them together.  So in the case of a customer database, the seller sees their customer base as the ones on his customer file whilst I see it as that file plus one or two others that I control.  I know that by adding it to my existing customer databases I can reach all those new people with a salesperson or an e-mail as soon as the deal is done.

A classic example of leveraging a database is what I advised Cheryl Hardwick the managing director of www.boffer.co.uk to do. Boffer is a deal-a-day site. It sells only one product per day, sourced from stock from bankrupt companies and companies with excess stock. The bulk of that stock is sourced through another company I have an investment in called CPM asset management, a company that offers a very rapid way of turning problem stock into cash.

Boffer has a tremendous cult following. It sometimes has in excess of 30 thousand unique visitors per day. However the fact that it only has one product on sale per day does restrict the possibility of ramping up the revenue. My advice to Cheryl was that she should set up a sister site to boffer and leverage the boffer database by encouraging boffer customers to visit the new site. On the 15^th of December 2009 boffer’s sister site www.bigoffers.co.uk was born. Bigoffers also sells excess stock, again sourced from CPM asset management. But it has several thousand products on its website. On its first full day of trading it did 500 orders with no advertising apart from an email to the current boffer database. That’s the effect of leveraging a database.

Buying a company into a portfolio is an attempt to make two and two equal at least 5.  Look for the possibility of synergies between the two companies that might improve profitability of both if they were merged.