I have a friend that is in the business of renting out outdoor wedding venue. The place looks something like the image above.

About 10 years ago, he and his wife quit his high paying jobs in Hong Kong and came to Bengaluru to start this. He poured his life’s savings into shaping it and landscaping it etc. Today, it is like See’s Candy.

His clientele are among the richest and hence he can raise his prices and still not lose them. In fact, if he kept it cheap, it wouldn’t appeal to his clientele. The need to get married is almost a basic need. And rich people can’t be seen doing things the ordinary way, can they?

The clients pay in advance to book the place, so he has no receivables or a collections department. He has no R&D expenses. His clients do all the marketing for him by sharing their wedding pictures on Facebook. And because every wedding involves hundreds of guests, word spreads around very quickly.

He doesn’t need more fixed assets like building or expensive machinery to get more business. He just needs to keep the place clean, landscaped, invest small sums in bug repellents etc.

So profit margins are very high and the quality of the business is such that all profits translate to free cash flow. Like Buffett said about See’s Candy in 2007 letters to shareholders:

Two factors helped to minimize the funds required for operations. First, the product was sold for cash, and that eliminated accounts receivable. Second, the production and distribution cycle was short, which minimized inventories.

However, like See’s there is only one problem and its actually a good problem to have. He can’t reinvest his profits into the business. So he HAS TO take out a majority of the profits …what a problem to have! And therefore like Warren Buffett, he invests that money into another business that can use the capital to scale up.

Just as Adam and Eve kick-started an activity that led to six billion humans, See’s has given birth to multiple new streams of cash for us. (The biblical command to “be fruitful and multiply” is one we take seriously at Berkshire.)

So why am I writing about this? I have had a front row seat to my friend’s journey and this business has been life changing for him, in a good way. A lot of entrepreneurs would tell you that their businesses have been life changing in a bad way.  For example, a civil works contractor, I met recently, was almost in tears because he has receivables due for over 6 months from an apartment’s owners association. In these months, he has of course had to pay salaries, pay his bills and in order to do that he has had to borrow towards working capital. Another example: I met a Jockey retailer who was complaining that he has to pay Rs 80,000 as rent per month for his showroom while customers are switching to buying underwear online. (Think of how many under wears he needs to sell to make just rent money!). A third example: some of my friends provide Digital Marketing services to clients who pay by checks and then deliberately send the checks to the wrong address in order to hold onto the money for two weeks longer.

So if you collect examples of businesses that are struggling for various reasons, you would come to appreciate the beauty of my friend’s business.

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I gave up becoming an entrepreneur long ago and a good decision too. Instead, I now look to be a part owner in listed companies that share similar characteristics as my friend’s business. One of our companies, is also a landlord and they collect rent and use it to erect more buildings. It generates profits and has opportunities to reinvest 90% of it back into the business for growth at very high rates of return.

Investing, as they say is simple but not easy. Simple, because the formula is easy to understand and freely available. It’s not easy because of our own human nature of impatience, fear, greed, unable to look through the clutter etc.

Thanks for reading.

 

Featured photo: Photo by Analise Benevides on Unsplash