While there are a variety of options open to people interested in taking advantage of inflation to grow their wealth, investing in businesses while costs are rapidly growing can make valuation and due diligence difficult.
Tangible goods are an excellent hedge against inflation, so when we look at a business, we look particularly at the tangible assets it would bring. This includes the real and personal property used to create goods and the physical locations and equipment that come with particular services. Inventory, however, in times of high inflation, might be difficult to move as quickly as necessary.
Another key factor to consider any time you’re investing in business, but particularly during times of inflation, is how resistant a particular business is to the highs and lows of economic changes. Consumers are price sensitive and will start to cut spending on items that become too expensive until salaries rise to catch up with inflating costs.
During the last year and a half, however, Covid has highlighted new relationships between supply, demand, labor availability, and distribution systems. As our world economy has pivoted to allow more people to work from home, consumption patterns have changed. People moved out of cities to new areas, built new homes and upgraded the ones they had, purchased more and more of their goods online, and massively stressed the distribution system. For a while, we saw an steady increase in prices on raw goods and commodities. Some of those prices have started to fall (lumber) while others continue to rise (steel).
At HRH Investments, we look for a $5 million EBITDA when considering purchasing a businesses. Our expertise is taking smaller companies in good markets and leveraging our team and expertise to grow those businesses. Often, we look at a business that has significant assets that will compliment our existing assets and work to make the portfolio stronger. Those assets can be tangible goods and property, but can also be expertise and experience.