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Imagine somebody offered you a 45 year old, US-based manufacturing business.
The purchase price is roughly $5.6m.
It comes with $5.8m in cash, $3.7m of unpaid invoices, $8.1m of inventory and around $1.7m of property and equipment.
After paying every liability on the balance sheet, the cash, invoices and inventory alone leave roughly $9.9m of net current asset value.
The factory itself generated more than $50m of revenue last year.
Over the last five years, the business generated roughly $9.7m of cumulative owner-FCF.
Which is an average of almost $2m per year.
A new owner could probably extract around $3.5m of surplus cash almost immediately, with another $0.7m released from excess working capital.
That would reduce the effective cost of the operating business to roughly $1.4m.
There is a catch, of course.
Actually, several.
There is some significant customer concentration, sales are down, and the factory is under-utilised.
But things are not actually as bad as they first seem.
One of those customers has bought from the company since 1998.
The other has been a major customer for almost 15 years.
The current concentration has been present for decades.
They have survived recessions, inflation, changing management teams, a global pandemic and a major financial crisis.
Revenue has fallen sharply before too.
In FY2022 sales dropped 11.5%.
They fell again in FY2023.
Similar volume pressure appeared years earlier.
Margins compressed because the factory carries meaningful fixed costs.
Then the cycle turned.
Revenue stabilised, volumes recovered, and In FY2025 sales increased 8% and gross margin recovered from 7.7% to 10.2%.
But, just for the sake of argument, let’s imagine the nightmare scenario actually happening this time.
Every major customer disappears tomorrow.
Revenue would collapse and the existing manufacturing operation would have to be aggressively restructured or wound down.
Even after assuming a severe write-down on inventory, there would still be enough asset backing to effectively preserve our initial acquisition cost.
In other words, that worst case scenario is already priced in, even though there is no sign that it’s actually happening.
If it doesn’t happen, pretty much every Dollar of owner-FCF from here would be pure profit for us.
On top of all this, there are several things that management can do to radically increase those profits over the next couple of years.
Let’s take a look...