The stated objective of Bancreek’s investment philosophy is to identify business models that may allow for compounding at above average rates. At Bancreek, we call such business models, “structurally advantaged business models.” Fancy term, so let’s break it down a bit.
 

Focus on a product or service that is differentiated

Let’s say we start a company together, and our goal is to build and develop a structurally advantaged business model to help us grow our investment over time. First, we must consider what we’re selling. Are we selling a commoditized[1] product? Or are we differentiated in some manner? Maybe we have a very strong brand. That’s a very common way to differentiate our product or service. But it’s not the only way. We could be a distributor that has tremendous experience in logistics. Or we could sell mission critical software to businesses that simply couldn’t operate without our product. There are many ways to differentiate. To be structurally advantaged, we must find at least one.
 

The role of profitability and free cash flow

Now that we are differentiated, we need to understand the profitability of what we are selling. But given that free cash generation is our goal, we need to think about more than just the profit we make on a sale. We need to consider how much we need to invest in working capital (e.g., inventory and accounts receivable) to support our sales. We also need to understand how much of our profit we need to recycle back into capital investments to maintain our sales. All else being equal, we want a product or service that requires less cash to maintain.
 

Using free cash flow to fund future growth

Less cash spent on maintenance frees up more cash to spend on growth! In our view, this is where things get exciting. So far, we have laid the foundation for a wonderful business. But do we want our business to just tread water? Not at all! Instead, we want to take control of our destiny, which we believe is driven by a robust growth investment strategy. There are many ways to achieve this goal. Maybe we have a compelling multi-year geographic expansion opportunity. Or maybe we are ready to launch new related product/service offerings. Or maybe we may have experience in acquiring other companies at attractive prices and generating more cash from them under our management. Our business model will need a strong track record of pulling one or multiple of these growth levers over multiple business cycles to be considered “structurally advantaged.”
 

Consistent advantage during good and bad times

Good news, we’re almost there! But not quite yet. Lastly, to really consider ourselves structurally advantaged, we are going to need to show resilience through challenging times. No matter what we sell, we are inevitably going to operate through periods of market and economic distress. But not all companies are equally sensitive to economic slowdowns. Some companies may experience a marked drop in revenue, or steep compression in profit margins, or the inability to generate free cash during downturns. Some companies may have too much debt and high interest expenses that diverts precious cash away from growth investments. But that can’t be us! To solidify our structural advantage, our hypothetical business must be more resilient during such times, positioning ourselves to come out of an economic slowdown an even stronger company.
 

Let us do the work for you

This wonderful, hypothetical company that we have built together is what Bancreek Capital Advisors (BCA) considers to be “structurally advantaged,” which in our view, provides it with a greater chance of being able to compound capital for its shareholders over time.

[1] A commoditized product is one that is widely available and interchangeable with one provided by another company.