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Businesses which Generate Float


DooDiligence

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Companies selling gift cards, for example Biglari's Steak and Shake:

 

http://www.steaknshake.com/gift-card

 

Sodexo and many others who manage luncheon vouchers for employer (widely used in Europe to give a tax reduced perk to employees and support the local restaurant industry):

 

https://en.wikipedia.org/wiki/Meal_voucher

 

The above wiki article about meal vouchers is much more detailed in French:

 

https://fr.wikipedia.org/wiki/Titre_restaurant

 

 

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I don't know if there's anything special about 401K plans as I'm not US based, but general fund managers are surely investing funds (AUM) for the benefit of their clients and not holding cash for a period prior to using it that they can invest for their own benefit.

 

However, I did notice an interesting use of fund assets in one of the funds available within my wife's UK pension scheme. It's a FT All Share Index Fund in which they loan out some of the holdings to short sellers and receive interest for doing so. About 2/3rd of this income goes to reducing the fund's total expense ratio and the remaining 1/3rd is paid to the fund manager who administers it.

 

The 1/3rd is effectively a sort of income on AUM and the 2/3rd potentially attracts more capital by keeping their effective TER highly competitive. From memory their reported TER was reduced to about 0.06% instead of perhaps 0.25%.

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I'd say that's a feature, not a bug. Having float is meaningless if it's sitting in the bank account earning 0.1%... you want to reinvest it and earn good returns on it.

 

Whether they make good returns or not isn't the point. My point is that the Net Income and cash flow dynamics of growing SaaS companies are actually not that attractive. There is no natural float.

 

I remember reading about the early history of Salesforce. They were growing themselves into oblivion because the cash flow dynamics for new customers were so bad. They fixed this by charging annually in advance rather than monthly. They also lowered their cost of acquisition by moving to an inside sales force.

 

So the "float" that the big SaaS players generate is due to the multi-year contracts that they need to cover the high initial cost of customer acquisition.

 

--

The economics of SaaS are generally less attractive than on-premise. Churn, for example, is significantly higher. Margins are lower. However, SaaS is much more attractive to customers.

 

Update: I don't remember where I read about the early history of Salesforce, but it might have been this book:

https://www.amazon.com/Behind-Cloud-Salesforce-com-Billion-Dollar-Company-ebook/dp/B002PJ4SU2/ref=sr_1_1?s=books&ie=UTF8&qid=1484321419&sr=1-1&keywords=marc+benioff

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  Float seems to be OPM ( other peoples money) that is returned within a certain time frame or never returned or redeemed.  Business Models that use OPM that are returned is infinite. It seems to be the original poster is looking for business's that never return money back to the lenders or business's that return in a incremental way that net net it increases each year that is non insurance. Maybe the question is which business models return excess to market returns that increase OPM each year and keep it going until i pass away

. In our circle the archetype are compounders. As William Poundstone said" A practical theory of investment must largely be a theory of reinvestment..  Just a observation but:

 

Asset management=  Asset manager that returns in excess to market returns.  Aum increases ( float). Float works both ways.

 

Private to Public arbitrage =  The float( remember opm) is fixed via some financing then a private business is bought usually at a lower multiple due to that its actively managed. Then added to a public company which is re rated due to increased multiple on earnings due to that its passive. Private business's can be bought at 3-6x multiples then flipped at 6-15x multiples once its in a public company.

 

To occam's razor this a float business is any business that i get money (opm) for "blank" and i earn " much more then blank".  Repeat cycle.

 

 

 

 

 

 

 

 

 

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ritchie brothers generates float - used equipment auctioneer. it's not a ton, but they collect cash from auction winners well before they pay it out to auction sellers, so working capital is a cash source instead of cash drain.

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sci, grave plots. My parents have grave plots paid for our whole family 10 years ago, no one is dead yet, it maybe be another decade before anyone is and will be many decades before all of us are. Too bad it's going out of style, I'd like to buy one.

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sci, grave plots. My parents have grave plots paid for our whole family 10 years ago, no one is dead yet, it maybe be another decade before anyone is and will be many decades before all of us are. Too bad it's going out of style, I'd like to buy one.

 

Funny you should mention this.

 

I'm prospecting around for a real estate venture & while looking at properties yesterday, I passed a cemetary & thought "float!"

 

Is this truly a dieing business? (pun totally intended...)

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I'd say that's a feature, not a bug. Having float is meaningless if it's sitting in the bank account earning 0.1%... you want to reinvest it and earn good returns on it.

 

Whether they make good returns or not isn't the point. My point is that the Net Income and cash flow dynamics of growing SaaS companies are actually not that attractive. There is no natural float.

 

I remember reading about the early history of Salesforce. They were growing themselves into oblivion because the cash flow dynamics for new customers were so bad. They fixed this by charging annually in advance rather than monthly. They also lowered their cost of acquisition by moving to an inside sales force.

 

So the "float" that the big SaaS players generate is due to the multi-year contracts that they need to cover the high initial cost of customer acquisition.

 

--

The economics of SaaS are generally less attractive than on-premise. Churn, for example, is significantly higher. Margins are lower. However, SaaS is much more attractive to customers.

 

Update: I don't remember where I read about the early history of Salesforce, but it might have been this book:

https://www.amazon.com/Behind-Cloud-Salesforce-com-Billion-Dollar-Company-ebook/dp/B002PJ4SU2/ref=sr_1_1?s=books&ie=UTF8&qid=1484321419&sr=1-1&keywords=marc+benioff

 

I think we have very different philosophies on what float is. Coming from a subscription business background, I would count that $500 as very real float. Every time you add a customer it pays for 1/3 of the next one, so you can scale at a faster rate than you otherwise could.

 

The float is real and is generated, it just makes more sense not to hold onto it when you can reinvest at pretty good returns. It's a managerial decision; the float is real in terms of the deferred revenue liability. It's just a matter of what you're going to do with it.

 

I'd be perfectly content for a company with a good subscription business model to show no or negative free cash flow if it can invest its float at very attractive firms. No thoughts on the Salesforce case in particular except that there is a good chance they were acting rationally; I just think it's important that my thoughts on the broader subject are better understood.

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I think we have very different philosophies on what float is.

 

No, we agree on what float is. It's just that the float is not a natural outcome of the SaaS business model.

 

When a customer books an airline ticket, they need to book in advance. When someone buys insurance, the loss always happens in the future. This is natural float.

 

My experience is that most SaaS companies bill monthly in advance. There is no float. Some SaaS companies generate float. But that is because they have the pricing power to bill annually in advance.

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Service corp international (SCI) is the largest US funeral operator and  they offer a prearranged funeral service where people prepay for their graves and they're able to invest this in whatever they please sometimes for decades. Sounds like a pretty nice float.

 

On another note, a wonderful recession resistant business. Looking to look more into it and possibly add on a nice pullback.

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Being able to invest float in whatever they want for many years is great. I wonder how well they actually do invest it, though. Could be worth looking into.

 

It sounds like the sort of business where ownership by a skilled investor like Buffett could pay off handsomely if the ongoing operating costs are not too high and competition from tax advantaged churches does not encroach on the pre paid part of their business.

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