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Ideas to help identify recession resistant businesses

    1. High Cost of Failure

    The key here is really about being positioned in a ciritcal area of your customer's value chain, such that they would have significant impact to their business by forgoing your services or maintaining the products. 

    2. Significant Maintenance and Repair Revenue

    Generally, maintenance capex is the last operating expense to be criticized in budget reviews. The primary driving factor is that the cost of delaying regular maintenance of fixed asset can have significant longer term costs. 

    If this is combined with #1, for example, where a small repair or regular maintenance is the alternative to losing days of production capacity or sales, then you can have a high degree of confidence that the business will perform well even when customers are cutting back on spending elsewhere. 

    3. Blue-chip customers

    Regardless of the size of the business, having large, well capitalized customers leads to lower likelihood of reduced volumes from the customer and higher likelihood of collecting payment. 

    *Note that these customers do generally have strong negotiating power, particularly if they are a large percentage of total revenue or your business has several competitors. 

    4. Highly Variable Cost Structures

    Operating leverage is desirable when a business is steadily growing. However, during periods where the goal is to weather the storm, being able to flex down the cost base and protect profitability and liquidity is key. 

    It goes without saying, generating more cash flow is always always a desirable outcome, especially when the cost of raising funds increases as capital providers become more cautious. 

    5. Rental businesses

    Rental businesses essentially allow other businesses to achieve #4. Instead of making a large fixed asset purchase is the form of purchasing equipment (ex. heavy machinery), if a company can rent that machinery to complete a job and earn revenue without the large capital outlay, they almost certainly will during times of uncertainty. 

    6. Staples

    To state the obvious...

    Further, products that serve as lower cost substitutes for consumer products tend to fair well during downturns where households are strained. 

    7. Essential Service/ Regulated Utilities

    In the US, utilities such as gas and water are overseen by state regulators. They are allowed to earn reasonable rates of returns on their investments in infrastructure to deliver these services and often granted local exclusivity. This essentially makes them monopolies proving a service that the end customer cannot live without. 

    8. Diverse & Defensive End Customer Markets

    Like having blue-chip customers, a margin of safety can also come from having a broad set of customers that are less than perfectly correlated to the same economic factors and secular trends. Serving customers who are also defensive can greatly benefit performance through cycles. 

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