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WeWork Faces Challenge Before IPO

The workspace provider seeks to avoid comparisons to rideshare firms.

By Steve Dudash

July 22, 2019

To see article at U.S News & World Report 

THERE’S A LOT TO LIKE about WeWork, whose shared workspaces have the look and feel of a Silicon Valley tech firm, with modern, sleek designs, welcoming open spaces and even beer on tap. The nine-year-old company has led the coworking wave and rode the growth of the gig economy to a valuation of nearly $50 billion.

At the same time, WeWork, which recently rebranded as We Company, has given skeptics plenty of ammunition. Without a real estate portfolio of its own to lean on, WeWork, it could be argued, is nothing more than a glorified middleman, refurbishing large rental spaces and then leasing them out to entrepreneurs and other small firms in startup mode. Not only does this model have thin margins but it’s highly vulnerable to the ups and downs that influence the broader economy, just like any other real estate-based business.

More concerning, however, are the losses, which totaled almost $2 billion last year. The company’s cash hemorrhaging ways apparently spooked SoftBank, an early investor that reportedly backed off ambitious plans to provide as much as $16 billion in additional equity funding. Potentially putting more strain on its balance sheet are recent news accounts outlining WeWork’s plans to raise $4 billion in debt.

For a company that is reportedly on the brink of an IPO, these are huge challenges to overcome, evoking comparisons to Uber Technologies (ticker: UBER) and Lyft (LYFT), two other unprofitable companies that have made inauspicious public debuts in recent months.

To its credit, WeWork seems to appreciate the task ahead. It has begun to aggressively pursue higher-margin business service offerings, including human resources and information technology support, as well as health insurance. Furthermore, it is also in the process of building an enterprise-focused business line that will provide big companies like Sprint Corp. (S), UBS Group (UBS) and Amazon.com (AMZN) design, buildout and facilities management services.

These, of course, are significant undertakings. Services represented only about 5% of WeWork’s $1.8 billion in revenue in 2018, while membership fees accounted for almost all the rest. Can it grow this portion of its business fast enough to become profitable and provide value for would-be shareholders?

This will hardly be the first time a company has been forced to reinvent itself to remain viable. Remember when IBM Corp. (IBM) only sold computers? It successfully became a provider of business, tech and consulting services, even as few would argue that it’s as influential as it once was.

Microsoft Corp. (MSFT) went through a similar transformation when the influence of personal computers began to wane. Microsoft suffered through a series of missteps under former CEO Steve Ballmer, making a number of silly acquisitions and failing to appreciate (until it was much too late) how transformative the iPhone would be.

The company, though, has reinvented itself under current head Satya Nadella, who shifted Microsoft’s focus to the cloud, a steadily growing and highly profitable unit that has propelled it back to prominence, once again the largest firm in the world based on market cap.

Apple (AAPL) is the latest high-profile example. Facing slowing iPhone sales and an increasingly saturated smartphone market, it is attempting to stay ahead of the curve by shifting from hardware to services. That was underscored during the company’s “special event” in March, when CEO Tim Cook unveiled streaming, news and gaming services, along with a credit card. There was no mention of any hardware products.

By most accounts, Apple’s initial efforts are not off to a great start, with the news and video streaming options failing to excite consumers. But with billions in the bank and near unsurpassed brand loyalty, the company has time to get this transformation right.

WeWork doesn’t enjoy those same luxuries, so it must act fast. Its mission is equal parts clear and daunting: to establish long-standing connections with both its rent-paying tenants and enterprise customers. That’s how Amazon went from online bookseller, to a marketplace for nearly every imaginable good and service, to now the world’s foremost cloud-based platform through Amazon Web Services, which drives most of the company’s revenue.

Just as there’s no guarantee that the rideshare model will ever turn a profit – which is why Uber and Lyft are venturing into numerous other business lines – WeWork’s existing core business may never blossom. Therefore, were it to struggle to reinvent itself into a service provider, the company’s future is likely bleak, no matter what outside investor backs it, how much debt it raises or what kind of IPO it has.

How To Serve HNW Small Business Owners During Times of Volatility
Advisors must be able to offer practical support to high-net-worth business owners who confront a volatile environment just as they are about to make a deal.
By Steven Dudash
May 29, 2019

Original Article:

Over the years, small business owners have emerged as ideal clients for independent advisory practices. Not only do entrepreneurial synergies exist that tend to make such individuals easier to work with, but many also occupy the stratified air of the high-net-worth segment.

While serving this niche can be rewarding, even exhilarating in some instances, it’s also hard work, requiring specialized expertise that doesn’t often come into play for other clients. This is perhaps best underscored when it comes time for the client to sell their business.

For an overwhelming majority of small business owners, the entity is by far their most valuable asset, used to fund most, if not all, of their retirement. This can create complications even during the best of times. But what about when markets are rumbling, like they have recently in the wake of renewed concerns about a prolonged trade spat with China?

Advisors must be able to offer practical support to high-net-worth business owners who confront a volatile environment just as they are about to make a deal. Here are some top considerations:

Utilize dollar-cost averaging. As suggested above, whether a business is worth $5 million or $50 million, it will likely make up the lion share of the owner’s net worth. The temptation over the last decade or so, when markets enjoyed near-uninterrupted gains, was to take the entire windfall and convert it into stocks.

Though that approach flies in the face of dollar-cost averaging, a fundamental financial planning precept, many advisors did it anyway. With double-digit annual returns having been the norm in the wake of the financial crisis, they hesitated to push back against clients who wanted to be more aggressive, wary of getting second-guessed down the road about perceived unrealized gains.

Dollar-cost averaging exists for a reason: Clients may not benefit from the highest of the highs, but they won’t get punished by the lowest of the lows, either. Take the guesswork and emotion out of the market. Don’t plow a lump sum into the markets and instead make investments gradually, which will shield clients from risk.

Clients should always be ready to sell, even if they have no plans to do so. Business owners typically have a pretty good idea of when they want to sell, with the timeline sometimes based on their age or reaching certain revenue/profit milestones. Whether they are prepared to sell their business when that time comes is another story altogether.

Advisors, therefore, should encourage such clients to prepare for their exit years in advance to guard against the possibility that market risk could erode the value of their business. We’re currently beginning to see this in financial services.

For years, advisors have been hesitant to sell their books of businesses, thanks to the upward trajectory of the markets. Their practices were escalating in value and, for some with recurring fee-based revenue, life was too good to quit. However, as the investing environment started to face hurdles late last year, their valuations took a hit, and the outlook could have changed.

The problem, though, is that many have not prepped for exit, meaning the realities of the market at any given time could wield outsized influence over a sale process. The same principle applies to countless industries across the country, whose fortunes could take a turn based on a declining economy or a micro-event cutting into their revenues (i.e., a microbrewery that has seen their aluminum costs rise as a result of tariffs). Always have an exit strategy, because you’ll never know when you’ll need to use it.

Communicate how much a client will need to maintain their current lifestyle. Let’s say a client comes to you and says they are about to sell their business for $25 million. On the surface, that sounds like a lot of money—and in most instances, it is. Yet, many business owners who have adjusted to a high-net-worth lifestyle will be surprised that an amount like that won’t take them as far as they think.

They have car payments, a couple of mortgages, a country club membership as well as food, entertainment and leisure costs, to say nothing of a child’s college and their own medical expenses. Additionally, they have service providers, including financial advisors, lawyers and accountants. These obligations accumulate quickly and could be exasperated by the fallout of a volatile market.

Make sure business owner clients know what it will take for them to preserve their current lifestyle, not just now but for the next 30 to 50 years (keep in mind, this wealth, in some instances, is intended to last for generations). If there’s anything we know about the high-net-worth segment, it’s that they are loath to make do with less. Many would prefer to work a few extra years.

Volatility is the norm, not the exception. While concerns about trade are driving the most recent ups and downs, an entirely different set of considerations could spark investor anxiety in the future—and complicate the exit of a small business owner in the high-net-worth segment. Be prepared to help your clients when that happens.