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So, you want to start a business, right? Then you’d better make sure it is the right kind of business!
We are living in an era of remarkably booming technology and entrepreneurship.
And there has never been a better time in history of mankind to create your own business. In most countries of the world, the process has been greatly simplified and the required capital is only minimal, especially for online ventures.
Even if you are working a day job, you can start slowly by working on a side business in the afternoons and weekends. You can pour “sweat equity” into it and watch it grow until you feel ready to make the leap and leave your day job in order to fully focus on your business.
As notorious Billionaire Mark Cuban has mentioned:
“Sweat equity is the most valuable equity there is. Know your business and industry better than anyone else in the world. Love what you do or don’t do it.”
In this context of roaring technology, business and globalization, entrepreneurship has been in vogue. And for good reason.
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Entrepreneurship as a vehicle to wealth
Entrepreneurship is one of the most solid approaches to building wealth. A business, under the right circumstances, can become a potent vehicle to wealth and riches.
As a matter of fact, the world’s wealthiest people have made their fortunes by building businesses and growing them to large entities that provide value to society. They have made it by playing aggressive offense (making more money), not by playing defense (minimizing expenses).
Problems however arise when people with limited education and knowledge on the subject attempt to start their own business. Misguided by poor sources of information, they start businesses that lack the characteristics that are required so that they grow into something substantial and potent.
They think that they have to start a business in order to be “their own boss” or that they should “follow their passion”, as if those were prerequisites of sound entrepreneurship.
Based on shaky foundations, these business fail or at best, they break a tiny profit for their owners.
So, “what kind of businesses should I prefer?”, you might ask.
The correct approach here is to aim for the creation of businesses that are scalable and saleable. In essence, we should prefer businesses that have the potential to scale to a large degree, and that are also suitable for sale.
Unfortunately, most people start businesses that lack both of these traits, so eventually they get trapped into jobs that are masqueraded as “businesses”.
Businesses should be scalable
First and foremost, in order to help you with your wealth building process, a business must be scalable. This means that the particular business should be inherently easy to scale, i.e. grow to an autonomous entity that will provide large amounts of value to people.
But why is scale so important?
Scale in business matters because it is the driver of large profits and consequently of large asset value.
Scale will lead a company to generate explosive income for its founders, and a high income is prerequisite to building wealth. As a second benefit, high income means that the business also sports a high marketplace value. If you decide to sell it (e.g. via a business exit), the lump sum of money you will get will be so much higher.
Scale is so critical because it is the only approach via which you will be able to serve many people.
The more people you provide value to, the wealthier you will become. In order to make millions, you have to impact millions. And the only way to serve such a large amount of people is via an entity that can scale to accommodate the customer demand.
How to identify a scalable business
Identifying a business venture that can scale is not difficult, but requires a fair amount of thinking and due diligence.
You have to honestly ask yourself questions on the nature of your potential business:
– Can the net income of this business grow to five digits ($10,000+) or even six digits ($100,000+) per month?
– Can this business realistically be worth millions at some point?
– Can this business survive at least a decade in the market, or is it a fad that will be obsolete in a few years or even months?
– Can this business be replicated and expanded to other locations by means of franchising or chaining?
– If it is a product based business, how many units could it potentially sell?
As you understand, scale is a fundamental trait that a business should possess. But is there any way to have a super successful business without scale?
Yes, there is, but only if the products or services that the business provides have “magnitude” instead.
By “magnitude” here, we refer to the profit that each transaction generates for the business. Selling a chewing gum has little magnitude, so you have to sell many of them. Selling a Bentley has much bigger magnitude, so you only need to sell a few of them.
The only way to balance the lack of scale in a business is by providing a product or service with huge magnitude. This means that the business might not have a lot of customers, but for each customer, the impact will be tremendous.
For example, a wealth management company might not have so many customers, but the value offered to each of them is so huge that can balance out the lack of scale.
Summing up, your business should possess either scale or magnitude in order to be an effective vehicle to building wealth.
As author MJ DeMarco writes in his book, “The Millionaire Fastlane”:
Scale creates millionaires. Magnitude creates millionaires. Scale and magnitude creates billionaires.
Businesses should be saleable
Another important characteristic of a business is that it should be saleable. This essentially means that the business can operate independently of its founder and that it has value in the marketplace.
Let’s examine these two prerequisites.
As soon as your business venture gains some traction and starts generating profits, you should strategize the way to remove yourself from the equation.
In his book, “e-Myth Revisited”, author Michael Gerber, describe this as “working on your business instead of working in your business”.
As the founder and owner, you should eventually distance yourself from the business’s low level operations and free up time and resources. Your focus should then shift towards more important issues, like strategic planning, cultivating partnerships etc.
There are many approaches to achieve this, including the introduction of written procedures for specific tasks, the automation of tasks with the use of technology and the delegation of tasks to employees or freelancers.
The bottom line is that you should move from being an “One Man Army” that does everything by himself, to building a robust system that will allow the business to run smoothly on its own.
Unfortunately, this is not possible in every case. Some businesses simply lack the characteristics required to make them run on their own.
An example of this would be a business of which the owner can’t afford to replace himself as an operator because of thin margins and low sales volume. This usually happens when you offer a commoditized product and you have not been able to build a brand for it.
Meet John, who runs a local pizza joint. John already starts with a handicap, since his business is limited by its locality and can serve only a specific geographic area. On top of that, John offers a non-unique product, since he has not established a brand in the marketplace.
This is a dismal combination: Selling a commodity product in a locally restrained area from a brick and mortar store. The end result is both low sales (small scale) and low margins/profits (small magnitude). John remains trapped in his “business” not affording to replace himself with a General Manager.
A corollary of the above is this:
A business, in order to be valuable and saleable, should be generating profit after everyone, including e.g. a general manager, has been paid a salary.
If the founder acts as a general manager, then this should be taken under account.
This is a very common mistake that entrepreneurs make and can be prominently seen in several episodes of the TV show “Shark Tank”. The show features a group of potential investors (the “Sharks”) and aspiring entrepreneurs who look for investments for their business venture.
The entrepreneur sets a price for his business and pitches it to the Sharks. His goal is to make a deal with one or more of them. A negotiation usually follows between the interested parties, around company valuation, specific terms and other general details.
What often happens is that a founder/entrepreneur will come to the show with a business that made, say $50,000 profit in the first year, but he has not taken a salary out of it. He will then proceed to claim that the business is worth $300,000 assuming an industry multiple equal to 6.
Unfortunately, the harsh reality, which is highlighted by the “sharks”, is that the company made no profit that year. The reason is that the entrepreneur has not accounted for his own time that should have been budgeted in as a “General Manager” salary.
This does not mean that the business is worthless (sometimes it does!) or that it will never be worth the amount that the participant thought it was worth. It just means that the business has not gained enough traction and the valuation is not there yet.
How to identify a saleable business
So, how do you assess whether or not a business is saleable? Again, via extended due diligence.
You have to ask questions regarding your potential business:
– What part of this business can be automated with the introduction of technology?
– Can this business operate based on a list of procedures that employees will follow without my surveillance?
– Are the margins high enough to support the outsourcing or delegation of tasks to other people?
– Introducing employees (human resources management) will increase complexity and costs. Will those be justified by increased production and sales?
– Can this business evolve into an autonomous entity that will function without my physical presence and involvement?
Of course these questions do not have binary answers. It is not black and white. There are degrees of how easy or difficult it is to automate a business.
What we should do, is to pursue ventures that can be molded into self-sustainable systems that will operate without our supervision. That is the end goal here.
Starting a business nowadays is easier than ever. And people all over the world are hopping on the entrepreneurship wagon on a journey to acquire wealth.
This is totally understandable, since business is a surefire way to obtain riches. However, there is an inherent danger to this. A lot of people lack the fundamental knowledge needed to assess what constitutes a good business.
A business should always be started on the right premises. Otherwise, it is doomed to fail or barely survive, trapping its founder into a dead end.
Two of the most important characteristics a business should possess is those of scalability and saleability.
A business should be able to scale, in other words, to attract and accommodate increased demand. This is the only way to achieve high income that will ultimately lead to wealth.
Additionally, a business should be saleable, i.e. have an intrinsic value to the marketplace. A founder can achieve this when he has managed to remove himself from the business, with the latter still remaining profitable.
These traits usually go hand in hand and feed off each other. Online businesses are a perfect example of ventures that naturally possess these traits, and they should be the first choice for new entrepreneurs.
Closing, whenever you find yourself evaluating a new business opportunity, make sure to ask the right questions and assess: Is this business scalable and saleable?