Why'd You Start Your Business? 3 End Goals
Most of the entrepreneurs I talk with are wrapped up in the challenges of building something new, taking on the world, hiring people, and making payroll.
But they often can't answer an important question: What do you ultimately want the business to do for you? What's the payoff you seek for your hard work and risk-taking?
In my view, there are three types of businesses you could be building. None are right or wrong, or more or less likely to be successful. You just need to know which one yours is so you can stay focused on your goal. The business type should drive your day-to-day approach and inform all your strategic decisions.
The main objective for this type of company is a sale to a larger player. It should demonstrate repeatable process, recurring revenue, and seasoned management. So you, as the owner, should have a specific plan for how you would like to sell the company, and even an idea of who you would court to sell to and why.
Companies like this tend to capitalize on an emerging trend, intellectual property, or proprietary technology that could be useful for a larger company. In recent years we have seen many examples of smaller companies that built smartphone apps or websites that the likes of Facebook and Google swallowed up at record prices. The owner's payday was tied up in the sale price.
With companies like these, your salary as the owner is often less than what you could earn working for another organization because profits are reinvested in the company. You are building a company for a payoff sometime in the future. That means you'll take the greatest risk in hopes of a large longterm reward.
My current business, User Insight, is conceived from the start to be an "M&A Candidate." I am intent on developing a proprietary method of consumer research that will attract the interest of a larger company that needs this.
This type of business is created with the main goal of generating lots of cash for the owners. Oftentimes, a "cash factory" takes something relatively cheap, adds a new or different element, and marks it up significantly. If you are running this type of company you are unabashedly in it for the money, and focused on keeping margins very high.
Consultancies and other project-based businesses are good examples of of companies that fall into this category. Many consulting companies, for instance, are built with virtual teams who feed money in with limited overhead; they also have the flexibility to grow or shrink as warranted.
With a company like this, you need to watch overhead, invest wisely in growth, and cut unnecessary costs quickly and decisively. You want to make as much money as possible on everything you sell so you can ultimately to do something else, like start a new business or retire. While the opportunity to sell to another company is not out of the question, it is more unlikely.
This type of company generates enough money every year just to support the primary owner(s) and allows great schedule flexibility. Unlike a "cash factory," the "one-man band" has very few employees and often relies on the owner's expertise. Often seasonal, examples include: tax accounting, insurance sales, or dental care.
If you're a one-man band, you're in it for the longterm; you basically create a job for yourself, one in which you have to do all the work. While you're not necessarily handling unique work, you're building contacts and accounts that could be valuable to someone else when you decide to move on.
If you don't know which one of these your company is, you need to get that straight before you spend one more day or one more dollar at it.