There's a million dollars under your shoe," my father used to tell me. "You just have to find it." As a kid, I had no idea what he meant. I finally figured it out when I became an entrepreneur, but I also discovered a corollary: You have to learn how to recognize the million dollars when you see it. To do that, you first have to understand the difference between getting income from a business and creating value.
That thought came to mind recently when I was talking to a young entrepreneur named Kyle (not his real name) who founded and owns a kickball league and a basketball league. He had approached me for advice about starting a new business he intended to build around a product he'd come up with, a portable scoreboard. He told me that keeping score in these amateur leagues can be a problem, because the teams play in parks where there are no scoreboards. He believed he had the solution and that--given the thousands of such leagues around the country--he could sell a huge number of them.
I had no idea whether he was right about the market for portable scoreboards, but I did note that the product didn't sound patentable and I suspected it could be easily knocked off. More important, I didn't understand why he wanted to assume all the inherent risks of starting a new business when he already had a successful one he could build on. Kyle said he wanted to own a company that had some equity value so he could sell it someday.
"Why can't you do that with the business you have?" I asked.
He said there was a problem with the permits for using the parks where the teams played their games. You couldn't have a league without those permits, and they were all in his name.
That didn't strike me as much of an obstacle. I was sure he could transfer the permits to his business. But I needed to know more. "What is your annual revenue?" I asked. He said he wasn't sure. "What are your annual expenses?" He wasn't sure of that either. He did know, however, how much he took home from the business every year, as well as how many members he had and how much each member paid per year. From those numbers, I was able to make a rough estimate of his annual revenue and his net pretax margin--between 40 and 50 percent, which was excellent.
It was obvious from his responses, however, that he wasn't running his company like a business. If he were, he would have been able to rattle off his revenue and costs and had some idea of the company's potential value. As it was, it was serving simply as a source of income.
I pointed out to Kyle that the leagues have at least one extremely desirable quality from the standpoint of equity value: recurring revenue. It was highly unlikely that he would ever be able to get recurring revenue in the scoreboard business, assuming it proved to be viable--that is, able to sustain itself on internally generated cash flow--and even that was not a certainty.
Kyle wasn't convinced. I asked him to think about it. My fear is he'll fall into the same trap that hundreds of other young entrepreneurs have--chasing after new opportunities rather than focusing on growing the business you have. I've seen it happen over and over again. There is no surer way to miss the million dollars under your shoe. I just hope Kyle doesn't learn that lesson the hard way.