Jun 112017
 
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To Make More Money, Solve Bigger Problems

What entrepreneur does not want to make more money? The question is how to do it.

While there are exceptions, of course, in my experience and observation, the amount of money you make is usually directly related to the size of the problem you are solving for your client or customer, the barriers to entry to getting into the business, and how many other people are willing and able to solve the problem you’re looking to solve for your prospective customers. These factors are particularly important when it comes to service businesses, which is what we’ll focus on here.

Let’s consider a few of many possible examples.

House cleaning

Undoubtedly, keeping one’s house clean is no small problem, particularly if you have kids and pets. That said, cleaning a house requires minimal specialized skills and there is a large number of people willing and able to provide this service. So, as a house cleaner, you’ll make OK money, but nothing that will knock your socks off. In order to make exceptional money in this business, you’d need to have a large customer base and a team of cleaners working for you. You’d still be making a relatively low profit margin, but on a much larger volume of sales than if you were doing all the cleaning yourself.

Mergers and Acquisitions Advisory

In the M&A advisory business, there is plenty of opportunity to make more money than in many other service businesses. This is true despite the fact that there is a large number of providers of these services. How is that possible? Well, in M&A advisory, whether you’re advising the buyer or seller of the business, typically there is a great deal of money at stake – anywhere from hundreds of thousands to tens of millions of dollars, or even more.

In other words, these are bigger problems to be solved for your customer. In such a situation, the buyer and seller are willing to pay significant dollars, often even a percentage of the deal value, in order to attract high-quality advisors. This business also requires specialized knowledge and credentials which act as a barrier to entry, so although there are a lot of M&A advisors, it’s a relatively small number compared to what you’d see in other service businesses where the knowledge and credential requirements are much lower, or non-existent.

Family Business Advisory

In terms of having bigger problems to solve, family businesses probably end up somewhere toward the top of the list. Running a family business is very challenging, with the challenges often growing with each successive generation of the family. In such a situation, where there’s a lot more than money at stake, and the money issues themselves can be quite large, the advisors tend to make more money than your average consultant or provider of other services.

Again, in order to provide advisory services to family businesses, specialized knowledge and experience is required, so there are significant barriers to entry in this business as well. Not dissimilar to M&A advisory, as described above, family business advisors are paid quite well, with daily rates ranging from a couple thousand dollars to well over ten thousand dollars. These advisory fees can be seen as a bargain by the family business client, though, as in many cases the survival and prosperity of the family business – the engine of wealth for the family – hangs in the balance.

Tree Removal Service

The tree removal business is quite different than the services mentioned above, as it involves extensive and dangerous physical labor, combined with planning and ingenuity. The specialized knowledge and equipment required for this business typically also take a significant investment of time and resources to acquire, which places sizable barriers to entry in place. This is particularly true for the tree removal businesses that are “legitimate,” rather than just a couple guys with a chainsaw and a pickup truck.

So, given the barriers to entry and the risk inherent in cutting trees near people’s houses and other structures, it’s not surprising that entrepreneurs in the business (“legitimately” in the business) make more money than other entrepreneurs in service businesses that solve “smaller” problems and have fewer barriers to entry. There is plenty of competition in this business, but there is also plenty of business to go around, given that ongoing tree maintenance is necessary and acute tree removal needs arise on a regular basis due to hurricanes, other windstorms, and fungus/other diseases in the trees.

We could look at an almost endless list of service businesses and press each of them against these factors of the size of the problem solved, barriers to entry and number of competitors in the business, but I’m sure you get the idea already.

When you are looking at starting a business or expanding your current business, carefully consider these factors. Such an exercise is likely to give you a solid understanding of how likely it is that you’ll make more money in the business you’re considering than in other businesses that may also be options on the table. That will allow you to make a more informed decision about where to invest your time, money and other resources as you take on your next entrepreneurial venture.

I look forward to your thoughts and questions.

 

Paul Morin

paul@companyfounder.com

www.companyfounder.com

 

 

 

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Apr 042011
 
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If you are like many entrepreneurs, you probably have at least ten ideas each day for potential businesses, products and services. You’re constantly seeing things and processes that can be improved and you’re probably very interested in and aware of trends in a variety of marketplaces. So are you rich yet? Has your ability to come up with ideas gotten you where you want to be?

Unless you constantly force yourself to differentiate between ideas and opportunities, chances are that your ability to brainstorm new solutions for just about anything has not yet made you as wealthy as you’d like to be. So what is the difference between ideas and opportunities? How can you determine whether this one is just another idea, or a real opportunity that can be turned into a profitable business?

In another article I wrote on a similar topic – idea screening – I provided a series of criteria to help you determine whether a particular idea could provide you with a business that suited you well. Those criteria included:

Does the business have high gross margins?

Are there a lot of employee headaches associated with the business?

What potential does the business have to reach break-even cash flow within 12 months?

What is the startup capital investment required relative to what you are able/prepared to spend?

Do the strengths necessary to be successful in the business suit those of the founder(s)?

What is the founder(s)’ level of enthusiasm for the industry?

What is the founder(s)’ level of enthusiasm for the idea?

Does the business have potential for residual income?

What is the market growth rate for the market/niche you want to go after? How is it expected to behave in the future?

What is the number and strength of the competitors you’ll be going up against? Competition is not necessarily bad, but you’ll want to understand what you’l l be up against.

What will be your ability to take a vacation in this business? Retail, for example, can be tough.

What is the potential for “significant” (to you, based on what you consider “significant”) upside in the business, if you are successful?

Will there be a lot of liability risk in the business? Anything that deals with products or services for young children, for example, can carry a high level of liability risk.

This is certainly not an exhaustive list to measure your potential venture against, however looking at it against these criteria will help you determine whether it’s “just another idea” or a true opportunity that you would like to pursue. Also, and very importantly, what may look like just another idea to some people, may look like a great opportunity to others. It depends very much on your perspective and where you’re coming from. It also depends on what type of business you are trying to create. In another article, I described five broad categories of businesses that you could consider pursuing. These categories included:

Hobby Businesses: for example, if you were to try to turn your love for collecting antique toy trains into a business.

Lifestyle Businesses: an example here would be if you were trying to capitalize on specialized knowledge you had developed and use it to become an independent consultant to businesses on that topic. Rather than a career, you’d be seeking a business that allowed you time and geographic flexibility, while at the same time allowing you to earn a comfortable living.

Franchise Businesses: This would be where, for example, you’d open up a Subway or McDonald’s franchise, with the desire to take advantage of the strong brands and systems they have created and provide to their franchisees.

Self-Funded Growth Businesses: In this category, you invest your own financial resources and “blood, sweat, and tears,” with the objective of creating a growth business. Here you’re not looking at hobbies usually and you’re not just looking at creating a comfortable lifestyle with time and geographic flexibility. Rather, you are “putting the pedal to the medal” and trying to build a “real” growth business, with multi-millions in sales and most likely, a decent number of employees.

Outside-funded Growth Businesses: Here is where you try to do pretty much the same thing as in the Self-Funded Growth Business model, but you try to do it more quickly and/or on a greater scale. In this case, you would typically take equity investment from “angel” and/or venture capital investors.

There is no wrong type of business to start, of course – it is an individual and personal decision, based on your biases and where you happen to be in life when you decide to start a business. Even though there is no wrong type of business to start though, as you can see, your mentality with regard to which type of business you’re trying to create will have a significant impact on how much weight you put on the various screening criteria discussed above. If you’re trying to start a Hobby or Lifestyle Business for example and you determine that the startup costs will be $10 million, that may be an extreme negative. If you’re looking to start an Outside-funded Growth Business, on the other hand, then startup costs of $10 million may be very much in the realm of reason.

So, in conclusion, work hard first to understand what type of business you would like to create. This doesn’t need to be cast in stone, but depending on where you are in life, you may gravitate strongly toward one of the categories mentioned above. Once you’ve thought that through, when you get your normal flow of business/service/product ideas, likely on a daily basis, consider them in light of the type of business you’d like to create.

Once you’ve considered your ideas in the context of the type of business you are trying to create, and discarded those that don’t match with your objectives and vision, you are now in a position to apply the idea screening criteria mentioned above, as well as any others you may like to add. You can find an Excel (or PDF, if you’d prefer) screening worksheet here to help you with this process.

I hope you have found this post helpful as you work to differentiate between ideas and true opportunities, in the context of the type of business you’re trying to create. If you have questions or comments, don’t hesitate to contact us or to leave a question or comment below or in the top right corner of this post. Either way, we’d love to hear from you as you look to turn your ideas into opportunities and profitable businesses.

Paul Morin
CompanyFounder.com
paul@companyfounder.com.

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