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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Aug 122011
 
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Entrepreneur:  Follow Your Heart. Analysis Is Overrated.

As an entrepreneur, you must follow your heart.  Analysis is important, but it is overrated.

For those of you who are big into analysis and are going to get upset hearing it referred to as secondary to anything, let me explain.  This is kind of like me making an Irish joke – it’s OK, because I’m Irish.  Similarly with analysis, I can move it down the priority list a bit and recommend to others that they do so as well, given that analysis has been a major part of my career, particularly in the early stages.

This may further placate the “quant jocks” and analysis devotees who may otherwise be offended:  in no way am I saying that you should not do analysis when you are considering which business to pursue!  To the contrary, I still think it is very important to develop as strong and accurate as possible an analytical understanding of the business ideas and opportunities you are considering.  What I am saying though, is that the analytical part of the process should come second, not first.  Choose your potential ideas and opportunities first on what your heart says, then bring your mind into the picture to determine whether there may be “gold in them there hills”.

So, if you’re going to follow your heart, you have a few questions to answer.  First, what is it in life that really excites you and gets you “fired up”?  Make yourself a list.  Brainstorm.  There are no bad ideas when you’re brainstorming.  Make the list with your heart, and then you can come back and use your mind to analyze it later.

Next, if you’ve been wanting to start a business for a while, but just haven’t “gotten around to it,” ask yourself why.  What is it that’s holding you back?  Is it fear of the unknown?  Is it a lack of confidence in your ability to make the business successful?  Is it more generally a concern that you’ll “fail” and that will be embarrassing for you?  Is it simply that you have not come up with an idea that you think represents a true opportunity?  Business idea screening can be complicated if you don’t have a background in that area.  Seek help, or use a business idea screening tool to help you work through it.

If lack of time has been your excuse for not starting a business that you’ve been thinking about for a long time, ask yourself this question:  when do I expect to have more free time?  If you are like most people, the answer will be “never”.  The only way to have the time to start a business, or do anything outside the norm of your everyday schedule, is to make that time.  No one will make it happen for you.  You have to do it.  It will require a great deal of discipline and dedication, but if you are following your heart and pursuing a dream, you will find sources of extra energy that you never knew existed.  Do yourself a favor and answer this question:  What small step can I take right now that will get me moving on the way to my dreams?  It doesn’t have to be a big step, just take a step and get the ball rolling.

Ok, so now that you’ve gotten the ball rolling and you’ve decided to follow your heart and your dreams, back to that annoying analytical stuff.  Although you will be following your heart first, you’d do yourself a disservice if you didn’t make sure you took all the proper steps to ensure that your business idea is not doomed from the start.  When I say doomed, I’m talking about from a profitability perspective.  If it never looks like it can make you “real money,” it may be OK as a hobby or a charitable pursuit, but don’t kid yourself into thinking that it’s going to put food on the table for you and your family.  In order to get yourself and your business ideas grounded in reality, you’ll want to make sure that you understand how to do a simple break-even analysis, how to calculate and understand profitability and the Income Statement, and once again, how to differentiate between ideas and opportunities.  There’s a lot more analysis and “left brain” stuff you can and should do to plan your business and increase its likelihood of success, but the few exercises I just mentioned are the minimum – those you MUST understand and do.

You must first follow your heart, then use your mind and intelligence to determine which of your “heartfelt ideas” make sense as a business.  What sense does it make to have a potentially very profitable business that you’re going to hate?  Well, it makes about as much as sense as having a very unprofitable business that you love!  There must be a balance.

I look forward to your thoughts and comments!

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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Apr 032011
 
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If you are starting or already have an early-stage business, you may have come up with an idea and just decided to go for it. While that works for some, I have found that it is always a good idea to get very clear in your head the objectives you have for a business, before you start it, or at the very least, before you try to grow it too much.

There’s probably an infinite number of categories of businesses you could create, particularly if you want to get very specific about the venture’s characteristics. Rather than try to take on the world here, we’re going to focus on five broader categories of businesses that I have found encompass the vast majority of companies out there.

1.) The first category is what I call Hobby Businesses. An example of a business that falls into this category would be one where you collect antique trains, so you decide to go into business buying and selling them. The beauty of a business like this is that typically you won’t lack for passion for the subject matter, as it’s something that you’re already willing to do in your spare time for free. Another positive about this type of business is that no matter how much time and resources you invest, within reason, with deference to your relationship with your family, you can hardly lose. You love the subject matter and would probably be spending money on it anyway. The downside to a business like this is that it’s hard to keep your hobby and love of the merchandise separate from the commercial interests of the enterprise. In the end therefore, while there are exceptions, a business such as this typically remains in the hobby realm and does not develop into a larger, more profitable enterprise.

2.) The second category is Lifestyle Businesses. This is the kind of business that allows you to have flexible hours and maybe even flexible geography, yet pays you well enough to make it worth doing. An example of a lifestyle business would be working as a business coach. There’s no doubt that there are some coaching businesses that are large, have several partners and various administrative staff and are extremely profitable, but on average, these are one- or two-person Lifestyle Businesses. They take advantage of the background and capabilities of the owner and allow that owner to make a good wage with a lot of flexibility; however they are highly unlikely to become fast growth companies with many employees. There is nothing wrong with Lifestyle Businesses, in fact, they can be great! It is important though that you understand their limitations and realize that if you are trying to create a fast growth business, then that is a different animal, with different lifestyle, investment, risk and upside expectations.

3.) The next category is Franchise Businesses. This one does not require too much explanation, since as consumers, we’re all familiar with a large number of very successful food franchises, such as Subway, McDonalds, etc. Franchise Businesses do not appeal to all entrepreneurs, but they do appeal to a good number, particularly those who have come from jobs in corporate America and are accustomed to a structured environment. Franchises can be great businesses, with excellent profitability. Also, on average, given the proven system they usually provide to their franchisees, Franchise Businesses fail at a much lower rate than the overall startup population. On the downside, Franchise Businesses can require a significant initial investment that is outside the reach of many entrepreneurs. They also require ongoing royalty payments to the Franchisor. That said, they can be an excellent alternative for the aspiring entrepreneur who has very little experience in startups and who has some funds available to dedicate to the franchise startup costs.

4.) The fourth category is Self-funded Growth Businesses. These are not hobbies, they are not Lifestyle Businesses and they are not Franchises. Rather, they are businesses that you start with the intention of growing them into large enterprises with many employees and many millions of dollars in revenues. In this category, you are funding the startup costs yourself, from your own assets and available credit. You are not seeking outside investors, most likely because you want to retain control of the business and you do not want to have to answer to equity investors, whether they be friends and family, angel investors, or venture capitalists. Since you typically need significant funds to start a growth business (let’s say $250k plus), this type of business is usually started by someone who is either independently wealthy from other sources, or has started and been successful with other businesses and wants to pursue their next great idea. Just because businesses in this category are self-funded at the outset, does not mean that they will not take growth funding down the road, rather it means that in the startup phase, the company founder(s) do not want the complications of having outside investors. Businesses in this category can fall into a number of industries and business types, depending on the background of the founder(s).

5.) The fifth and final category on this list is Outside-funded Growth Businesses. Such businesses often fall in the technology space, as this is an area of great interest for angel and venture capital investors, two of the most common types of equity investors in early-stage companies. Because they are “Outside-funded” does not mean that none of the founder(s)’ money goes into the business; it just means that a significant portion of the funding comes from outside sources and a good portion of the control of the venture is ceded to those outside investors. For many types of true growth companies, given the startup costs required relative to the net worth of the company founders, there is no choice but to take outside capital [investor pitch template, here]. This is not all negative, of course, as having the participation of the right investors can help the founders accomplish many of the early partnering and customer seeking activities necessary to achieve success. On the other hand, most any entrepreneur who has worked with outside investors will tell you that they would much rather be able to drive the business in the direction they want, without having to answer to outsiders. So taking equity investment from outsiders is a doubled-edged sword, but the reality is that, particularly in the tech space, very few of the great companies that you would know by name were started and grown without the benefit of outside equity capital.

This list of startup business types is not exhaustive, but it gives you an idea of the five broad categories of businesses that you may consider starting. Before you invest the first dime in your business, I strongly suggest that you come to terms with the type of business you are trying to start. If you find that you want to start a business that you simply cannot afford to fund from the resources of the founder(s), you will need to seek outside capital. In that case, there’s a wide variety of funding sources that you can consider. In any case, you will want to make sure you do a good job of screening your ideas to ensure that they truly represent the types of opportunities you want to spend your time, money and other resources pursuing.

I hope you have found this helpful in gaining perspective on the types of ventures you may start up and grow. If you have any questions with regard to how to apply these ideas to your particular venture, don’t hesitate to contact us. In any case, we’d love to hear your thoughts/comments/questions/ideas. Please enter them below or in the top right corner of this post.

Paul Morin
CompanyFounder.com
paul@CompanyFounder.com.

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