Starting a Business That Can Grow in Value
By John Warrillow
As the economy languishes, more and more people are taking
matters into their own hands and starting their own businesses.
Short on cash and long on energy, most founders of new business
start-ups succeed purely because of their stick-to-itiveness.
However, if you want to create something of value that you could one
day sell, it’s important to start a business that can scale into
more than just a glorified job. Here are three steps for starting a
business you can sell down the road:
Step 1: Pick a product or service that has the
potential to scale:
Scalable products meet three criteria:
to employees (or you can program technology to deliver them).
to your customers.
meaning customers have to come back to repurchase often.
Jim Hindman recognized that the typical auto mechanic
business—reliant on the owner as master mechanic—lacked scalability,
which is why he picked oil changes as the service to build Jiffy
Lube around. Hindman reasoned that he could teach a 16-year-old high
school student to change oil, and customers would come back every
three months to prolong the life of their car. Hindman sold Jiffy
Lube to Pennzoil for $42 million.
Step 2: Turn your company into a cash-spitting ATM:
Once you have isolated a product/service that customers value and
need to come back for, start charging up front. Think it’s
impossible? Remember, you are only selling what your customers find
most valuable and need on a regular basis (Step 1). If you avoid
commoditization, you get to set the terms, and charging up front
allows you to use your customers’ cash to finance your growth
instead of going to a bank or sharing equity.
Michael Dell used to inventory computer parts and wait for
the phone to ring. As a result, his company sucked up gobs of cash
and almost choked on its own growth. Dell turned his cash flow cycle
on its head and started charging customers first and then ordering
the inventory on 60-day terms. As a result, he was able to use his
customers’ cash to finance his growth in the early days.
Step 3: Start saying no:
Once you have some
cash coming in, start saying no to anyone asking you for
customization. Focus on the product or service that you identified
in Step 1. Being a specialist at one thing will make you more
referable and will preserve your cash and resources.
For example, the School Photograph Company based in Danbury,
England, does only school photos. Every year, schools hire the
company to take the annual classroom shots (repeatable). The company
hires young photographers happy for the portfolio-building
professional experience (teachable), and headmasters hire the
company because it is the best in England at getting a group of
squirming kids to sit, smile and get back to class within minutes
(valuable). The company doesn’t do wedding photos. You can’t hire
the School Photography Company to shoot your son’s T-ball team. Its
specialization makes it referable and ultimately an acquisition
Follow these three steps, and you’ll be on your way to
creating more than just a job. You’ll have a business that will grow
in value and which you can sell one day.
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