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:

• They are teachable to employees (or you can program technology to deliver them).

• They are valuable to your customers.

• They are repeatable, 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 target.

 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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