When candidates first start to explore business ownership, the process can become overwhelming because there are countless questions to ask and alternatives to consider. From my experience, there are a few core characteristics that create better opportunities that feed long-term growth and success.
Recurring Revenues
Having a revenue stream that is recurring – weekly, monthly, or annually – provides you with a more solid foundation upon which to build in the future. ADP (payroll processing), Orkin (pest control), Planet Fitness (gyms) are all businesses that have created a stable, recurring customer base that facilitates revenue growth by minimizing the customer loss ratio.
Generous Margins
Put simply; large margins enable you to make mistakes in your business and recover. As an example, Microsoft can attempt to develop a product, fail, and remain viable because its margins are very large. Restaurants struggle with any hiccup in their business because the operating margins are much smaller.
Limited Reinvestment Requirements
Owning a business that requires constant capital reinvestment just to maintain position are very difficult. The first business that I owned, a commercial printing company, suffered from this ailment. As technology developed in the market, we needed to continually invest in updated equipment just to maintain our market position. Instead, think asset-light businesses that can adapt inexpensively.
Non-Cyclical Demand
Attempt to find a business with revenue that is not dramatically impacted by economic ups and downs. Think about “needs” versus “wants.” More consistent industries generally include healthcare, automotive service, consumer essentials, and B2B services.
If you needed to give up one of these four characteristics, which one do you think you could best mitigate?
