Business Discovery - Part 1
A guide for entrepreneurs to discover their first or next business
For budding entrepreneurs being "open to anything" is a recipe for disaster.
There's thousands of different types of businesses and directions to go in. With no direction you will feel lost and most likely never get started.
The goal of owning a business is freedom - freedom to do what you want, when you want with people you want. To achieve freedom you need to find a business that builds off your strengths so you can make you a boat load of money.
This is first of multi-part series to create a business discovery roadmap. Subscribe to receive future updates.
Pretend you have interest in moving and tell the realtor: "I'm open to living anywhere, send me some listings". A realtor would ask questions to help narrow the search such as:
Do you want to live in a big city, suburbs or rural area?
Do you want to live near the coast or not?
Do you want to live in a red or blue state?
Do you want 4 different seasons, or hot all year round?
After narrowing down you can dive into specifics:
How many bedrooms/bathrooms?
Do you want a yard or not?
What is your budget?
How important is the school system?
We'll apply this same strategy to your business discovery
A lot of people say you have to find a business you are passionate about to be successful. This is bullshit. I not a "car guy" but operate a growing enterprise of 24+ auto repair shops.
You should be passionate about the process of running a business: identifying & solving problems, setting goals, developing your team & making money. The "widget" itself wether laundry, auto repair, garden gnomes or housekeeping is irrelevant.
The business must make money otherwise you've bought yourself an expensive hobby. Adjust your own financial acquisition criteria as needed:
Cash Flow to Owner:
After debt service & manager comp
Healthy Net Margin
Retail Occupancy Cost
Rent % of Sales < Net Profit % of Sales
Sales: $1 Million Year
Bad: Rent $200k (20%), Net $100k (10%)
Good: Rent $100k (10%), Net $150k (15%)
Average Sale Per Transaction
A low average transaction will require a ton of marketing to drive volume and staff to handle lots of transactions.
Dunkin’ Donuts average sale per customer is $5. To do $1 million sales @ $5 each that’s 200,000 transactions or about 550 per day!
A high average transaction will need very targeted marketing to drive the right customer and a solid sales process to convert leads
Solar panel average $16,000 per job. To do $1 million sales @ $16k each it’s 60 transactions or about 5 per month
You want to find a business model that fits your strengths. Are you someone who wants to manage volume and follow systems to create efficiency? Or are you someone who loves the art of selling? These are two extremes as there are many businesses that fall in between blending volume with sales process.
How are you going to fund the business? Obvious methods are cash & SBA loan
Cash is good for small biz
SBA Pro: 10% down option, 10 year term
SBA Con: Put your home as collateral
The best way to buy a buy a business is with owner financing. You can buy an existing cash flowing business with little money out of pocket and don’t have to go through all the hassle of SBA financing.
How does owner financing work?
The owner of the business becomes the bank
You make down payment & monthly payments every month
Every term is negotiable (rate, term, down %, collateral, etc. )
How will this new business fit into your current lifestyle?
You will start the business while you continue to work 40+ hours at your existing job or business.
Find a business that requires low time commitment, minimal overhead & low cash investment. A side hustle is a good way to start stack up for the cash and give you the courage to go all-in. It's a recipe for failure to acquire a business that will requires a lot of hands-on work & you can't allocate the time.
A side hustle may feel like a comfortable way to get start but you'll go much faster and further once you can go all-in
Burn The Boats
You quit your current job or selling your current business to go "all in" on the new business.
You are 100% committed to making it a success and will work as long and as hard to build the business. If you can go all-in on a business that's treated like a side hustle by the previous owner you could have an immediate impact.
Vertical or Horizontal Integration
A vertical integration is another step in the supply chain or sales process that another company currently handles.
For example if do water/mold/fire remediation you are ripping out the carpets, wet drywall & leaving. A vertical integration would be the contractor that comes in next to rebuild the room with new drywall, paint, carpet etc.
A horizontal integration would be a merging with a competitor in the same field or opening up additional locations. In my business we buy existing auto repair shops in our market or convert competitors to our brand.
Sell education/info product, drop shipping, coaching/consulting, +++
Low barrier to entry
Operate from anywhere in the world
Easy to scale
Must kick-ass at marketing, copyrighting, sales funnels, social media
Pizza, Dog toys, Haircuts, Tire shop, Laundromat, +++
High barrier to entry due to real estate requirement
Extremely local. Customers come from 1-2 mile radius (for major cities)
Capital required to scale
Housekeeping, HVAC, Painting, Senior Care, Water Remediation, +++
Medium barrier to entry - low to zero occupancy/overhead if mobile
High gross margins since "cost of good sold (COGS)" is usually minimal
Huge territory radius (1 hour +) if traveling to customer
Scalable by expanding the team & territory
A retail or service business will provide a solution to a local need. This is perfect for someone that is hands-on hiring, training & managing a team. The business will most likely be located in your backyard so you'll know the market & trends.
To browse businesses to for sale
Over the next few weeks I'll be diving into:
Buy vs. Build
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Business with Beers
Every week on my podcast I bring you the stories of entrepreneurs about building their business, wealth & passive income.
See you again next week!