I get asked all the time…… ”What is the best business to own”. The answer is, of course, it depends. It depends on your skill set, your strengths, your long term game plan for the business, what you want it to do for you and your family and your finances. Our goal at FranNet Carolina is to match folks up with the businesses that best fit them – after going through an assessment and interview process.
“No really Mike…what is the best business to own? In your opinion, of course.” Well ok, that is different. And if I am pinned down to answer this question, my answer is……a business that operates with a simple business model; that can grow significantly; that can produce a recurring revenue stream; and that can produce a good return on the initial investment and on an operating basis.
This opinion was formed years ago after playing a round of golf with a guy I had not met before. We had finished the round and were walking back to our cars and he asked me about my business and I asked him what he did. He said, “oh … I wash windows”. Cute answer. We both chuckled and I thought to myself, man he must wash a lot of windows to be able to afford the nice truck he was driving and play golf frequently. Later on that day, I mentioned his name to my wife and she said, “Oh I see his yard signs for his company all over Charlotte.” It was at that moment I gained significant insight into what makes a good business model.
THINK: Simple – Scalable – Recurring – ROI
Making the decision to get into business for yourself is a big one and should be given much consideration and thought accompanied by much research. For many, the big fear is of course, RISK. What if I invest money and time and start up my business and it fails?
There are ways to reduce your risk: One is to buy a franchise. You are buying a game plan and a system that can give you a real head start and improve greatly your chances of success. Another is to buy a business that is described by the words above… Simple – Scalable – Recurring – ROI. And of course, you can combine the two.
Simple: A business does not have to operate with a complex, innovative business model to be successful and generate good income. In fact, finding a business that performs one service and performs it well is simpler to run, less scary and probably has a better chance of producing an acceptable profit margin. One of my favorite franchises in 2014 operated in the mosquito and biting insect abatement business. Not glamorous; but what a business! They spray suburban homes (and some commercial customers) 7 times per year between the months of April and September. Each spray takes 15 to 20 minutes. As the customer base builds, efficient routes are set up to make sure maximum revenue is generated on an hourly or per customer basis. Few employees are needed and the business operates 7 months per year. Doesn’t get much simpler than that.
Scalable: In my client interviews, I may suggest a business to them and will be told… “oh that market is saturated already.” Rarely is that the case but because you may see a lot of a certain business in your town, you may make that assumption. “Could we really put in another dry cleaner and could we grow it?” Your business needs room to grow and you may be surprised how few customers, out of the entire market, your business needs to become successful. In my mosquito abatement business example, I ask my clients if they think that, over a 3 year period, they could get a 1000 or 1500 households, out of over 250,000 households locally, to use their service. That is less than one half of one percent but still represents a sizable business. In researching the business best suited for you, always consider scalability.
Recurring revenue: It was once said that the 8th wonder of the world is compound interest. The 9th may be recurring revenue. If you could build a business with customers that bought from you weekly or monthly, and do this every year because you gave them great service, you would generate a growing income stream that would build value in your business. Predictable income streams build equity and sell for a higher price than other businesses. In the mosquito abatement business, customer retention rates have exceeded 80% nationally. You only have to replace 20% of your customers annually and you still grow each year with each percentage point gained over the 20%!
Return on investment: Whether you are starting up a franchise or buying an existing business, you certainly don’t want to overpay for getting started. Some franchises have high fees (sometimes justified, sometimes not) and some owners of existing businesses ask for a selling price that is too high. (Selling price is negotiable). You want to feel confident that your business can generate enough income to pay back your initial investment within a reasonable amount of time, say 2 – 5 years, and can generate a good profit on an ongoing, operating basis. Because of their lower start-up costs, low overhead requirements and relatively high gross profit margins, service businesses (like my mosquito abatement example) give you a good chance to accomplish both. No matter how you get into business, calculating (pro forma) projections that are realistic for the first five years of business ownership is essential to determining your ROI potential.
Simple – Scalable – Recurring – ROI
For many people, this may describe a good business concept to become involved in, especially if you have never owned a business before.