Monday, January 30, 2012

How To Evaluate A Business

In business school I learned an easy way to evaluate a business from Rob Wiltbank - an awesome teacher and co-author of the book The Catalyst. He called them the "6-ables". If a business passed each of these 6 "ables" then it was a good idea. Here they are:

1) Feasible - Can you actually do it? Sometimes there are limits of money, nature, technology and laws. This is really mostly important for starting up a company.

2) Reachable - Can you talk (reach) to your customers? You could have the coolest product or service, but you also need to be able to tell people about it.

3) Valuable - Do customers want what you're selling? It's not enough for YOU to think it's cool, your customers also have to think it's cool too.

4) Scalable - Can you do it a million times almost as easily as the first time? This is why Microsoft is so profitable: They write their programs once and then sell it over and over again. The more you can do this, the better.

5) Durable (secret sauce) - How hard is it to copy your idea? This is your secret sauce that will keep you different from everyone else. To me, this is probably the most important part, but it is especially important when looking to invest in a company. Another term for this would be "competitive advantage". Apple's secret sauce used to be Steve Job's vision for sleek designs and seamless interfaces - you can't copy him. We'll see how Apple does without Jobs in the future.

6) Saleable - If you want out, will someone buy you out? Or, can you get others to invest in your business? This means your business is valuable to someone else.

Bonus 7) Traction - Prove it (for new business ideas). Do you have any currently satisfied customers? How many? An idea becomes much more compelling if people are lining up to hand you their money.

Pretty cool, right? When talking with people, I work through this framework. It's fairly comprehensive and doesn't get bogged down in the details. Clearly executing on an idea is also critically important, but this is the first step to see if it's even worth pursuing.

For creating our property management company, we worked through each of these too. Here are our basic answers so far:

1) Feasible - Yes, lots of businesses do it. Getting properly licensed seems to be a challenge, but it's very possible.

2) Reachable - Craigslist makes it super easy to find new tenants. Property owners are a little different though. One possibility is going to the county property record books. Another is talking to friends and real estate agents. So yes, our customers are reachable.

3) Valuable - Definitely, especially the bigger places and for owners who live far away. Plus, we've got the training and time to keep owners out of trouble with tenants and the IRS.

4) Scalable - Kind of. It isn't like software where you write it once and sell it a indefinitely, but in a way it is. For example, we can use the same tools for multiple properties. There is definitely a time requirement that can't be scaled since this is a service type of business.

5) Durable - The secret sauce. :) I honestly don't know if what we have is durable. One factor will be our properties (and their locations) which can't be copied. Another will be our systems/policies and interpersonal skills. These are soft things, that if done right will be very hard to copy.

6) Saleable - Maybe. I hope so. That will all depend on how profitable we are.

7) Traction - We've already had a couple people talk to us. So there's interest, but no paying customers yet.

So, when you're thinking about starting a business, or joining one, run through these "ables" and see how it stacks up.


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