Along with principles like agile, lean, and just-in-time production, the principle of MVP—minimum viable product—is a popular buzzword in business. Especially among start-ups and small businesses with tight budgets. (Well, big businesses also have tight budgets, but in a small business, it’s much more personal.)

Except it looks to me as if many entrepreneurs might be missing the essence of MVP. I see it in businesses that waste time and money, ugly and buggy products, and services that fail to satisfy customers’ needs.

MVP too often turns out to be too much M and too little V.

MVP can be a powerful antidote to the perfectionist’s trap of failing to launch until the product is perfect, but pushing crap out the door swings the pendulum too far. Both scenarios lead to failure: customers either have nothing to buy, or there’s no demand for an inferior product.

The key to any successful MVP design is to intimately understand the customer’s needs. But how do we know whether our design will earn customer happiness points? How can we tell if our MVP is too minimal or truly viable?

Customer surveys, prototypes and opinion polls can cheaply give us some useful early indicators of demand. But they’re only indicators.

The only reliable way to validate our design is this: “Has a stranger bought it?”

Your real customers are not friends or family giving sympathy votes, or beta testers who get free access. Validation through actually selling the product is the only test for viability—the crux of MVP—does it give value to the customer?

Also key is that the M of MVP doesn’t mean incomplete, but simple. The point of M is to invest the least effort and cost to test what works. But an incomplete product probably won’t satisfy the customer’s need. This holds true for every stage of your MVP development path.

For example, early versions of Google Docs had only about 3% of MS Word’s functionality, yet it was a complete product—all functions worked—and it satisfied users' needs for simplicity and collaboration. (A Smart Bear)

Google Docs now has much more complexity than its early versions, yet the development path involved a series of complete products, albeit simpler versions of the final result.

This aligns with principle #1 of the Agile Manifesto’s 12 principles: “Our highest priority is to satisfy the customer through early and continuous delivery of valuable software.” (2001)

Contrast this with the waterfall lifecycle, which many newbies conflate with agile and MVP principles. For example, developing a software system might involve building the database, then the front-end user interface, then the functionality. Although this is an incremental development approach that seems consistent with agile principles, none of the product iterations has value to the customer until the last release.

In other words, it's unlikely you'll get to sell the final, complete version of your product if your development path doesn’t deliver products that customers value at every single stage.

Every business needs four types of people:

· Customers to make purchases.

· Suppliers to provide goods and services.

· Employees to do the work.

· Owners to invest capital.

Customers want the best value at the lowest price. Suppliers and employees want the highest compensation for the lowest cost. And owners want the best return on their investment.

Sustainability hinges on maintaining a satisfactory trade-off between these competing needs, but it's impossible to achieve a perfect balance. Some will enjoy higher prioritisation than others.

So who comes first?

I suspect most entrepreneurs would argue that their customers come first because, without them, there would be no revenue and, thus, no business. Some might opt for their employees instead, claiming that you can't sustain a good client base without a good workforce.

Personally, I believe that owners always come first, but no-one ever admits to that because it's not politically correct. We've been socialised into believing (or at least claiming to believe) that “the customer is king” and “our people are our most important asset”. But when times are tough (cf. COVID), unprofitable customers are ditched and non-critical employees are retrenched. Owners are always first in and last out.

The tendency for owners to neglect their own needs is compounded by the media's schizophrenic presentation of entrepreneurship: you're either a selfless innovator striving to make the world a better place, or a corporate sociopath who'll stop at nothing to maximise personal gain.

There's no rational (or relatable) middle ground. No-one celebrates the sensible owners who look after their customers, employees, and suppliers, while also protecting their own financial interests. We're too distracted by Elon Musk memes and Bill Gates conspiracy theories.

As an owner, you assume all of the risk. Yet most of the owners I know believe that they're doing the right thing by putting everyone else's needs ahead of their own. They usually only pay attention to their own interests when their business is in dire straits, and by then it's often too late.

Look after yourself while you're looking after your business. No-one else is going to do it for you.

Failure demand is a false demand from customers for your services. It’s the opposite of value demand. But if value demand is when customers demand a service they’re willing to pay for, does that make failure demand something customers “want” but would rather not pay for?

In a sense, yes. But it’s much more than this.

Failure demand is, “The demand caused by a failure to do something…right for a customer”. (Medium, 10 Sep 2020) It was introduced by John Seddon in 1992 to highlight the distinction between systems that satisfied customer needs versus command and control-oriented management.

Value demand looks like quote requests, purchase orders, or the sound of the cash register’s ka-ching. It’s what happens before your customer writes an appreciative testimonial. These are the activities in your business that are driven by customers wanting what you’re selling.

On the other hand, failure demand is a buggy product to be repaired, a billing query to be answered, an unfathomable user guide that needs explaining, or making another call to the dispatcher to re-schedule the service consultant who didn’t show up. Again.

It’s the vague, generic job ad that garners 100s of CVs, each earning an impersonal template rejection email or, worse, the insulting last line in the job ad, “If you don’t hear from us, your application was unsuccessful.”

Both types of demand use up your business’s capacity. The one satisfies customers and earns revenue, but the other eats profits straight off your bottom line. Naturally, we’d want to reduce failure demand to free up more capacity for value demand.

But while it’s easy spotting failure demand activities in your business, it’s much harder doing something about them. The more you focus on them, the more you’ll get. Especially as you scale your business.

Failure demand thrives with management controls like activity-based costing, growing customer support call centres, standardised job descriptions, or rigid processes that remove decision making power from customer service. This is especially problematic in service-oriented businesses, where the one-size-fits-all service is almost guaranteed to fit no one.

This is the trap of failure demand, when management attention is mis-directed at inward efficiencies instead of systemic effectiveness in satisfying the customer’s need the first time around.

Failure demand is not fixed by addressing failure demand.

Don’t set targets to control the turn-around time or cost to fix errors. Don’t build admin and reporting software to monitor fault resolution. This just entrenches failure demand.

The only sustainable solution is to focus on the system that gave rise to failure demand.

So how do you know where your system is broken and where it needs fixing?

It starts with tuning in to your customer. Ideally, if every customer is satisfied and there are no come-backs, then you’ve eliminated failure demand.

The gains are typically much better than marginal. Many service-based businesses waste over 50% of all customer service activities on fixing errors. (Vanguard Consulting) The problem with failure demand is not the demand from failures, it’s your systems that aren’t meeting customer expectations.

Eliminate failure demand and you’ll probably discover all the capacity you need to build loyal fans and grow your business.

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References:

1. “Failure demand vs Value Demand”, Medium, 10 Sep 2020.
2. “Failure Demand”, Vanguard Consulting, sourced 08 Oct 2021.

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Proposed amendments to the Employment Equity Act include the prohibition of non-compliant companies from doing business with state entities. Of particular interest is that the compliance requirements for small enterprises (i.e. those employing fewer than 50 people) are lighter than those for large companies.

Unsurprisingly the Department of Labour has framed this as a victory for SMEs, but I'd argue it's yet another administrative incentive for staying small instead of scaling up. The Broad-Based Black Economic Empowerment framework, Labour Relations Act, and Small Business Corporation tax structure are just some of the other regulatory initiatives that directly encourage entrepreneurs to dial down their ambition.

South Africa's entrepreneurial environment could not be more schizophrenic. On the one hand, a vast network of government agencies, incubators, and enterprise development programs relentlessly encourage people to start their own business. But those who do, and who survive for long enough, quickly discover that there is an exponential red tape burden beyond a tipping point.

None of this makes any sense.

The cost of starting a business (i.e. actual cash outflows as well as lost opportunity costs and expenditure in kind) is very high, yet the survival rate is very low. So why are wide-eyed entrepreneurs, ill-equipped for the reality of running a business, herded lemming-like to the precipice of economic disaster?

Every other medium of economic participation has an exhaustive framework to protect new entrants from bad actors as well as their own naiveté. Job-seekers are protected by labour laws. Borrowers are protected by the National Credit Act. Investors are protected by a litany of financial regulations and agencies.

There is no safety net for entrepreneurs. Instead, those who are brave, stubborn, smart or lucky enough to beat the odds are rewarded with an avalanche of red tape that punishes them for growing their business, creating jobs and contributing to socio-economic development.

Amazon and Costco sell the same things with the same variety of products. Yet while Amazon squeezes other retail chains out the market, Costo is not only relevant, but is expanding globally.

How?

To set the context, Costco operates a membership business model with profits achieved through high volume sales and rapid stock turnover (versus raising prices for higher margins).

Although membership is not a loyalty scheme—it costs $60 or $120 a year—customer churn is phenomenally low at only 9% (Future Work Technologies, 2019). How Costco drives 91% of customers to renew their membership each year is that it consistently impresses them with high quality products at exceptionally low prices.

With a massive inventory range and high-volume turnover, one could imagine Costco’s outlets taking up acres of space. Indeed, while each store is really just a warehouse, space is optimised by stocking only 1 or 2 of the best brands for each product line. By comparison, while Walmart Superstores carry 140,000 SKUs, a Costco warehouse might hold as few as only about 4,000 SKUs.

So instead of a bewildering choice of a dozen different brands of coffee bean, you might find only the 1 brand that Costco deems the best quality that still assures a low price. As another comparison, while US supermarkets have a 30% mark-up on average, Costco’s average mark-up is a mere 11% (PolyMatter, 2019).

The combination of bulk buying, lowest price, and high quality criteria means most suppliers are clamouring to win those 1 or 2 spots on Costco’s shelves. This competition plays directly into Costco’s quality-price promise to customers.

The key difference between Costco and the failing retailer chains is that, unlike retailers who sell indiscriminately, Costco’s approach is to stock only the best quality brands at the lowest price in each product line.

But that sounds a lot like most retailers’ tag lines. It’s not what really sets Costco apart.

Costco’s key success factor is its ruthless buying policy: if the quality-price criteria can’t be satisfied, it simply won’t stock a product line at all.

Could this principle work in your business? For Costco, losing a few brand snobs is evidently well worth the loyal customers who keep coming back.

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References:

1. “HOW COSTCO WORKS BUSINESS & REVENUE MODEL”, Future Work Technologies, 2019.

2. “Why Costco is Cheaper than Amazon”, PolyMatter, 25 Oct. 2019.

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Most entrepreneurs rely on organic growth by default. Building a market footprint from scratch has its merits, but it's often a slow and speculative approach. The alternative is inorganic growth: partner with other companies that already have the clients, product lines, systems, talent, and other assets that you seek.

Mergers and acquisitions are two of the most common options for joining forces. So which is right for you?

Acquisitions can be done on a share or asset basis. The former typically involves the transfer of all assets and liabilities, while the latter is limited to specific resources and obligations (which may require third party consent, such as creditors for encumbered assets). Their tax implications can vary considerably. For example, securities transfer tax will be levied on the sale of shares, while the sale of assets may incur VAT.

Mergers are often assumed to involve two companies blending together into a new entity with shared equity, but there are actually a variety of possibilities. One of the merging entities can subsume the other (instead of both amalgamating into a third company), and the consideration for the deal needn't involve shares (cash is an obvious alternative).

One of the biggest advantages that mergers enjoy over acquisitions is the immediate and automatic transfer of many assets by operation of law (which cuts out a lot of painstaking admin). They can also benefit from  tax exemptions, subject to how consideration for the deal is structured. On the downside, they're typically "warts and all" transactions, so thorough due diligence is critical.

Ultimately, the choice of deal structure should be informed by what you're trying to achieve. If speed and simplicity are of essence, and you're certain the fit is right, then a merger will likely be preferable. On the other hand, if you're only interested in parts of a company instead of the whole, then an asset acquisition will probably make more sense.

When describing your business to a stranger – a customer, a supplier or potential business partner – how do you help your listener to truly get it?

The challenge, like with sales calls or business networking introductions, is that it’s easy to launch into explanations that bore the listener with details. That’s far from the ideal conversation where speaking and listening are shared, not one-way traffic, and where both sides feel understood.

It takes time and skill to craft an opening sentence or two that gets your listener engaged. So what’s the best way to figure out what information matters?

The enterprise context model (ECM) can be a time-saving technique to literally draw a picture of who and what matters to your business. At its core, the ECM is a simple black box of your business that shows the key stakeholders that interact with it.

It’s a tool every good business analyst (BA) will know. And because every good entrepreneur is also at least conversant with key BA techniques, this should be a standard tool in every business owner’s toolbox.

So why don’t more entrepreneurs use it? Anecdotally, I think most people just don’t know about it. It’s not something I’ve seen in management textbooks or online literature for entrepreneurs. Also, it’s a simple-looking model, so maybe its apparent lack of sophistication is a turn-off?

The thing is, the ECM has immense power in its simplicity and its variety of applications. You can use it to design a new venture or product, review your business strategy, rapidly onboard new hires, or identify the best angle to open a sales call.

Here’s how it works in a nutshell:

The easiest way to start is to think of a simple linear process model of inputs, throughputs and outputs. Your business is the “throughputs” part, which we show as a “black box”.

On the left, we show key sources of inputs and on the right are the targets of our outputs. This picture already tells us a lot. For starters, it directly illlustrates where your business fits in its industry value chain.

Add to this your collaboration and accountability stakeholders below and above the enterprise box. Collaborators are vital in supporting or even outsourcing key processes, while accountability stakeholders are people we need to satisfy for governance, social or economic drivers.

If you start with my template illustrated above, you’d obviously replace each yellow stakeholder box with names of specific players, like suppliers or distribution channels, or at least aggregate each type of stakeholder. You may also want to label each arrow with the specific things that flow into and out of the business.

And that’s it. Plain and simple.

Actually, I lie.

The purpose of the ECM is not merely the output of having a picture. I’ve found time and again that the greatest feature of the diagram is not the diagram, but the conversation in developing it. The process is both conflict-rich and unifying in getting your team on the same page – literally!

And we’re only scratching the surface of the ECM’s applications. You can integrate it with other business models, like the value chain, process models, capability maps, or the business model canvas. You can use it to strategically surface interaction weaknesses to overcome departmental silos or business-versus-technology barriers.

But even with its most basic use, you’ll have a plethora of angles and stories about your business.

Most importantly, the enterprise context model will help you clarify who your key stakeholders are so you can tell each stakeholder just the right story about your business – the story that matters to them.

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You've finally reached the Promised Land of entrepreneurship: a business that is small enough to manage without too many headaches, but large enough to churn out healthy profits like clockwork. So what's the best way to extract all of that surplus cash and reward yourself for years of blood, sweat and tears?

There are three obvious options: remuneration, dividends, and shareholder loans. Many owners will be primarily concerned with their respective tax implications, which will vary depending on your particular circumstances (e.g. whether your business qualifies for the Small Business Corporation tax structure or not).

As a rough rule of thumb, increasing your salary will probably be more tax efficient than paying a dividend until you approach the highest income tax bracket (i.e. 45%). Yes, the dividends tax rate is only 20%, but they're paid from after-tax profits, so the effective tax rate can actually end up over 42%.

Increasing your remuneration has the added benefit of reducing your company's taxable income, but bear in mind that SARS can disallow salary deductions if they're deemed excessive relative to market benchmarks.

Loans are usually not a good idea. Interest-free or low-interest loans are deemed to be dividends and will be taxed accordingly. However, unlike actual dividends, they'll continue to be taxed as deemed dividends until they're repaid. Loans can also expose your personal assets to risk in the event of business creditor claims.

Tax aside, there are some other important factors to consider. Increasing your remuneration has the advantage of putting cash in your pocket immediately. Dividends, by contrast, tend to be declared at the end of the financial year, so you'll have to wait for your payout.

That said, the cash flow advantage of a salary increase can be a double-edged sword. We tend to adjust our lifestyle according to our earnings, so salary increases often get treated as disposable income instead of invested for long-term financial freedom. Dividends can just as easily be splurged on a new car or overseas holiday, but the delayed gratification fosters sobriety.

Finally, dividends don’t impact the value of your business in the same way that salaries do. As an expense, salaries reduce your profitability, whereas dividends come out of your retained earnings. If your salary goes up, then your profits and retained earnings will come down, eroding business value in the process.

Look at it from an investor’s perspective: would you rather buy a business that generates surplus earnings for its owner, or one that operates on thin profit margins due to bloated management salaries?

Why does Hollywood keep churning out atrocious sequels?

Money.

A simple answer, but explaining why it works can be edifying.

Between 1996 and 2016, 532 of the roughly 13,000 movies produced have sequels. (Vox, 2016) Of those 532 sequels, only about 25 earned a critic rating better than their original.

That means 95% of all sequels over that 20-year review rated worse—sometimes much worse—than their original. Professional and amateur critics alike lambasted them. Whatever your favourite genre, from Blair Witch to Rambo, Bridget Jones, or the Ocean’s Eleven franchise, the sequels were often formulaic: the same characters solving the same problems. Wash. Rinse. Repeat.

Yet on average, sequels earned 8 times their original movie’s revenue.

A paradox, it seems. How can a sequel be bad yet still make so much more than its original?

If there’s a movie franchise of sequels that you love, you might notice that overall production quality is neither excellent nor really bad. Usually, it’s good enough.

While it seems villains, story lines and scripts roll off a factory conveyor belt, so do the cast and crew, including the extended “business”, like the marketing and distribution teams, finance and IT. Compared to the first time around the block, re-assembling the team and business systems is quick and easy, i.e. low budget, when you can simply copy the template.

But that speaks to only the cost side of the equation. No one made money by making something cheaper. You only make money by actually selling what you make.

As a producer, it helps enormously that you’ve validated your business idea in round one when the original movie has earned millions. Add to this solid customer feedback: your fans are literally telling you what they want more of.

And that’s exactly what that amorphous movie industry we call Hollywood does: it gives the fans what they want. (Usually!)

Sequels are made for the fans, not the critics.

In fact, in any business, you want to have some critics. Your product should not be for everyone, only your tribe of loyal fans.

Here’s a rule of thumb: the harder it is for your non-fans to identify themselves out of your target audience, the weaker your product and marketing design.

Movie sequels might not push creative or technical boundaries. Some might not even be “art”. But if there’s proven demand and you’ve built a business system to satisfy it profitably, then you’re surely onto a winning formula.

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It's natural to equate success with outcomes: we celebrate when our team scores a goal, when we receive a diploma at the end of our studies, and when our bank balance gets bigger.

Obviously outputs matter, but fixating on them distracts us from the key inputs that influence where we end up. This is particularly relevant in business, where obsessing over the numbers on a financial statement can blind us to how those numbers got there in the first place.

You can't scale a thriving business (or turn around a hot mess) if you don't understand the root causes. This ought to be self-evident, yet many business owners only track lagging indicators of success (e.g. sales, revenue, net profit) with scant regard for the leading ones.

One simple tactic for getting to the bottom of your success (or lack thereof) is by asking a series of nested "why" questions. As you peel away the layers, you'll likely uncover hidden catalysts shrouded by blind spots.

For example, imagine a business grows its revenue from R1 million to R10 million over the course of several months. What's responsible for this success?

Let's start with the first and most obvious "why": why did their revenue increase so sharply? Perhaps the primary cause was the launch of a new product line that their existing customers snapped up like hot cakes.

Why did they introduce this new product line? Let's assume the sales manager insisted that they do so.

Why was the sales manager so insistent? Presumably he believed that their customers would love it.

Why did he believe this? Maybe he had a hunch based on his market experience, which was validated when someone inquired about the product on the company's Facebook page and a few dozen people seconded the request shortly afterwards.

The obvious conclusion is that customer feedback is a leading indicator for sales. Hardly ground-breaking insight, but it has profound implications if this fictional business (like many actual companies) allocates substantially more time, effort, money and other resources to growing sales (a lagging indicator) than soliciting customer feedback (a key leading indicator).

It usually only takes four or five "why" questions to uncover a key leading indicator. When you do, treat it with the same reverence as your output priorities: set targets, plan how to achieve them, and track your progress.

Boredom is a virtue. Its absence directly limits entrepreneurial growth and success.

When last did you embrace feeling bored for an extended period, say, at least 10 minutes?

Chances are, you haven’t felt bored recently and, when you did, you most likely killed it by grabbing your cell phone. These anti-boredom devices are ubiquitous, whether we’re in a shop queue, traffic, or even the toilet.

Almost everyone has experienced boredom as a negative state, even distressing and tiring. Workplace outcomes are often negative: anger, absenteeism, errors, risk-taking.

Avoiding boredom is reinforced by social conditioning: the devil makes work for idle hands. Militaries love to make “busy work” to keep soldiers from vandalism and sabotage.

In moments of low stimulation and underwhelm, most people would rather fill slow time with an activity, even an unpleasant one. Researchers wrote in ScienceMag (2014): “[We] found that participants typically did not enjoy spending 6 to 15 minutes in a room by themselves with nothing to do but think…many preferred to administer electric shocks to themselves instead of being left alone with their thoughts.”

But boredom has a bad rap that’s just not merited.

As with all emotions, boredom has a message and drives specific behaviour in response. Occasionally, boredom is a coping response to information overload or complexity that “goes over our head”. But most commonly, boredom tells us that we lack presence, that our current options are not meaningful or novel enough. This is different from “having nothing to do” or feeling ennui—it’s rare for anyone to literally have no options to do anything. Boredom is when the available options are not compelling.

Hence, boredom drives us to change our activity, to increase stimulation or meaning. But if we can’t change our task, we’ll find stimulation in our thoughts.

Sometimes we’ll get stuck in negative thought patterns, like ruminating on our shortcomings or fixating on unsolved problems. Conversely, people “with high working memory capacity are more likely to engage in prospective mind-wandering, and…autobiographical planning.” (Consciousness and Cognition, 2011) In other words, we’ll plan and anticipate future goals.

When our thoughts turn to shortcomings, problems or goals, we’ll probably want to do something about them. In this way, boredom can enhance creativity and problem-solving.

Some research shows that an acute sense of aimlessness when bored could prompt us to ponder existential questions, meaning-of-life stuff, down to our very identity and who we want to be.

But if we’re always preoccupied with day-to-day trivia, we’ll rarely lift our heads to ponder the bigger picture and a meaningful life. (A surge in recent years of depression and anxiety disorders correlates with increased access to anti-boredom devices.)

For entrepreneurs, this can profoundly affect our relationship with our business and its raison d’etre.

Paradoxically, if boredom is an emotional trigger to daydream a healthier life and better business, then the act of envisioning the future instantly stops boredom. And implementing the plans to achieve that vision further reduces the opportunities for boredom.

So how do we exploit boredom, especially as a business owner? After all, entrepreneurs can’t ever be bored when there’s always more on the to-do list than time available to do it.

I’m obviously not suggesting boredom as the goal; rather, make time for uninterrupted thinking. Carve out small chunks in your day to meditate. Anything from 5 to 15 minutes once or twice daily can help us re-connect with our purpose. Longer chunks done weekly or monthly are good for designed reflection or a thinking framework to revise strategies and tactics.

This is the essence of strategic tasks: where the sense of pressure or urgency is low, but meaning and impact are high. It may look like we’re doing nothing, but just thinking is probably the most important activity an entrepreneur can do.

When last did you think? I mean, when last did you really stop doing to just think?

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References:

1. “Just think: The challenges of the disengaged mind”, ScienceMag, 4 Jul 2014.

2. “Back to the future: Autobiographical planning and the functionality of mind-wandering”, Consciousness and Cognition, Dec 2011.

Image credit: Wallpaper Flair

The Employment Tax Incentive is a boon for entrepreneurs who want to hire and develop talented junior employees. However, a recent SARS private ruling highlights that there are limits to how far business owners can take advantage of the ETI.

The ruling concerns a company that enrolled student employees in an external training program managed by a non-profit organisation. The students received a tablet, data and monthly cash stipend as incentives for persevering with their training.

However, while the students were employed for a year, they had to forfeit their salary for the duration of the training program with no guarantee that their employment would be extended thereafter. Furthermore, instead of performing any actual work, their only duty was to attend the virtual training courses.

SARS had to determine whether these students qualified as employees for the purpose of the ETI. According to the ETI Act, an "employee" is any natural person (excluding independent contractors) who:

1. Works directly for someone; and

2. Either receives, or is entitled to receive, remuneration from their employer.

SARS concluded that the students did not satisfy these requirements and, therefore, that the company was not entitled to claim from the ETI.

While this is a private binding ruling and limited to the company in question, it does set a precedent for other entrepreneurs. The ETI is a great opportunity for SMEs to grow their teams cost-efficiently, but creative schemes that border on exploitation won't cut the mustard.

The Competition Commission vetoed the sale of Burger King to a foreign buyer based on, for the first time, BEE and not competition. (Lexology)

Is this another short-sighted bureaucratic bugger up?

Yes.

On 1 June, 2021, when the commission blocked the deal, it cited concerns over black ownership dropping from 68% to 0%. This was despite the buyer committing to 4 other significant BEE-related goals worth hundreds of millions, possibly billions, and directly benefitting over 1,250 black workers and plans for future black ownership.

Although ownership is an important BEE factor, the commission is obviously misinterpreting BEE and competition legislation. In its view, ownership apparently trumps all other factors that might support BEE, including denying present black owners from realising the value of their investment.

This runs against the intentions of BEE and the commission’s mandate. The decision directly prejudices blacks from participating in the economy by (a) blocking black owners from growing their business and cashing out and, (b) blocking or slowing benefits to thousands of black workers and suppliers.

The decision also sets a precedent that disadvantages everyone in the economy, especially black entrepreneurs. To the cynical, it’s another notch in the woke list of “white privilege” factors: reducing black ownership is irrelevant to a white-owned business.

What the commission is actually saying to black entrepreneurs is, “If you’re black, you can sell to only other black entrepreneurs.”

That restricts buyers to only South African investors (because non-South Africans can’t be “black” in BEE terms) and only those who are blacker than you.

It seems the commission is missing the point of entrepreneurship being to grow your business in order to enjoy the profits, whether as dividends or exit capital. Especially that last bit about exiting. When you sell out and you’re limited to a tiny pool of buyers, it devalues the realisable value of your business. It’s a clear disincentive against black entrepreneurs to grow beyond a small business.

It’s ironic that, instead of assuring healthy competition, the commission is stifling it. It also reinforces the concentration of black wealth amongst only those few who can afford major buy-outs and a key failing of B-BBEE not actually being broad-based.

What to do?

Fortunately, as statistics indicate, most businesses are not big enough that their sale triggers an eyeballing by the Competition Commission. So don’t fret about it. Just keep building your business.

In fact, building a business big enough to merit the commission’s attention would be a badge of honour—would you prefer an insignificant business or one that gets the Competition Commission’s panties in a knot?

Image credit: Wallpaper Flare.

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Most entrepreneurs know that profitability matters, but there's more to your bottom line than meets the eye.

Your accounting profit reflects how well you're pricing your goods or services and controlling your costs. It's a measure of business sustainability as well as management competence.

However, accounting profit is strictly limited to business line items and excludes an owner's investment circumstances. Therefore, it's a reasonable indicator of business performance, but not a reliable measure of investment performance.

Your economic profit, on the other hand, includes your required rate of return (i.e. the return that you need to justify your investment risk). Many entrepreneurs under-estimate their required rate of return, and it's not unusual for an owner-run business to make an accounting profit but an economic loss.

For example, consider a business that makes a net profit of R1 million and pays a dividend of R500,000. Many owners would be delighted with these results.

But what if you had to invest 10 years and R10 million to get your business to this point? If you had allocated that same capital over the same timeframe somewhere else, you could have enjoyed a better return with less risk (e.g. you would have more than tripled your capital by simply investing in the S&P 500).

The distinction between accounting profit and economic profit is critical, because your business isn't just a place to work. It's also an asset that can (and should) create wealth for you.

Accounting profit tells you whether your business is making enough money for itself. Economic profit tells you whether it's making enough money for you.

Popular business literature typically focuses on either big companies or start-ups, seldom the guys in the mid-sized sector. Yet mid-sized companies—let’s say, those with revenues of at least R100m per year—are usually much more resilient than their smaller cousins.

Illuminating data from US companies during the 2008 financial crisis show that 82% of the mid-sized players survived, while only 57% of small businesses lasted. Medium businesses also added an average of 20 jobs each while big companies down-sized. (Harvard Business Review, 2016)

We see similar results in South Africa during the lockdown crisis, where small ventures are most at risk, while medium and large companies have deeper reserves to ride out the storm.

But the challenge with inferring a company’s resilience based on its revenue, or even its net profits, can be grossly misleading.

In our M&A work, we regularly review client and acquisition target businesses. What we often find is that, although the financials might flatteringly put a business in the “M” category of SME, the underlying fundamentals are much closer to the “S”.

In other words, the business has grown, but its capabilities have not scaled. Growth is where inputs and revenue grow at the same rate, whereas scaling leads to revenue increasing exponentially faster than costs.

In scaling, the business “machine” that generates those revenues is more intelligent, efficient and reliable than a business with a more-of-the-same approach to growth.

It’s like seeing a business with R100m in revenue trapped by its systems designed for only R10m. It’s not sustainable.

If you want to scale your business sustainably—versus purely grow the financials—here are 3 areas to focus on:

1. Define your strategy by your market position and brand identity. Vision, mission, KPIs and financial projections are important, but they’re stand-ins for real strategy.

Customers won’t care about you if they can’t distinguish your brand from your competitors. No business has a strategy unless it’s driven by how customers see it and experience it.

2. Don’t replicate; build capabilities to scale. You may have found a niche and grown rapidly, so there’s nothing wrong with a “rinse and repeat” growth approach to exploit this.

But riding the crest means you risk crashing when the wave breaks. Fundamental growth means continually asking what your business must look like in order to capitalise on the next wave.

Planning for future scenarios means pre-emptively designing your talent, processes and technology to be ready for the next scenario and not playing catch up after the world has changed.

3. Systemise. I’ve noticed many of our clients baulk at the word, as if I’ve just sworn like a sailor at them. But in fact, innovation and growth are impossible without an underlying platform of stability, which can only be achieved through governance and SOPs.

Start by mapping your key value-chain capabilities, then prioritise which ones will yield the greatest value from raising their maturity. Stabilising how things are done not only increases quality and efficiency, but it literally liberates attention to focus on strategy and innovation instead of the minutiae of operational work.

Whether you’re building a lifestyle business or an asset to fund your financial freedom, use these techniques to level up your business.

(Image credit: Fintel Connect Technologies Inc.)