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.

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.

Image credit: Eat This, Not That!

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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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.

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.)

The balanced scorecard is misleading. Perhaps it’s even a misnomer.  Developed by Robert Kaplan and David Norton, it was popularised by management consultants (including me!) in the 1990s. The philosophy helps to balance executives’ attention on a spread of KPIs (key performance indicators) instead of fixating on, say, only a financial indicator or a growth target.

The model’s generic areas of focus are financial, customers, internal processes, and innovation and learning.  A good consultant would facilitate clarifying your vision, then devolving this into an objective for each area, which then cascade into KPIs and key results for each objective.

For big companies, Balanced Scorecard came like a panacea to corporate silos and their myriads of often conflicting targets and metrics.  The model helped simplify complicated plans and focused execution on what mattered most.

All fine and well for big business, but this is invariably the completely wrong approach in a small business.  Executing a strategy—or even tactical plans—with attention on so many areas and KPIs is precisely what blocks many entrepreneurs from success.

The concept of “scarce resources” is not merely a concept in small business, but a lived, daily reality.  As owner-managers in small businesses, every decision we make should be to move the needle on just one strategy or key objective.  There’s no luxury of a corporate head office staffed with MBA graduates fussing over exotic models.  We cannot afford to distract ourselves from a singular focus.

If you’re familiar with Balanced Scorecard and you’re keen to apply it in small business, there is a hack solution.  Instead of balancing the 4 perspectives with equal priority, arrange them hierarchically where the lower levels support and enable the higher levels.

Starting with financial objectives at the top (e.g. revenue, EBIT), identify the customer targets that will achieve this (e.g. NPS, CSAT), then the internal processes that enable these (e.g. cash cycle, conversion rates, quality), and lastly the underlying innovation KPIs that can improve all the higher-level metrics (e.g. suggestions per employee, time-to-market).

If you’re questioning why finance is the highest priority, then the more important question should be, why are you in business?  With this adapted structure of finance as the priority, there’s plenty of room to serve the community and “make the world a better place”.  If finance were not the top priority, you can’t achieve anything else.  Even not-for-profit companies know this truth about the money.

If you want entrepreneurial success, prioritise one thing at a time.

Holding out for better days is not a viable business recovery strategy. The recent re-tightening of lockdown rules should prove that this external locus of control – expecting factors outside our business to fix our business – is really no control at all.

If you’re a business owner struggling to keep your head above water, you’ve surely taken some steps to stay afloat. But maybe it’s time to get unreasonable, time to adopt extreme measures.

“Extreme” doesn’t mean cutting costs to the bone, though that might be needed, or taking reckless risks. I mean trying new combinations, or trying entirely new things.

“Extreme” includes trying on thoughts and emotions that you’ve been afraid of, until now. Here are some thoughts that might be scary, but life-saving for your business...

1. Get help

The combination of economic uncertainty, social distancing (physical isolation) and a bleak vista of the middle-distance future easily conspire to thwart even the most optimistic personalities. Getting help should span business consulting, personal mental health and everything in between for you and your team.

Take an agile approach and contract on just the next month’s quick wins or next 3 therapy sessions. A business coach can help keep you focused on near-term goals. A therapist can help preserve a positive outlook. It needn’t cost more than a few thousand rand.

2. Change your strategy

Start with your owner’s mandate: can this business give you the returns you deserve for your time and money? How can you build confidence and commitment in this?

Can you change your business model i.e. the fundamental way you make money? For example, with the property rental market declining since COVID started and, rather than holding empty rental space, property developers are switching from build-to-let to a build-to-sell model.

Analyse your product-market mix and prioritise your intersecting niches of product lines and customer segment. Which niches have the most profit, the best cash flow, the quickest sales cycle, or least competition? Can you shut down poor-performing niches and survive on only the one or two best niches?

3. Overhaul your operations

Take a zero base budget approach and imagine re-building your business from the ground up. Can you deliver the same value to customers with less infrastructure, less labour, use outsourced services, or find suppliers with better payment terms? Can you automate or exploit better technology to improve productivity?

4. Consider business rescue

In the same way that a debt rescue practitioner negotiates easier payment plans with personal creditors, business rescue can ease the burden with business creditors and develop a plan to turn around a decline. The success rate is not high – estimated at 10%-30% – but it could be a better option than immediate liquidation. (fin24, 07 Jun 2020)

Could you achieve this result informally? E.g. contract on exclusive supplier agreements to get longer payment terms and extend your payables’ days.

5. Keep comms channels open

When there’s bad news, the worst thing you can do is keep your support team in the dark. Keep your partners, staff, even clients and suppliers informed of your plans.

Now might be a good time to lean on them a little differently and ask for input in designing your turnaround. Getting their contributions also could build a sense of shared ownership, which raises their commitment to seeing you win together.

6. Micro manage your plan

This is not about micro managing people – focus on the results. Get obsessive about your short-term goals because you don’t have the luxury of waiting.

Break down your planning into shorter periods. If you had monthly management meetings, run them weekly with weekly targets and deliverables. If you had weekly team meetings, start daily stand-ups, and again, set goals to match the new timelines.

7. Do what scares you

Each of these tactics is surely not news to you, but maybe there are combinations of them that you’ve not yet thought of. As the saying goes, if you want different results, take different actions.

But different actions start with different thoughts and feelings. The bigger the result, the scarier those new thoughts and feelings.

If ever there was a time to epitomise entrepreneurship, it’s when the going gets tough. Because this is what it means to be an entrepreneur: the courage to bring things into reality that others cannot.

The unique value that you create for your market, and the distinct brand that you build around it, doesn't exist anywhere else. These wheels need to be invented.

On the other hand, it's unlikely that your administrative systems and management controls warrant extreme divergence from established standards. Acquiring these ubiquitous wheels from someone who has already invented them will probably be good enough.

Many entrepreneurs are tempted to build every facet of their business from scratch. This is both unnecessary and risky, because it's impossible to predict with certainty how long it will take or how much it will cost. It also delays growth, because scaling without consistent and sustainable benchmarks is a gamble.

Growing a business may feel like invention, but a lot of it turns out to be unnecessary reinvention.

The alternative is acquisition: get what you need from someone who already has it.

Are you still measuring productivity as profit ratios on your income statement, or sales conversion rates, or widgets per worker? If you’re an owner in a small or medium business, it’s time to introduce a different metric to measure performance: learning.

A lot of traditional methods for adapting to change involve rigorous, detailed and slow change programmes. This approach often leads to perfect product designs and intricate changes to sales and production methods, but by the time the solution reaches real customers, it’s not what they want.

Unless you’re in a well-established business selling proven products or services to customers whose needs seldom change, you’re unlikely to remain competitive with industrial-era management.

Without learning, concepts like agile, MVP (minimum viable product) and pivoting are mere clichés. Specifically, the learning is about validating your ideas as quickly as possible.

Lean validation improves your organisational learning to respond to market needs and be more successful, or at least to stay in business during tough times. Here’s how it works…

As a customer-centric business, your starting point is to define your customer, problem and solution hypotheses. The customer hypothesis describes our assumptions of who we think our customers are. It could be based on demographics, but more likely, a good customer hypothesis identifies people in specific situations or with specific behaviours or preferences.

E.g. people who want to do something about global warming but do it as conveniently as possible.

Then define this group’s problem hypothesis. The problem is not just the symptoms we might observe, e.g. “People aren’t recycling.”

Go deeper to find the root cause behind what we think the customer’s problem is. E.g. “They forget to put out recycling the night before,” or “They don’t know how to sort the 7 different types of plastics,” are two discrete causes. Each one might need a different solution.

But don’t worry about the solution just yet, because so far we’ve likely made multiple assumptions. We need to eliminate them by proving or disproving them, transforming them from assumptions into facts.

Identify as many core assumptions as possible. Focus on the riskiest ones that, if incorrect, would break your business, or at least guarantee product failure.

Then ask, “What do I need to learn?” Starting with the most risky assumptions, design your MVP as an experiment to test your hypotheses.

To test your assumption, figure out what you actually need to build in order to learn if the assumption is valid. What you build is not necessarily the MVP itself – imagine investing the time and money in building an actual product that no one wants!

A good experiment helps you to fail fast. Which is quicker and cheaper: building a survey and collecting 100 responses (from the “right” customers) or building a prototype and trying to sell it to 100 customers?

Decide on the minimum success criteria. How many “yes” responses will be good enough? Just 1? Or 10% of all responses? Or maybe 100%? How many responses in total would yield a statistically reliable result?

Now get out there and test your hypotheses. Using the data you gathered from real customers, is your assumption validated? If yes, move to the next stage of development, which is to test your next riskiest assumption.

As soon as an assumption is invalidated, it’s time to pivot to a new set of hypotheses. E.g. for the same type of customer, instead of the problem hypothesis being forgetting to put out their recycling, work with an alternate hypothesis that they don’t know how to sort their recycling. Then figure out new assumptions, design your MVP to test the riskiest, set your success criteria and run the experiment.

Only once all assumptions are validated would it make sense to invest in changing your product, sales and production processes to actually start selling the new product.

The goal of being agile in business is getting solutions to market quickly, but achieving that is by learning to fail fast.

There are very few brands that are truly remarkable and worthy of global renown. Even the most successful brands reach only an itsy bitsy fraction of the world’s population. In other words, “big” brands are successful despite their limited reach.

It’s good to have a grand vision for your business, but the surest way to get there is with small goals. That includes starting with the smallest market possible.

That might sound absurd, but aiming to please everyone leads to mediocrity. We end up with a business designed by committee.

If you reflect on when you started your business, I bet you over-estimated how big your market was. It’s normal. You wouldn’t be an entrepreneur if you weren’t optimistic.

Most start-ups and new products far underperform their up-take projections. So don’t plan to fail. Capturing the whole market doesn’t happen in one step.

When we limit our audience, we automatically pay a lot more attention to each special customer. Focusing on a select group of customers makes us lean, agile and efficient. Loyal fans can help us fix our product until we’re ready to scale up.

For your next product launch, imagine refining your marketing so that only your ideal customers respond. It will need you to define your audience precisely – vague, abstract criteria won’t do. Compared to trying to sell to the masses, a well-defined target audience is a small audience.

Then imagine if everyone who responds buys from you. Now imagine that everyone who buys from you is so delighted they’re compelled to spread the word.

Win your first loyal customers, then build from there.

If limiting your target audience sounds scary, ask yourself which you’d prefer: a mediocre business for the masses, or a remarkable business in a profitable niche?

The difference between investing and gambling are predetermined exit conditions. So whether you’re starting out or scaling up, define the price you’re willing to pay and the point at which you’ll walk away.

In trading circles, this point of no return is typically expressed as a stop-loss: the price at which you liquidate your position and cut your losses to avoid risking a catastrophic drawdown.

Unfortunately, the stop-loss concept is anathema in many business circles. There’s a toxic culture of entrepreneurship that equates disinvestment with failure, and advocates going all in regardless of the risk.

Pathological obsession has its place, but it’s simply not appropriate for the vast majority of business owners who aspire to achieving financial freedom and creating generational wealth for their family.

No-one starts a business expecting to fail, but this is precisely what happens more often than not. The odds are stacked against you, so set a stop-loss: decide how much time and money you’re prepared to invest, as well as the results that your investment must generate to justify further perseverance.

Success isn’t a straight line. Loss is inevitable. So when you lose, make sure you don’t lose everything.

Almost every entrepreneur’s dream is to cash out and live financially free — to sustain their lifestyle without having to sell time for money.

In reality, when the time comes to retire, most entrepreneurs are bitterly disappointed. (That’s assuming their business lasts that long.) They realise too late that their company is not a company or it’s not worth an investor’s second look.

What do I mean by “not a company”? It’s not the legal definition that matters — you might have a company, partnership, or a franchise, but it might operate like a practice.

The dipstick test is to measure the company’s dependence on its owner. If you're easily replaceable, then you have a company. Can you take an uninterrupted 4-week holiday and come back to a business that’s in the same state you left it?

But if the work you do is a key driver of value to customers — e.g. your work is highly skilled, creative or personal in customer relationships — then you have a practice, not a company.

This applies to most professional services firms, like lawyers, architects, and plumbers. I’ve even seen some franchise contracts obliging franchisees to work regular hours. The only buyer who might be interested in your practice is another professional willing to trade places with you.

This is not what investors look for. Investors want to buy out the owners and replace them with a manager. They don’t want to be stuck in your role.

The owner-dependence test is a useful guide, but it’s often too subjective. For a more objective measure, especially for owner-managed small businesses, we prefer a more reliable method of assessing the owner’s discretionary earnings (ODE). This involves comparing the owner’s salary against fair market rates and adjusting for perks (like overseas “business” trips), dividends and a few other items. (For larger companies, we’d use other valuation methods.)

If your ODE is similar to a regular employee’s pay, then you own a job, not a company. Or if you earn less than fair market rates, you’re donating free labour to a charity — expect investors to cross the street to avoid this.

To appeal to any true investor, your ODE must not only show how a new owner can replace you with a professional manager, but also come out with enough, regular dividends payments that justify the risk attached to owning your specific business.

This is where most entrepreneurs fail to see how they’re not paying themselves enough. Accounting profits might all be positive, but in relation to the risk attached to your business, you might be making an economic loss.

For most small businesses, the dividends an investor earns should pay back their investment within 2 to 5 years. The higher the risk, the shorter the payback period.

In addition to ODE being too low, you might be subsidising your business in other ways. For example, if you’ve paid off your bakkie and use it for work, your company enjoys this free benefit. Profits might look reasonable, even healthy. But will you donate your bakkie to the new owner? I doubt it.

A new owner would have to replace it. So after normalising cash flow to present a budget where capital or depreciation (or any other free benefit) is paid, the company might actually be in  a loss scenario. Good luck finding a buyer willing to take over a business that can’t sustain itself off the bat.

And there’s a myriad other reasons, usually unique to each industry and business conditions. Landing a major client might shine up the financials, but a concentrated customer base poses a big risk. Old assets or technology past their best-before dates need more capital to replace them than simply buying you out. Competitors threatening a price war — are your pockets deep enough?

It’s too late to discover your “company” is unsellable when you’re ready to sell. It takes years to turn around and build up an unsellable company that’s attractive enough to investors. And offloading in a hurry typically gets you barely the book value for the assets before winding down and de-registering.

As a business owner, your strategic planning process should never be limited to simply planning your business strategy. It should always start with your shareholder exit goals: what’s your price and when do you want it? Then work backwards so your business funds your financial freedom.

Is your business performing well? There are two ways to answer this.

First, is what you’re getting out of your business worth what it’s taking from you? Using my Triple-F model, we could measure this as the finances invested and extracted, freedom your business takes or gives you outside your business, and fulfilment in your work and the difference you make in the world.

If you could invest everything you’ve put into your business somewhere else, could you get a better return? Are you satisfied with your Triple-F score?

The other angle is to consider how other businesses are performing and how your business compares. This isn’t about keeping up with the Joneses, but assessing what’s possible and realistic. If your specific market has a proven ceiling of selling only 1,000 widgets a year, then a goal to sell 1,001 widgets next month might be an impossible target.

I can’t help you make the first assessment – we’d need a direct conversation for that – but a few trends in the local small business environment might help you answer the second question. If every business is struggling equally, it may not be realistic to expect much more from your business, right?

Actually, not quite true. While most businesses are struggling as a result of lockdown restrictions, some are thriving. Where might your business fall on the scale of “struggling” to “thriving”?

We first need to sift through a lot of noise. There’s plenty of hype about how bad lockdown is for business, but who is calibrating “bad”? Everyone seems to know someone who knows someone who had to close down. How do we measure “economic crisis” and other hyperbolised headlines?

A BusinessTech headline, “Lockdown forced nearly half of small businesses in South Africa to close,” seems to be quantifiable. The story cites research by Finfind: “an inability to operate during the lockdown forced the closure of 42.7% of small businesses.”

Digging into it, though, there’s no reference to a baseline or timeline that informs the statistic, only that 1,489 businesses responded to the survey. This renders the “42.7%” unreliable. (In statistical terms, it’s nowhere near “half” – I guess precision doesn’t sell newspapers.)

By contrast, Stats SA reported in March 2021 that company liquidations for the calendar year 2020 were 2,042, which is marginally down on 2019’s 2,035. This is surprising because all the negative news would suggest liquidations ought to have rocketed.

Nonetheless, the Finfind data could be valid because Stats SA counts only the closures of formal businesses, i.e. those registered with CIPC. A 2017 Trade & Industrial Policy Strategies report (ironically referencing Stats SA), counted 670,000 formal small businesses in SA and 1.5 million informal businesses. Informal businesses are typically micro in size (less than 10 employees), which are typically the most vulnerable, so maybe this is where “half” of business closures is happening?

Alternatively, you might be fortunate to be in the “right” industry. Economist Mike Schussler tweeted a chart on 21 Mar 2021 that showed 4 industry sectors with healthy growth: furniture and appliances, hardware, used vehicles, and pharmacy. Industries losing heavily are those related to fuel, retail, and new cars. (Interestingly, travel, tourism and accommodation don’t feature in the chart.)

If you’re in a “lucky” industry, you might be thriving or, at least, holding steady. But these are the macro stats; there’s more relevant data that can help measure what “bad” means for your business.

How you trade is critical predictor of survivability.  As I wrote previously (Prioritise Customer To Survive), regardless of size, industry or growth stage, if you need physical proximity to your customers and they can pay only in cash or by EFT, you’re likely going to be challenged by the COVID-19 crisis.

If you can sell and deliver online, you have a better chance of surviving. In a 2020 Facebook survey of 86,000 small businesses in USA (Later), 51% of respondents depended on being in the same place as their customers.

In South Africa, with a lower adoption rate of online trading and less reliable infrastructure – load shedding, internet access and data costs – we should expect a higher proportion of face-to-face SMEs and, hence, a much higher ratio of distressed businesses.

My heart goes out to entrepreneurs who invested their life savings in B&Bs, coffee shops and restaurants – if you haven’t closed down, I’d love to hear how you kept things going.

In a field study by UBU  (ITWeb, 15 Mar 2021), in which 60 small business owners were interviewed from a once-bustling Bellville small business precinct, 85% had suffered a negative impact due to lockdown restrictions. Respondents included retailers, restaurants, coffee shops and spas. Specifically, “over 70% of businesses suffered a revenue loss of more than 25%…while almost 30% of respondents said their total revenue had dipped more than 50%.”

So how are businesses coping?

Most SMEs are focussing on cutting costs through payroll reductions, with retrenchments and short time the most common, unfortunately for workers. Other tactics include moving to smaller premises or other rent reduction methods. After wages and rent, other costs and cash flow solutions could be possible with your suppliers, like a moratorium on price increases, or softer credit terms.

But cost control is merely a stopgap. There is no “normal” to return to after COVID – the real adaptation is not to merely survive, but to prepare for the new normal and re-grow your business. According to the UBU study, “[Businesses] may not find retaining their customers to be a challenge, they certainly are finding it difficult to attract new ones...”

I’ve met with many entrepreneurs who gave up their rented shop space and now trade from their home or garage. For some this is a transition step to going online; only a few intend re-opening a physical shop. This introduces an entirely new marketing challenge in generating online versus foot traffic, followed by new ways to convert visitors into sales and then fulfil the sales.

While our core business model might stay the same, the way we do business might be overhauled completely.

Some businesses have introduced a delivery service, something many owners had never contemplated before COVID. Have you noticed the swarms of delivery bikers zooting around the streets? And it’s not limited to the food industry, either: I know of some bicycle shops that now offer home service options. Who knows, we might see the return of GP home visits!

Lastly, if you’re looking for inspiration for innovation, SME South Africa published a thought-provoking list of “10 Innovative COVID-19 Business Solutions We Loved”.

If you believe you can keep your business going, then go all in to make it work. Times of chaos and transition are often ripe with opportunities – is this your time to transform your business so it serves you better in the new normal?

(Image credit: SME South Africa, https://www.pexels.com/@thatguycraig000)