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10 Cardinal Rules for buying your own business

12/9/2013

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Picturephoto credit: Gord McKenna via photopin cc
Many toy with the idea of buying a business for themselves; but it’s such a risk most never take the chance. Here are 10 rules that will guide anyone to making better choices.

1 YOU are the most important consideration
It’s a mistake to first value a business as a financial investment. Most importantly it's a career investment. Your life to date has given you valuable skills and experiences. Use Reflection exercises to understand your Personal Business skills first; then seek an opportunity that will utilize them. Lesson 8 (free preview available) of the online Fit for Life workshop is a great starting point. Also the book Business Model YOU.

2 Discover your preferences 
In addition to skills, your business performance is affected by preferences. Clarify the business preferences that make a difference to you. You can download the Franchise Business Model worksheet which is further explained in the online workshop Lesson 11 (free preview available) as a guide for this. Be comfortable with your risk and sales orientations as discussed in this lesson before buying a business.

3 Search in specific business categories and geography
If you don’t know what you’re looking for, it will be extremely hard to find. Online businesses for sale directories estimate that 90% of the people registering for their services are unable to purchase a business. Most of these failures are those going there to find easy, secure sources of income. They aren’t obvious. What you can find are opportunities that may or may not fit YOU. The directories are organized by business category and geography, so having a set of these criteria to focus your search gives you a reasonable chance of finding those opportunities. Even if you use a business broker, they can do little to help you without focus from you.

4 Creatively research your financial situation
A profitable business or franchise, with good books and records, can be partially financed; however, each opportunity will have a downpayment. You may be surprised at the financing opportunities available to you with a little research. The SBA offers a number of programs, plus there are alternatives to SBA loans that are often even more attractive. Combine your risk preference with your potential financial capabilities to set the financial scope of your search. This can also be added to your search criteria.

5 Have a personal contribution for your business
A business brings resources to a market. In most cases, the owner makes a significant contribution to one of these two areas. If your potential contribution is resource management, look for opportunities with established sales assets. Look for an established brand, location, or sales network. If your contribution is sales and market management, look for established resources like a desired product line or service that appeals to you. The same logic applies to finding the right franchised business to buy.

6 Utilize Key Partners
No one is successful by themselves. Even the Lone Ranger had Tonto. Learn to develop and use Key Partners as soon as possible. These are going to be the people in your life that will help you through difficult decisions. If looking at franchises, ask other franchisees how much support is received from the franchisor? If looking at independent businesses, look for people who will be able to add to your expertise. They can be the former owner, key employees, vendors, and professionals such as financial advisors and business consultants. If married, take time to communicate wholly with your spouse. They may or may not be able to help on any given specific; but they can help you understand YOU; and you will be a big part of the business.

7 Be able to Model any target business
When you find an interesting business to buy, be able to quickly answer the question, so what makes this business work? Financial statements will not tell the story. It’s a Value Proposition that has to make sense to you and that you can easily explain. The Business Model canvas is a proven tool here. Use it or anything similar. You are going to be be buying that Value Proposition, not its cash flow.

8 Understand the cash flows
Most business opportunities are priced on cash flow. The problem is that cash flow is a concept, not something physical that can be easily measured. That allows for a lot of “creativity” in its calculation.  In general, wherever there is a reason to add to profit for cash flow, there is also a reason to subtract from it. For example, if cash sales are not completely reported on tax returns, then suspect that there are cash expenses that may also be missing. If depreciation is added-back to profits, then also be sure to subtract also capital replacement costs. If interest is added-back, then debt service should be subtracted, etc. After  first understanding your reasons to buy a business, then work on understanding the financials to establish reasonable pricing. If you are not comfortable calculating cash flows, find a key partner to help you in this area.

9 Respect the seller
Almost every independent business on the public market is there because the owner has burn-out. This could be from age, sickness, changing personal opportunities, or changes in the business. However, this doesn’t mean they don’t value their business. It’s an extension of themselves as much as a child might be. Deals happen when the owner sees in the buyer someone who can take care of their child as well as pay reasonable value for it. Franchisors are expanding their operations and are looking for team players who can help them. They are looking for someone who can compliment their system as well as afford to participate as an owner. In either case, both sides must first respect each other enough to make any financial considerations worthwhile.

10 Begin with the End in Mind
Do you want to be the one selling this business in the future due to burn-out yourself, or would you rather have used it to achieved the financial goals necessary to move to the next stage of your life? Start with clear ideas for your exit plan. A business is more than a cash flow; it’s a stage of life and will best serve you when seen in that light. Having some idea of what should come next and when you want it to happen will guide you in making better business decisions.


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Personal Business Models - Key Partners are the Key

7/3/2013

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Picturephoto credit: Alba Soler Photography cc
Personal Business Models have opened the door for individuals to reinvent themselves in a systematic way. The individual is Resource Constrained, so the process starts with YOU, as opposed to the Market. 

This idea of reinventing while still being limited is not just applicable to individuals. It applies equally to the organization that doesn't need to start-up something new, yet still needs reinvention to turn-around its situation. This will overview 5 short YouTube videos, collectively named the Lean Turn-Around series, that describe this approach to working with Business models. They conclude with a new importance to the role of Key Partners in Personal Business Models.

For those not already familiar with the Business Models canvas, there is a 2 minute introduction to the canvas here and another fast introduction to Personal Business models here. These videos were produced assuming the viewers are already familiar with the book Business Model YOU. The video windows here are small. If you click on the YouTube logo in the lower right corner, they will expand on that site.

Why your idea was worthless

Individuals and Organizations in need of reinvention did not get that way because they were short of ideas. Yet, great ideas alone cannot produce market value. This video introduces Emergent Properties, things that simply don't exist until other things get properly combined. Value doesn't exist at the idea level, so no matter how good an idea might potentially be, more basic elements are needed. In fact two more, which are presented here.

Business Model Deliverables

 Business Model YOU and its Workshops deliver much more than just one or more Personal Business canvases. Insights emerge as you work across the regions of the canvas. An example is given of reinventing a substantial business using the process and tools typically associated with a Personal canvas. Organizational and Personal Business Model Generation processes are then contrasted.

Business Model Processes

After a survey of the dozens of tools available from both processes, focus is given to some feedback tools. This section will be of particular interest to those using Personal Business Models for Personal Branding. Personal and Organizational Models are then connected along with noting a weakness necessary in the Personal (Constrained) Model Generation process.

Business Model Pivots

After going through Design and/or Reflection stages, its time to Redraw the Model and then test and Pivot. Using the canvas regions introduced earlier, Patterns of Pivots can be developed. A and C Pivot types are discussed along with a warning about not working hard on B Pivots early on.

Acting on a Personal Business Model

The conclusion of the series is a focus on how to grow your new Model. Since Personal Business Models start as Constrained, being able to address those constraints become important. It's argued that in addition to Customer Discovery, Key Partner Discovery will be necessary and examples of Key Partner types are shown. Franchise statistics are used to quantify that importance. Those relating Business Models and Networking will find this especially useful.
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Personal Business Models - 3 sources for new Channels

3/21/2013

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photo credit: Studio Antwan via photopin cc
Your Personal Business Model has tremendous Value to offer. If only you could reach the Customers who need it, YOU would be rolling in cash flow.  Business Model Channels are there to create access to prospects as well as deliver Value to Customers.

In developing the Business Model using the Business Model YOU guidelines, a lot of effort is placed on defining personal Key Resources. This same thinking naturally extends to placing similar effort into personal Key Activities and Key Partners. A useful approach is to now take this understanding and use that to develop more Business Model Channels.

Business Model Channels fundamentals

A "rookie" mistake made by those new to the Business Model canvas is to use the Channels and Customer Relationships they desire. Those working with Personal Business Models are especially suseptable because they have just spent considerable time exploring who they are and what they might become. This makes us a bit introspective. Canvas Channels and Customer Relationships should correctly be those the Customer Segments desire, not you.  Consider how YOU want to be contacted in your business relationships as a starting point. From there, start to consider how your potential Customers might feel. How would they like to be prospected? It's never out of place to ask your Customers for feedback to be sure you're getting this critical area correct.

A second mistake is to not realize that these are plural terms. We are really looking for the best mix of Business Model Channels, not trying to find the best one.

Types of Business Model Channels

Business Model Generation classifies Channels as Owned and Partnered. For example, you can do your own selling, or pay a commission to a Key Partner to do it for you. This is an elegant way to look at someone else's  business model Channels.

For your own model, I would like to offer an alternative approach as well. Your Channels frequently directly relate to your Key Resources, Key Activities, and Key Partners. In the example, your own selling is a Key Activity and the commission sales a contribution of a Key Partner.

This gives us 3 sources of Personal Business Model Channels - Resource Channels, Activity Channels, and Partner Channels. 

Key Resource Channels

These are by far the most desirable (and generally most costly) Channels for a Personal Business model. I see that all the time as a business broker. Entrepreneurs frequently contact us to purchase an established business in order to own more Channels. Examples of Key Resource Channels are an established reputation or brand, a popular location, satisfied past customers, internet pages with high page authority, and a sales force in place. You can "own" these Channels, so they are easier to manage and keep healthy.

Key Activity Channels

The opposite of Key Resource Channels are Key Activity Channels. These are typically the least costly because they tend to be "do it yourself selling". Examples are types of Direct Selling which include mail (and email) campaigns, personal and telephone cold calling, and internet blogging. There are also Indirect selling approaches which include networking organizations, public speaking, publishing, workshops, and events. They may be low cost to initiate; however, these are the Channels that also do not scale well (or sell very well when it comes time to exit your model). There is a commonly held belief that any new career must start here and over time develop Key Resources. All it takes is courage. While courage is essential, if customers are not willing to pay more than cost for your value as you present it, courage only leads to financial losses. You will frequently find this misleading message embedded in career and business development advice.

Key Partner Channels

A practical alternative strategy is to work together with Key Partners. These Channels can be both cost effective and scalable; however, they will require you be a good Key Partner in return. Key Partner Channels can be VARS, Distributors, Retailers, Professional Referral partners, even Customers who are now "fans" and enjoy being able to recommend you to their contacts. Actively looking to promote Key Partner relationships into Key Partner Channels may launch a new Personal Business Model more easily than a Customer Discovery/Validation process. 

Finding Your Channel mix

Your model is based on a mix of Resources, Activities, and Partners (RAP). The development of a corresponding mix of Channels from them should feel natural, even inviting. If it doesn't, the problem may be your RAP is insufficient for the model's Value Proposition or Customer Segments and needs to be adjusted. In the end, a good business model should just make good sense.


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Launching Personal Business Models - Key Partner Discovery

3/5/2013

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photo credit: Stuck in Customs via photopin cc
How can we act on a reinvented Personal Business Model?  Key Partner Discovery is a safe and powerful catalyst to boost your career plans.

Getting a Personal Business Model off the ground

The ACT section of Business Model YOU has sound advice on using Customer Discovery as a place to start. It's very reasonable to take a newly developed Business Model to the streets and test if it's something that 1) people really want, and 2) they are willing to purchase. There are countless examples of ideas the flew past the first test only to fail the second.

However, Cold calling, which is often what Customer Discovery really becomes for an individual, is distasteful or even overwhelmingly threatening. It can easily stop an individual's ACT phase dead in its tracks.

Customer Discover is not the only way we can "get out of the building" and test a model. Look to the other side of the Business Model Canvas to Key Partners. Working with Key Partners is much less threatening and often more rewarding than going directly after customers.

Take a moment to watch this video by the author of Business Model YOU discussing the development of the book. Ask yourself, does this seem to be an example of Customer Discovery or Key Partner Discovery? The process of building out from Key Partners is natural for the individual.

What makes a Key Partner?

For organizations, Key Partners are sought where Key Resources and Key Activities they DO NOT HAVE can be outsourced. For individuals, Key Partners are frequently those who compliment the Key Resources and  Activities that they DO HAVE.  It's a far more vital role. In a Personal Business Model (PBM), it's very possible for Key Partners to develop into Channels; and then for the Channel's Customer's to develop back into more Key Partners. Almost any established individual practitioner will tell you most business now comes from "referrals." This is known as a positive feedback loop in Systems Dynamics.

The ability to provide positive feedback in any form is a prized attribute of a Key Partner and one to be sought right away in launching a reinvented PBM. Unlike sales prospects, partner prospects are eager to find sources of feedback that will help their business models as well as yours. In a sense, this is recommending Networking as an alternative to Cold Calling; however, those who understand canvas thinking have a unique advantage in this area over a group of people who just pass leads along. Your understanding of how the canvas pieces fit together help you better recognize the Key Partner potential in others.

Key Partner YOU

More importantly, it helps you recognize the Key Partner potential in yourself. Who has Value Propositions that are complimented by yours? Who can benefit from the insights produced by your value story? Not everyone has learned to think like that. Start to gather ideas about the kind of Key Partner YOU make by reviewing your answers in the  "Personality and Environment" exercise. Then look again at the "Get Out!" exercise in Section 4 of Business Model YOU substituting Partner Discovery for Customer Discovery. It becomes less threatening and more exhilarating. 

Career reinvention is just a fact of life in today's changing world and we can expect to need to reprocess any career multiple times. Our personal Key Partners make this more achievable and rewarding. The take-away - it never hurts to become a better partner now.

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    Author

    Bob Fariss writes about the issues facing Executives in career development. He teaches Business Model Thinking  and also represents individuals with an entrepreneurial flair seeking to sell, buy, or start-their own business.

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