Small business models: Where do you fit in?
In a recent “Sources of Insight blog article,” Stephen L. Nelson, author of QuickBooks for Dummies,” analyzed five small business success formulas. While the article is aimed at readers who might be considering starting a small business, the model descriptions can be helpful for current small business owners looking to plot strategy for the next period of time.
The five success models identified by Nelson are
- Model # 1“It’s Almost Just a Job” Businesses
- Model # 2: “All Leveraged Up” Businesses
- Model # 3: “Early Bird” Businesses
- Model # 4: “External Solution” Businesses
- Model # 5: “Secret Sauce” Businesses
In this week’s Speak Up, we’ll look at the first three.
It’s almost just a Job
This model is essentially a transformation of a corporate career into a private practice or consultancy. Were you a corporate accountant, IT specialist, trainer, business analyst, marketing specialist, who left the corporate arena for whatever reason and began offering your services “on your own”? Then you are basically running your old job as a standalone business. Nelson says about half the small businesses he works with are of this type.
The revenue basis for this model is “fee-for-time”– charging a fee for time spent delivering services. The advantages of this model are that it is relatively low risk: you are familiar with the work; you know the target market; start-up costs are minimal; overhead can be low; and as long as you can engage enough clients/customers, you have a reasonable chance to “replace” your former corporate salary. Downside factors include minimal ancillary support (you have to assemble an office infra-structure and provide all the support work yourself, at least initially).
Nelson finds that this model works out fairly well for the owner. Sell enough hours of service consistently, and you are in business—literally. Relative to other small business models and even corporate careers, the almost a job business is fairly low risk. Oh, you may work really hard building an initial profitable customer base, and customers will come and go. But you won’t show up some Friday and find that you lost all your customers (as could happen with your corporate career).
All leveraged up
Being all leveraged up means owning a small business that requires many expensive fixed assets. Capital equipment; real estate; heavy start-up franchise fees; business purchase price. All these require financial resources, which generally means borrowing money. Hence, the business owner is leveraged.
Nelson cites some statistics from Bizcomps database showing that on average a small business can produce profits at roughly 40% of the business’s value. Now, if the small business owner borrows at 10% and the business can produce at 40%, then the business is 30% to the good (gross profit on the borrowed money).
The main caveat to this model is the potential for a bad year. The leverage against the business owner is fairly constant, whereas the leverage in the owner’s favor (that gross profit number) is variable. So one bad year out of five can substantially eat up the results of the good years. We have seen this in the last two years with some major financial institutions. So the lever gives and the lever can take away.
The Early Bird Businesses catches . . . something
The classic entrepreneur story is about the visionary who gets out in front of the competition with a new idea and executes on it. Henry Ford’s assembly line; Preston Tucker’s car of the future now; Steven Jobs’ Apple user-friendly interface; Ted Turner’s 24-hour news channel; Amazon.
Two of the examples above became enormously successful: Ford and Turner. One started out on fire and came back to reality: Apple (arguably). One flopped. Tucker was a true innovator and aggressive marketer, but fell to the forces of the marketplace moguls, who outmuscled him legally and financially..
Therein lies the weakness in the “early bird” model strategy. It is risky for a number of reasons.
- The entrepreneur’s idea may be so in front of the market, that the market is not compelled to buy the benefits of the idea (sub-compact cars from Japan prior to the gas crisis of the 70s)
- Poor execution on an idea for which all the other stars are aligned (Jobs and Wozniak chose not to concentrate on the business market with the original Apples allowing late entry IBM to steal the personal computer market)
- The competitive arena may be too crowded for the small business owner to be successful long-term against larger operators (restaurants).
Innovative products and ideas may stir excitement but the excitement doesn’t always translate into sufficient sales. Think of 8-track players, Beta recorders, and the latest ab exerciser infomercial.
Does your small business fall into one of these first three models? If so, does it feel right model for your work-style and temperament? Upon some personal analysis and reflection, is the model you’re following giving you the greatest opportunity for growth? These are good questions. You and your coach should delve into them.
We will cover the final two models, External Solution and Secret Sauce next week.
If you would like to talk to Coach Up about your small business positioning, contact us at coach1@coach1up.com.
