Blue Elevator Blog

The Three Dimensional Business

There are fundamental differences between businesses that succeed and those that don’t.  In business, there are a lot of things that have to line up.  There are a lot of moving parts.  In fact, at Blue Elevator™, we often tell people that business is three dimensional.

In brief, we are going to outline some powerful concepts.  Each of these concepts stand on their own, but these concepts should also be taken together.  All together, they form what we call the three dimensional business.

The Triple Play

In baseball, the fielders endeavor to put out base runners.  An alternate name for this article could have been The Triple Play.  Picture this: No outs.  Runners on first and second – and batter up.  The batter hits a hard grounder to the 3rd baseman.  The 3rd baseman cleanly fields it, steps on 3rd base, and rifles it to the 2nd baseman who pivots and throws to the 1st baseman.  Just like that, it’s 1,2,3 – out.  A triple play.  It is seldom seen.  And, in business, so are the three concepts to follow.

Monetized Involvement

Business owners must be able to monetize their involvement in their businesses.  There is this fundamental difference between a hobby and a business.  As the saying goes, “If you do what you love, you’ll never have to work a day in your life.”  That is unless, you have bills to pay.

• The key is to find what you’re good at, something you love doing, and something the market needs.  Sound familiar?  Read our article about the Deliverable.
• Your business must make a profit.  If not, you don’t have a business.  Whereas profit is important, that shouldn’t be your sole pursuit.  Profit is an ancillary by-product of a job well done.
• But, alas, owners must be able to monetize their involvement in their businesses.

If you can’t exchange your skill or product for money, you won’t make it.  A business whose product is a service (e.g., plumbing) is a good example of monetized involvement.  Repair a leak – get paid.  Simple.  Juxtapose that with a similar business where the owner spends all of his/her time “bidding” room additions – and never winning a job.

Having monetized involvement is both a concept and a degree of measurement.  An owner that can bid, win, and profitably deliver 5 out of 10 bids is doing better than the owner that bids and wins 1 out of 10.

Passive Income

Passive income is a new term for some, but a misnomer for others.  Passive doesn’t mean lazy.  It refers to a business owner’s ability to make money without having direct involvement in the production of the income.  Let me explain.

Let’s take the plumber in the preceding example.  The plumber goes out.  The plumber fixes a leak.  The plumber gets paid.  Monetized involvement?  Yes!

But how many leaks can the owner/operator plumber fix a day?  How many days per week can the plumber work?  How many years can the plumber get down on his or her knees and bust knuckles fixing leaks under sinks?  There is only so much one person can do.

Fundamentally, the business that doesn’t create passive income (either by design or by default) will experience the following:

• It will quickly reach a plateau.  Sound familiar?  Every business is headed towards a plateau.  Read The Three Reasons for Engaging Elevator™.  You can read all about the proverbial plateau.  The only question is how fast you get there – and if you will ever be able to begin new growth.
• Business owners that don’t learn the secret behind creating passive income will never scale.
• The business that doesn’t scale is really not a business: it is just a job for the owner.

Recurring Revenue

The remaining component of the three dimensional business is the ability to generate recurring revenue.  This is revenue that happens each and every day, week, month, etc.  Fundamentally, a business that doesn’t have the ability to generate recurring revenue does not create intrinsic value.  Let me explain.

Investors want to buy an asset (e.g., in this case, a business) that will generate a return for them.  The return needs to be passive and recurring.

Consider this example business listing.  In this case, the owner of this painting business (if he/she wants to sell it), might, in effect, have an offering like this:

Painting Business for Sale

“For Sale!  ACME House Painting is being offered to the right Buyer at a bargain price of only $100,000.  ACME’s asking price is based on 33% of the prior year’s sales, which totaled $300,000.  The sale is “all cash” with the business immediately acquirable and comes with established vendor contacts.  Business is directly assumable and Seller is willing to assist Buyer for 30 days following the sale.  This business is listed for sale directly by Seller.”

The ROI

Sound compelling?

At face value, the ROI might appear to be 3:1.  Not too shabby – especially for a business that appears “turn-key.”

The truth is, there may be a lot of value in this business.  Or, there may be little value in this business.

What if I told you that the $300,000 in revenue averaged $6,000 per week (e.g., $6,000 x 50 weeks per year)?  What if I told you that the $6,000 per week equated to 3 houses per week (at $2,000 per house)?  What if I told you that it took about 2 days to paint each house (1 day to prep and 1 day to paint)?  What if I told you that the customers were long-time personal friends of the Seller who felt sorry for the Seller?  What if I told you that each house “cost” about $1,600 to paint (e.g., a helper, paint, painting supplies, etc.)?  So, the profit was $400 per house.  If you recall, the Seller is willing to offer 30 days of assistance after the sale.  That is because the Seller will teach you how to paint a house.  This is because the Seller is the person painting each house.  Now, YOU will be the person painting each house.  So, your “profit” at $400 per house at 3 houses per week would be $1,200 per week working 6 days per week.

For the Seller, the revenue is “recurring” (e.g., personal friends of the Seller), but for the Buyer the revenue is “not recurring.”  There are other problems with this business – which we can discuss another time.

But suffice it to say that there is little value in this business.  A savvy investor understands that this is really just an opportunity to spend $100,000 to buy a job.  A true and real investor wants to buy a painting business that generates a scalable, passive, and recurring revenue and profit stream.

Takeaways

There are several takeaways here.  Think of the three dimensional business in these terms:

• The components could be developmental.  That is, a business might start out with the owner doing it all (e.g., monetized involvement), then scaling his/her business (e.g., passive income), and eventually experiencing growing even more (e.g., recurring revenue).
• The components could be concomitant.  A big word, I know.  The idea here is the proposition that the three dimensional business has all of the components in play all the time.
• The components are a checklist: Am I able to monetize my involvement – or am I just busy chasing my tail?  Am I able to generate passive income – or am I afraid or too controlling to ask for help?  Am I experiencing recurring revenue – or am I the person that has to go out and look for the next deal each and every week, month, etc.?

Summary

At Blue Elevator™, it’s true that we work with business owners holistically across all of the disciplines (e.g., sales, marketing, operations, finance, etc.).  As mentioned, there are a lot of moving parts and everything has to line up.

But no matter the task at hand, as with all of our clients, we always work with the backdrop of creating the three dimensional business.  And so should you!  In fact, all of our “actionable advisory” is multidimensional.  That is, practical to a point – but also designed to line up and create the three dimensional business.

If this sounds good to you, we invite you to contact us here.