How to know if a business model is good

Originally sent exclusively to The Letter subscribers on March 3rd. Want to be the first to get my personal newsletter in your inbox every Monday at 7am? Subscribe for free here.

A couple of compelling business models have come to my attention lately, and I believe they are worth sharing with you so you can adapt and implement my insights.

It’s essential to discuss why this is so significant first.

The hundreds of podcasts I have conducted have exposed me to the intimate struggles that entrepreneurs face in business.

My many consulting sessions have also allowed me to listen intently to the various sectors where entrepreneurs strive diligently, often teetering on the edge of failure and success simultaneously.

I find that their quest for both professional and personal success sometimes lacks the broader perspective necessary to win.

They become so entrenched in the day-to-day grind that they fail to recognise their unproductive actions yield meagre returns, as they repeatedly engage in futile tasks - hoping for better outcomes.

We can learn a lot from migratory animals. Like successful entrepreneurs, they move to environments that align with their needs.

They seek out the best locations to feed, establish their homes, and nurture their nests, while most people merely hope for improvement where they are.

Changing environments or adapting is what successful individuals do.

To sum this up, I would pose the question:

“What’s your model, and is it any good?”

Having had more irons in the fire than your average entrepreneur, I can attest that most of us tend to possess mediocre models rather than exceptional ones.

I have experienced ineffective models in the past; I either adjusted them, abandoned them as my experience grew, or simply ceased to pursue them.

The good news is that you, my friends, can significantly enhance your profitability with just a few tweaks to your model.

The harsh reality is that most people do not.

This inaction contributes to the alarming failure rates of businesses.

The key test to determine if your model is sound is to find out whether:

A. A bank wants to lend to your business or sector (banks have preferences for certain sectors - discover what they are and why; a good finance broker can assist with this).

B. A reputable business broker (who is on bank panels and is selective about whom they represent, like Grant Thornton) is willing to take your business to market based on results only.

C. Institutional money, including private equity and venture capital, is consistently flowing into the sector over time.

For truly effective models, ensure all three factors are in play.

You do not want to rely on the volatile trend of VC money chasing the next big thing; instead, look for established trends.

This is simply my opinion.

So, what business models have crossed my path that prompted my interest, having evaluated them against the three criteria above?

These are not my current businesses, but they certainly represent sectors that excite me for the future.

I believe they all exhibit economies of scale, competitive advantages, and meet the qualification test: “If I wanted to sell my business, would I have a line of prospective buyers?”

1. Waste Management

Waste management requires licensing and regulation, thus creating moats around the enterprise stopping every Tom Dick and Harry having a go.

Everyone needs waste disposal services, and once you secure a customer, they provide ongoing revenue.

Private equity is pouring money into this sector. I spend millions a year on waste disposal, but it does not engage me, so I won’t be pursuing it.

2. Self-Storage

Commercial property that operates as a trade offers excellent tax planning opportunities and excites me like a first date with someone you're smitten with!

Additionally, I encountered a business I admire with £500,000 in revenue, £400,000 in profit, and just one employee running the operation.

Some banks are eager to fund this sector.

3. Theatre Express

Recently, I had a guest named Laura from Theatre Express on my podcast - a fantastic entrepreneur who has appeared twice in five years.

Her business resells theatre tickets at substantial savings due to her buying power and connections.

Laura operates on a low margin, providing theatre-goers with excellent discounts.

To access these deals, one must be a member. Laura has thousands of members paying £12 a month. Winner, winner, chicken dinner!

I appreciate the moats and connections Laura has established for the business to operate; she must have relationships with the theatres and the ability to keep her offerings exclusive, ensuring theatres are happy to sell spare capacity at discounted rates.

Moreover, Laura doesn’t hold stock; she only needs to part with money for ticket codes when sales occur!

It’s better than a sale or return model - more like drop shipping but without the shipping. I’m in love!

Laura essentially operates on the Costco model, which you know I adore - offering low margins that customers love, but with a requirement to be a paid member accessing the deals.

4. Accommodation in Leisure

This model is one I have been examining for several years and embodies the principle of sweating the assets, which is possibly my favourite strategy in business.

I have realised that if you possess overheads and can add additional revenue streams without incurring further rent or rates, it truly is a dream come true for your profit and loss.

Attractions in the UK, like mine, draw customers from within a 45-minute to an hour's drive from their home, as a general rule.

By adding accommodation, visitors can make a weekend of it, travelling a couple of hours and creating a larger potential market.

Additionally, customers tend to spend more when making a trip that involves overnight accommodation, providing you with cash upfront as they book months in advance.

Why is this advantageous? Having advance cash flow before the delivery of services is beneficial for your bank account.

Furthermore, when customers arrive, they typically do not experience buyer’s remorse since the expenditure for accommodation was incurred long ago.

This leads to increased secondary spending once they are on site.

Plus people book days out with short term weather forecasts dictating the decision.

With a holiday you don't cancel a break when the weather is bad!

That’s my little roundup.

We must consider business models more carefully as they significantly influence success.

In other news…

Here’s a fun fact for you: did you know that Kodak was a completely invented name by its creators? They aimed for a five-letter word that was easy to pronounce, entirely unique, and universal across languages.

Similarly, Rolex, a brand I admire, has an intriguing backstory of a completely made up name with no meaning.

I enjoy learning about the journeys of these household names.

For instance, Apple, Disney, and Nike are all short, snappy words that are easy to remember.

I reflect on "Rossi," our ice cream company, and my first brand, "Jimbo," as being similarly easy to say, spell, and pronounce.

Learning that this was the intention behind names like Rolex and Kodak has made me ponder whether I should invest more thought into creating a powerful brand name for my group of companies. Food for thought!

And lastly, Sadly, the inventor of throat lozenges passed away a few weeks ago. There was no coffin at his funeral.

To fully appreciate that joke, be sure to read it aloud!

To your continued success,

James

PS. I’m hosting an evening show at the Leicester Square Theatre in June, it would be great to se you there - Details here.