Taking an Investor’s Perspective on our Business

Hi friends! Last week we discussed the importance of allocating our limited resources towards solving problems in the right way, and that leads us to the next question: how do we decide what’s the best problem to tackle?

In business, there are unlimited problems to solve; how do we determine which ones are the most important to solve? Acquisition.com’s team works based on the theory of constraints. There are natural constraints on a business, and a business will naturally grow to its next natural constraint and no further.

Therefore, it’s the job of the CEO to identify the next natural constraint and allocate resources to relieve it. Once that constraint is relieved, there will be another natural constraint on the business, and naturally, the CEO’s job is to constantly identify what it is over and over again and allocate resources towards solving it.

Strategies for Creating an Attractive Business from an Investor's Perspective

The way we identify the most important constraint on our business is by taking an investor’s perspective on it. Taking an outsider’s perspective on what’s an investable business will guide us towards creating a stronger business.

Investors have plenty of options for where to put their money. The two main decision factors are risk and reward. How risky is this investment compared to how much potential reward there is?

As a business, if you were competing against investing in the S&P500, which historically had a return of 8–10% annually with minimal risk on a long enough time horizon, then as a business owner, we need to make our business as attractive as possible to compete against the S&P500 as an investment.

Since investing in a single business is inherently riskier than investing in the 500 strongest companies in the US, we need the possible reward to be significantly higher than 10%. Stated differently, as a business owner, our job is to increase the reward as much as possible, all the while reducing the risk to as low as possible, in order to make our business attractive to an investor.

From an investor’s perspective, the two most fundamental aspects that make a business investable are top-line revenue and profit margin. Without sufficient revenue, a business may not be interesting enough for investors to consider. Once revenue is adequate, it's important to ensure that a good portion of it translates into a profit margin.

If the top-line revenue and profit margin numbers are "good enough," investors can then start looking at value adders and value detractors of the business. Value-adders are factors that make a business more appealing to investors, while value-detractors are factors that make the business less appealing.

Examples of value adders include revenue growth percentage, annual revenue retention percentage, EBITDA margin, and LTV:CAC (lifetime value to customer acquisition cost) ratio. These factors increase the potential reward for investors. On the other hand, value detractors, such as key man risk, key client risk, single channel risk, market risk, and data risk, increase the perceived risk associated with the business. These value adders and detractors would be interesting to go through in a later post.

The team’s benchmark for a revenue growth target is 30% year-on-year growth, and on this first hurdle, I’ve fallen short. I believe after a certain while, consistent 30% year-on-year growth in a dental office is difficult, and their benchmark number may be for the average industry and not directly relatable to healthcare services, but this benchmark number did cause me to reflect on my own situation.

Could it be that my thought was simply a limiting belief of mine? Could someone more talented pull this off?

The answer to the second question is definitely yes, as I have the privilege of befriending a group of founder dentists in Chicago who have managed to grow from 1 office to 10 offices in less than 8 years and definitely have kept up with a 30% year-over-year growth rate.

Since the answer to the latter question was yes, then the answer to the first question is also yes; this must be a limiting belief of mine. I need to challenge my brain to come up with ideas on how to grow 30% year over year.

Aligning Tasks with Revenue Growth

Intuitively, I understand that growing my revenues is a good idea, but I never knew how important it was at this stage of my business. Since I now have a bit more clarity on what the next step is to creating a strong business, I have debated whether I want a strong business or not. Would I just be happy working my business as a job and doing that for the rest of my career? Or do I really want to transform this job into a business, which is an asset that provides value to me?

To me, the answer was clear, as I’ve always had fears of being tied down to my job, and if I lost my abilities in my hands, my whole career would come crashing down. The brittleness of it all really gave me anxiety. Also, the enormous capital expenditures we incur to start our businesses felt like an anchor to me. To me, it was apparent that I would need to transform my job into a business, and that starts with increasing revenue growth. To be frank, many people will not agree with me, and having an enjoyable job for their whole career is much more enticing than trying to grow the business into an asset. There is no right answer to this question.

I needed to figure out what I could do to increase revenue growth. But first, I needed to figure out what I shouldn’t do. A helpful framework that the Acquisition.com team gave me was: for every task, can you draw a connection between this task and how it drives growth? If not, it may not be a task to focus on.

• A simple example for me would be the task of creating a communication style guide. This is a document that is a guide to how we should be communicating with our patients and what energy we are projecting through our communications. The connection between this and increased revenue growth is seen in improving the relationship between the business and the patient, increased understanding, transparency, trust, and ultimately, increased acceptance of treatment and healthier patients. This is a worthy task to accomplish.

• Another task that I evaluated was the overhaul of the supply ordering system. No direct connection could be drawn from that project to an increase in revenues, so that task was put on the back burner.

By being able to view all problems in our business through this lens, I’m able to more clearly prioritize where I want to allocate my resources.

My friends and fellow business owners, what sort of problems have you identified in your business that may be worth solving? And what tasks may be a problem not worth solving yet?

If you found this newsletter interesting in any way, could you please forward it to someone else you find who would benefit from it? I suffered alone for a long time in this game, and I know there’s others out there that feel alone as well, and it would be nice to build a community to support each other in whatever way we can.

K