Recently, I attended a conference on small business funding given by Launchpad LI. There were three entrepreneurs on the panel who discussed various topics in establishing and funding a small business. The moderator had asked one of them about the sale of one of his businesses and what had made it attractive to the buyer.
He responded that it was because he had developed a sustainable business, one that would last for a long time. What did that mean? He developed a good management team. He advocated continuous improvement in his manufacturing. He developed many products, not just one, that would carry the business. And, the business was profitable.
The advantage of having several products is one of the products would be able to carry the business as a “cash cow” thus providing funds to be able to develop and market a new product. The “cash cow” would provide enough profits or cash flow surplus that introducing a new product would not require outside financing.
If a product were to go out of demand or was replaced by technology, the new products would fill in the gap left by the outdated product. Thus the company would not suffer the loss from the discontinued product.
This discussion reminded me of when I was with an investment bank. The owner of a business, who created an
anti-theft device for automobiles, wanted to bring his business public. The business was doing quite well making over $250 million in sales with a gross margin of 50%. The business was not only in the United States but the owner had expanded to markets in the Far East and Australia. What a business!
After much investigation on this company, we decided that the company was not a candidate to go public. Why? This company only had one product; there were no other products being developed at that time. Surely, when the product saturated the markets it was in, his demand would decrease, sales would fall, and he would become unprofitable. And because he had only one product, the business was unsustainable!