Essentials They Don’t Teach in Business School
(But are Important to Know)
Last month I embarked on a personal pet project. I created a personal YouTube Channel and began posting a series of Business videos. Between now and the end of next year, I plan to post two videos a month that teach business model fundamentals. I will also be sure to make the videos accessible on Substack. The lessons are short – usually well under ten minutes – but the material is timeless and important to know.
I have not personally seen business model dynamics taught in business schools and hope to help change that. But the topic is so universal – and business touches so many – that having some knowledge about how business works is valuable no matter your career choice or field of study.
Having some knowledge about business can make you a better employee or investor. And knowing something about business model fundamentals may even inspire you to take the leap and try your hand at starting a business.
Want to know how it is that most multimillionaires made their fortunes in business? Business model fundamentals can provide the roadmap.
I have been studying and writing about business model fundamentals for the better part of three decades and have used my findings to help run three public companies, two of which I conceived and co-founded. Now, being on the back end of my career, I wish I had understood much of what I now know earlier. I would have had a better understanding of the many career choices before me as I was starting out.
Thinking about starting a business and want to know how to wrap your product around an optimal business model that stands to make you and your investors the most money? Knowing some business model essentials before you start can be, well, essential. And being able to articulate your business model components can be highly helpful in raising money from investors to start your new enterprise.
Thinking about peeling back the business models of public companies to help decide whether or not to buy shares? Knowing a business model analysis hack can be useful.
“If you own your stocks as an investment—just like you’d own an apartment, house or a farm—look at them as a business.”
That’s a quote from famed investor Warren Buffett and bears remembering because that investment philosophy enabled him to beat the returns of the S&P 500 for fifty-five years between 1965 and 2020 by almost double. Understanding business model fundamentals of companies that work in concert to deliver returns takes this approach.
Thinking about which job offer to take or pursue? Companies having impressive business models tend to pay more and offer better career advancement. And when you get there, understanding some business model basics can help advance your career and raise your awareness of the impact you are making.
Thinking about selling a company you started or own? Understanding the art of the possible when it comes to business models can help you position your business to get the best price. In a career of finance, I have witnessed the sales of many companies for prices that were too low because the sellers had no idea of the business model changes that the buyers had up their sleeve.
You may be skeptical. After all, business model dynamics are not emphasized in business school textbooks. So, allow me to whet your appetite.
Where do company investment returns come from? Yes, they come from dividends and changes in share price. But the latter is primarily a function of three sources of cash flow growth per share. Together, the four primary return sources, if they’re good enough, can unleash a fifth source: Upward changes in a business’s cash flow valuation multiple. If you want to be able to articulate the five sources of corporate investor returns, allow me to teach you.
What’s the common denominator for corporate financial success? Simple. Having an equity value more than creation cost. Most companies do not rise to this level. But optimizing your Equity Value Multiplier – that’s the amount a company’s equity is worth more than it cost to create – should be a universal primary business goal.
If you reduce a business model to the fewest components, how many are there? Just 16, but the first dozen cover the biggest essentials that can enable you to make investor return predictions. The final four variables just add a little more precision.
How geeky can business model fundamental analysis get? Geeky. But my approach is to take something that can be complex and then reduce it to as few moving parts as possible. And, to make it simpler, you don’t even need to use numbers. You can take any company, reduce it to simple business model relationships that combine to deliver investor return predictions and do it all in a small spreadsheet space you can see in a glance. And I will make the spreadsheet available to you.
What are the business model characteristics of the most valuable companies? They vary and it’s nice to know, but there is the potential for virtually all businesses to be financially successful. The thing is to do the best with what you have and enjoy doing.
That’s it. The video series was inspired by my book, “The Value Equation – A Business Guide to Wealth Creation for Entrepreneurs, Investors and Leaders” but with a meaningful amount of added material. I hope you enjoy them and welcome any comments you have. You can find me at christopherhvolk.com.