CHAPTER 10 Enduringly Profitable Small Businesses Flashcards
(17 cards)
What is the foundational trait of an enduringly profitable small business?
Recurring customers who buy from the business again and again.
Why is a business’s reputation important for enduring profitability?
A strong reputation keeps customers loyal and reduces the likelihood they will switch to competitors.
What does ‘the importance of being unimportant’ mean in business?
Businesses that are a small expense to customers face less price pressure and customer churn.
Why does VDCI enjoy high customer retention despite serving cost-conscious municipal governments?
Its services are a small portion of municipal budgets and provide specialized, reliable results.
What business tactic helps banks retain customers?
Offering integrated services like electronic bill pay that create high switching costs.
What kind of companies should buyers avoid if they want enduring profitability?
Technology-driven, cyclical, dominated by large competitors, or dependent on specialized assets.
What traits typically indicate a company will be enduringly profitable?
Strong reputation, limited competition, small customer cost share, and customer integration.
What risk do businesses with specialized assets face?
Dependency on one customer, who can drive prices down after the investment is made.
Can non-profitable businesses become enduringly profitable?
Yes, with a clear transformation strategy, as seen with ADEX and Greg Mazur’s pet food company.
What is a key risk of technology-driven businesses?
Rapid technological changes force companies to constantly reinvent products and find new customers, undermining recurring revenue.
Why should buyers be cautious about cyclical businesses?
Revenue can drop significantly during economic downturns, but acquisition debt payments remain constant.
What is the danger of competing with huge national chains?
Large competitors can undercut prices and dominate the market, crushing smaller businesses.
Why are specialized assets a red flag in small business acquisitions?
If the asset serves only one customer, that customer can demand lower prices, leveraging your fixed costs against you.
Can businesses without enduring profitability be good investments?
Sometimes, if the buyer has a clear plan to transform the business into one with recurring revenue and competitive advantages.
What transformation did Greg Mazur make to a pet food distributor?
He shifted from commodity products to exclusive, specialty lines sold to the same retailers consistently.
Why are non-enduring businesses considered riskier?
They often require strategic transformation, are harder to manage, and present more operational and financial volatility.
What is the preferred approach to business acquisition according to the authors?
Buying safe, enduringly profitable businesses with recurring revenue and fewer risks.
