5 Ways to Tell You Are Investing in a Great Businesses

Never assume you know what other people are saying when they use the word "invest". For a lot of people, it is just calculated gambling.

If you can win or lose, it is not an investment. An investment is something with significant upside over the long term with some downtrend in between. If the business is doing badly and because of that you want to take out your money, you didn't invest. That was a gamble.

Most people gamble. But it sounds novel to call it investing when they are winning. In investing, you rarely lose. This is because you are not investing to make a gain next week or at the end of the year. You invest with an outlook of at least 20 years into the future.

And yes, there are times you gamble. You make a big bet. You make a risky bet. Mainly because you think, "If I end up being right about this and I don't make this bet, I'll probably hate myself".

We all have such moments. The defining factor is how you deal with it. Your criteria in making those bets determine whether you will regret it or you will cherish the memory.

This is the art of picking great businesses to invest in. Here are my 5 criteria to decide:

1. A Growing Customer Pool

If the business does not have customers, it is not a business. A business idea is not a business. A registered company is not a business. A marketing plan is not a business. A product is not a business. A service is not a business.

Customers are what make up a business. If you have people you sell to, congratulations, you have a business. If you don't have people you sell to, you don't have a business (yet).

But as an investor, this is not all that you are looking for. You are looking for businesses whose pool of customer base is growing. Let me explain.

Let's say a business sells childcare products for new parents. That makes their customer base new parents (for the most part). Now, look at the statistics of new parents in the region or country where the business operates.

Is the rate of childbirth growing or declining? How many new parents are there today compared to 25 years ago, 15 years ago, 10 years ago, 5 years ago? Is the pool of new parents growing or shrinking?

If the answer is that it is growing, then that is a good business to invest in. If the answer is that it is shrinking, then that is bad news.

2. Long-Term View Leadership

This is a bit personal. And I have found it to be an accurate determination of the viability of a business. If the leadership team are short-term thinkers, the business will not last.

A business ought to have both long-term vision and short-term operational mechanics. Of course, all businesses claim to have a long-term vision. But when you get to see how they operate, that will tell you whether the long-term vision is real or not.

Without a long-term view, the business won't last. Some businesses are just good operators under the present conditions and circumstances. But nothing ever stays the same. When things change, they will be out of insight about what to do. This inevitably leads to the demise of the business.

The business must be building an important fabric of the future. Invest in businesses that have a theory of the world of the future. If they don't, it is too risky to make a 25-year bet on them.

3. Diverse Revenue Structure

Watch out for this. If you look at the company and see that there is one massive source of revenue that completely dwarfs others, that is not a good sign.

For example, 75% of sales come from one client. 85% of sales come from one salesperson. If that 75% client fire the company, the business is toast. If a bigger company poaches your 85% salesperson with a much better offer and they leave, the business is in a mess.

A viable business should have multiple revenue sources in varying percentages. No singular deduction can drill a hole in the business.

This doesn't mean that the business has to be selling other things aside from its main product. It means that if something around that main product fails, the business can adapt and recover fast. There is a structure for that.

4. Systems

If the business doesn't have systems, things are done anyhow. The way things are done last week is different from the way things are done this week. There is no operational structure. If this is the case, stay away.

The next important thing after customers (to a business) is systems. If a business does not have systems, hiring is going to be a pain.

You don't want to invest in a business where any new hire is going to be guessing their responsibilities into the 4th week.

5. Cashflow

Does cash flow cover debt service? If the answer is no, maybe it is not time to invest. Find out what the debt is.

Don't be excited about the revenue numbers. Look at the debt. Look at how much money is really coming in. If the business is not making money, then it is bleeding money.

Conclusion

These are 5 ways to tell you have invested in a great business. They have:

1. A growing pool of customers

2. Leadership that takes a long-term view

3. Diversification of revenue structure

4. Systems that guarantee seamless operations

5. A positive cashflow situation

Share this with someone interested in buying a business. Stay rich.