Ideal Business

Ideal Business

May 27, 2007

AH PERFECTION: Strange, but the most popular, the most
widely-requested, and the most widely quoted piece I've
ever written was not about the stock market -- it was about
business, and specifically about what I call the
theoretical "ideal business." I've added a few thoughts in
each successive edition. But seldom does a month go by when
I don't get requests from subscribers or from some
publication or corporation to republish "the ideal
business." So here it is again -- with a few added
comments.

I once asked a friend, a prominent New York corporate
lawyer, "Dave, in all your years of experience, what was
the single best business you've ever come across?" Without
hesitation, Dave answered, "I have a client whose sole
business is manufacturing a chemical that is critical in
making synthetic rubber. This chemical is used in very
small quantities in rubber manufacturing, but it is
absolutely essential and can be used in only super-refined
form.

"My client is the only one who manufactures this chemical.
He therefore owns a virtual monopoly since this chemical is
extremely difficult to manufacture and not enough of it is
used to warrant another company competing with him.
Furthermore, since the rubber companies need only small
quantities of this chemical, they don't particularly care
what they pay for it -- as long as it meets their very
demanding specifications. My client is a millionaire many
times over, and his business is the best I've ever come
across." I was fascinated by the lawyer's story, and I
never forgot it.

When I was a young man and just out of college my father
gave me a few words of advice. Dad had loads of experience;
he had been in the paper manufacturing business; he had
been assistant to Mr. Sam Bloomingdale (of Bloomingdale's
Department store); he had been in construction (he was a
civil engineer); and he was also an expert in real estate
management.

Here's what my dad told me: "Richard, stay out of the
retail business. The hours are too long, and you're dealing
with every darn variable under the sun. Stay out of real
estate; when hard times arrive real estate comes to a dead
stop and then it collapses. Furthermore, real estate is
illiquid. When the collapse comes, you can't unload. Get
into manufacturing; make something people can use. And make
something that you can sell to the world. But Richard, my
boy, if you're really serious about making money, get into
the money business. It's clean, you can use your brains,
you can get rid of your inventory and your mistakes in 30
seconds, and your product, money, never goes out of
fashion."

So much for my father's wisdom (which was obviously tainted
by the Great Depression). But Dad was a very wise man. For
my own part, I've been in a number of businesses -- from
textile designing to advertising to book publishing to
owning a night club to the investment advisory business.

It's said that every business needs (1) a dreamer, (2) a
businessman, and (3) a S.O.B. Well, I don't know about
number 3, but most successful businesses do have a number 3
or all too often they seem to have a combined number 2 and
number 3.

Bill Gates is known as "America's richest man." Bully for
Billy. But do you know what Gates' biggest coup was? When
Gates was dealing with IBM, Big Blue needed an operating
system for their computer. Gates didn't have one, but he
knew where to find one. A little outfit in Seattle had one.
Gates bought the system for a mere $50,000 and presented it
to IBM. That was the beginning of Microsoft's rise to
power. Lesson: It's not enough to have the product, you
have to know and understand your market. Gates didn't have
the product, but he knew the market -- and he knew where to
acquire the product.

Apple had by far the best product in the Mac. But Apple
made a monumental mistake. They refused to license ALL PC
manufacturers to use the Mac operating system. If they had,
Apple today could be Microsoft, and Gates would still be
trying to come out with something useful (the fact is
Microsoft has been a follower and a great marketer, not an
innovator). "Find a need and fill it," runs the old adage.
Maybe today they should change that to, "Dream up a need
and fill it." That's what has happened in the world of
computers. And it will happen again and again.

All right, let's return to that wonderful world of
perfection. I spent a lot of time and thought in working up
the criteria for what I've termed the IDEAL BUSINESS. Now
obviously, the ideal business doesn't exist and probably
never will. But if you're about to start a business or join
someone else's business or if you want to buy a business,
the following list may help you. The more of these criteria
that you can apply to your new business or new job, the
better off you'll be.

(1) The ideal business sells the world, rather than a
single neighborhood or even a single city or state. In
other words, it has an unlimited global market (and today
this is more important than ever, since world markets have
now opened up to an extent unparalleled in my lifetime). By
the way, how many times have you seen a retail store that
has been doing well for years -- then another bigger and
better retail store moves nearby, and it's kaput for the
first store.

(2) The ideal business offers a product which enjoys an
"inelastic" demand. Inelastic refers to a product that
people need or desire -- almost regardless of price.

(3) The ideal business sells a product which cannot be
easily substituted or copied. This means that the product
is an original or at least it's something that can be
copyrighted or patented.

(4) The ideal business has minimal labor requirements (the
fewer personnel, the better). Today's example of this is
the much-talked about "virtual corporation." The virtual
corporation may consist of an office with three executives,
where literally all manufacturing and services are farmed
out to other companies.

(5) The ideal business enjoys low overhead. It does not
need an expensive location; it does not need large amounts
of electricity, advertising, legal advice, high-priced
employees, large inventory, etc.

(6) The ideal business does not require big cash outlays or
major investments in equipment. In other words, it does not
tie up your capital (incidentally, one of the major reasons
for new-business failure is under-capitalization).

(7) The ideal business enjoys cash billings. In other
words, it does not tie up your capital with lengthy or
complex credit terms.

(8) The ideal business is relatively free of all kinds of
government and industry regulations and strictures (and if
you're now in your own business, you most definitely know
what I mean with this one).

(9) The ideal business is portable or easily moveable. This
means that you can take your business (and yourself)
anywhere you want -- Nevada, Florida, Texas, Washington, S.
Dakota (none have state income taxes) or hey, maybe even
Monte Carlo or Switzerland or the south of France.

(10) Here's a crucial one that's often overlooked; the
ideal business satisfies your intellectual (and often
emotional) needs. There's nothing like being fascinated
with what you're doing. When that happens, you're not
working, you're having fun.

(11) The ideal business leaves you with free time. In other
words, it doesn't require your labor and attention 12, 16
or 18 hours a day (my lawyer wife, who leaves the house at
6:30 AM and comes home at 6:30 PM and often later, has been
well aware of this one).

(12) Super-important: the ideal business is one in which
your income is not limited by your personal output (lawyers
and doctors have this problem). No, in the ideal business
you can sell 10,000 customers as easily as you sell one
(publishing is an example).

That's it. If you use this list it may help you cut through
a lot of nonsense and hypocrisy and wishes and dreams
regarding what you are looking for in life and in your
work. None of us own or work at the ideal business. But
it's helpful knowing what we're looking for and dealing
with. As a buddy of mine once put it, "I can't lay an egg
and I can't cook, but I know what a great omelet looks like
and tastes like."