Opening or investing in a small business is always a gamble, but investor Jack Stack, who has acquired or invested in more than 60 ventures, has picked up some valuable insights about evaluating the potential success of a new business.
Stack, the founder and chief executive of SRC Holdings in Springfield, Mo., is one of the foremost practitioners of open-book management, which means that all employees are privy to information about a company’s finances. Employees are taught how the business works and how they can be part its success.
While Stack has had a hand in many successful ventures, he’s also seen his share of failures. In a blog in the New York Times, Stack says those failures helped him develop three questions to ask when evaluating a business’ potential.
- Does the company produce positive cash flow? To be successful, every business needs a steady cash flow, which requires managing the spread between payables and receivables. A business need to get paid before its bills are due.
- Does the company cover its costs? Ask if the business can absorb its own overhead. That means they must break out the fixed costs from the variable costs. The fixed costs are the ones that don’t fluctuate with volume, like rent.
- Can it be diversified? Is the company capable of producing different products and services, or can it expand existing products and services to new markets. A businesses shouldn’t put all its eggs in one basket.
Stack says business owners need to ask themselves these questions and look at the business as an outsider would. “If you don’t like what you see,” he says in the blog. “It’s time to begin making some changes.”
This article was submitted by Rohit Arora, co-founder of Biz2Credit. Biz2Credit is a small business marketplace that connects entrepreneurs with financing options and advice to grow their business. Send all questions to