Most small business owners only see "a single business", and do not often make a distinction between the 3 main types that they may be about to create. The author makes a very good case for why there are 3, and why each needs to be better understood. If any entrepreneur is building a business, they need to know which type are you building. This is critical if you hope to sell the business later on in any future exit.
In its most simple form, a simple service can be started by a man with a lawn mower. The service can start "a business" by cutting customer's lawns. Can this lead to a huge multi-million dollar IPO in the future? The short answer is not likely. If it stays in a level one stage of business, the growth will be limited. It is one man with one machine. This basic business only generates revenue based on the limited hours by a person (staff labor) during a day. What is the value of such a business? At its maximum, the total value of sales per year is the most it could grow. There is limited by the operating hours. There is no sales multiple in a level one business.
In a level two business, the lawn mower man builds a circle around the main central mower. A sales person starts to find new customers in new areas. A clean up guy may be hired to gather the cut grass after a cutting. In this case, the business is getting more efficient, but the main lawn mower man is still at the center of the business. If the main owner gets sick or is injured, the business does not operate. This is the key weakness of any level two business.
A level three business creates a more complex organization without the central weakness of any single one key man at its center. At this level, the lawn mower man trains various staff to operate the lawn movers, and coordinates with the sales people in new markets, and the cleaning staff who do clean up operations. If the boss gets sick at this level, the business can still operate while the boss is away. This is the main aim of almost any entrepreneur.
This fully developed type of organization is the scalable style that can grow fast and wide. It is a business system that can lead to a possible trade sale to a rival who wants to buy an existing business that operates a smooth system in a given market. Alternatively, if the owner of this business wants to expand into more markets, he can issue stock, potentially in an IPO, and use the cash to expand and replicate the solid business model, a proven system leveraged into new markets.
The Top 3 Takeaways from this book that impact any reader are:
1) Level one businesses are about a key person in the center. The focus is on charging for that person's time.
2) Level two businesses are about a more efficient staff around a key person. This increases the efficiency of the key person's time.
3) Level three businesses are about removing any single key person, and refining a system that can be expanded and scaled. This is the perfect business opportunity to invest into and generate wealth from.
2) Level two businesses are about a more efficient staff around a key person. This increases the efficiency of the key person's time.
3) Level three businesses are about removing any single key person, and refining a system that can be expanded and scaled. This is the perfect business opportunity to invest into and generate wealth from.
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