What Makes a Business Valuable?

 

To maximize business valuation, it’s essential to focus on three core principles:

 

Recurrent Revenue: Businesses with recurring revenue streams—like subscriptions or long-term contracts—are far more valuable than those dependent on one-off transactions. They offer predictable cash flow and stability, which buyers love.

 

Needs Over Wants: Companies that cater to essential needs—housing, utilities, repairs, software tools—perform better during economic downturns. Wants, on the other hand, are discretionary and tend to suffer during recessions.

 

Low Peak-to-Trough Volatility: Businesses with a low peak-to-trough (i.e., less fluctuation in revenue during downturns) are more resilient and therefore command higher valuations. Quick recovery from challenges further boosts their appeal.

 

My perfect business provides a product or service that meets a need, not a want. Let’s explore what that looks like across three business types: real estate, service, and digital product businesses.

 

 

Real Estate: The Foundation of Stability

 

Why Real Estate Works:

 

People will always need a place to live and spaces to conduct business. Residential and commercial properties cater to needs, not wants, making them resilient during economic turbulence. Whether it’s single-family homes, multi-family properties, or strip malls, real estate offers predictable cash flow and asset appreciation.

 

Key Considerations:

 

Focus on One Type: Specialize in a single segment, such as single-family rentals or commercial spaces, to develop expertise and streamline operations.

 

Unit-Level Economics:

• • Example: A single-family home rented for $3,500/month with operating costs of $2,637 yields $863 in monthly cash flow, or $10,356 annually.
  • Margin: 24.6% gross margin—solid, but with room for improvement.

 

Make-or-Break Issues:

 

Capital is the biggest hurdle. Real estate is capital-intensive, with high upfront costs for down payments and closing fees.

 

Success relies on high-quality tenants and low vacancy rates.

Wealth Proposition:

 

Portfolio appreciation over time.

 

Renters pay down debt on your behalf.

 

Reliable cash flow covers operating costs and builds long-term equity.

 

Service Businesses: High Returns, Low Costs (Example: Towing Company)

 

Why Towing Companies Are Ideal:

 

Towing is a need-based service that performs well in any economic environment. Cars break down, accidents happen, and parking violations occur regardless of recessions, making towing a stable, essential business. It’s also a fragmented market, with many small operators and opportunities for consolidation.

 

Key Considerations:

 

Recurrent Revenue: Contracts with local governments, auto repair shops, and property management companies create steady, predictable income.

 

Unit-Level Economics:

• • Example: One tow truck costs $1,500/month (loan payment, maintenance, fuel, and insurance).
  • Labor for one operator: $5,000/month ($25/hour fully burdened for 40 hours/week).
  • Total monthly operating cost per truck: $6,500.
  • Revenue: Each truck averages 5 tows/day at $150/tow = $750/day or $22,500/month.
  • Gross margin: $22,500 – $6,500 = $16,000/month (71%).

 

Make-or-Break Issues:

 

Customer Density: Clusters of contracts within a defined area reduce fuel and labor costs, increasing profitability.

 

Reliable Contracts: Securing municipal contracts or agreements with repair shops and property managers can ensure steady business.

 

Wealth Proposition:

 

Recurrent revenue through contracts.

 

Low capital expenditure relative to the returns.

 

Potential to scale by adding more trucks and expanding service areas.

 

Digital Product Businesses: Scalable, Recurrent Revenue (Example: Odabi Local)

 

Why Digital Products Are Ideal:

 

Digital products, such as software tools or online platforms, have become increasingly popular due to their scalability, low overhead, and ability to generate recurring revenue. Odabi Local, for example, offers AI-powered marketing and business solutions that address critical needs for small to medium businesses, such as reputation management, social media management, and search engine optimization.

 

Key Considerations:

 

Recurrent Revenue: Subscription models (e.g., monthly or annual fees) create predictable cash flow.

 

Scalability: Once developed, digital products can be sold repeatedly without significant additional costs.

 

Unit-Level Economics:

• • Example: A software-as-a-service (SaaS) product like OLBE charges $100/month per user.
  • With 1,000 users, revenue is $100,000/month.
  • Operating costs for servers, customer support, and maintenance: $25,000/month.
  • Gross margin: $75,000/month (75%).

 

Make-or-Break Issues:

 

Customer Retention: Subscription-based models rely on low churn rates. Consistent updates and excellent customer service are critical.

 

Marketing and User Acquisition: A strong online presence and well-executed ad campaigns are essential to scale.

 

Product Adaptability: The digital product must evolve to stay relevant as market demands change.

 

Wealth Proposition:

 

High gross margins due to low incremental costs.

 

Scalable without significant capital investment.

 

Recurrent revenue increases business valuation and attracts potential buyers.

 

Financing and Unit-Level Economics

 

One of the most critical aspects of scaling any business is understanding its unit-level economics. This involves breaking down costs and revenue for a single unit—whether that’s a house, a tow truck, or a digital product—and optimizing profitability at that level before scaling up.

 

The Parable of the Carpenter and the Blueprint

 

 

Imagine two carpenters tasked with building a table. The first rushes into the workshop, using expensive wood and cutting without measuring. His table looks impressive at first glance but wobbles and eventually collapses under pressure.

 

The second carpenter begins by creating a detailed blueprint. She tests her design on scrap wood, refining her technique and materials until she’s confident in its durability. Her table, though slower to build, stands the test of time and becomes the centerpiece of many homes.

 

In business, the second carpenter represents the importance of getting your unit-level economics right before scaling. Whether you’re operating a towing company, investing in real estate, or running a digital product business like OLBE, mastering the foundational elements ensures long-term success and resilience.

 

Final Thoughts

 

Maximizing business valuation isn’t about jumping at every opportunity. It’s about understanding what works at a fundamental level and scaling deliberately. Focus on needs, not wants. Prioritize recurrent revenue. Refine your unit-level economics before expanding.

 

Whether you’re building a towing company, a real estate portfolio, or a digital product empire, remember: small, thoughtful steps lead to sustainable growth. Build with intention, scale with confidence, and watch your business’s value grow.