The "Flywheel" Value of a Business
Written by Jay Turo on Monday, September 17, 2007
Entrepreneurs and managers of startup companies and small business often under-value the "root" value of their enterprises. Similar to how a car, if it simply runs no matter how poor its condition, has a baseline value, so does a business.
At Growthink, we like to call this a business' "flywheel" value. By this we refer to the value of a business that comes simply from the core aspects of its existence - the assembly of a team of people committed to a common cause, an ability to process business from customers/clients (incorporation, a business bank account, etc.), a brand/history in the marketplace, and the learning/information/intelligence advantages that accrue to the business' principals via the expertise gained from repetitively grappling with and meeting client product and service expectations.
This "flywheel" value is borne out by statistics that, contrary to public perception, show that most businesses - once started - do NOT go out of business at the very high rates usually surmised. A survey conducted by the National Federation of Independent Business' Education Foundation bears this out. While the "common wisdom" is that 9 out of 10 small businesses fail within the first 3 years, the NFIB estimates that over the lifetime of a business, 39% are profitable, 30% break even (providing a living for the principals), and 30% lose money, with 1% falling in the "unable to determine" category.
In other landmark study in this regard in the Journal of Small Business Management, a study was conducted of 5,196 startups in 51 managed shopping centers across Australia over a 30 year period. The statistics showed that over 1/3 of all businesses survive 10 or more years, with less than 6% of theses businesses filing for bankruptcy within a decade.
What does this mean? While for sure growing a successful business requires large doses of talent, perseverance, opportunity, and yes luck, it is by no means an insurmountable challenge. And while weighing the risks and costs of originating and growing a business keep in mind the very large opportunity costs of NOT doing it. And don't be overly swayed by the naysayers who rely on faulty failure statistics for their pessimism.
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