Capital Notes

How to Read a Business Before You Back It

By Jason Kumpf

Before putting money or time behind a company, it helps to read it the way a good investor does. A few honest questions tell you most of what you need to know.

• •Understand how it really makes money. Follow the cash, not the story.
• •Look for a durable advantage. What keeps competitors from copying it tomorrow.
• •Judge the people. In the end, you are backing them.

Follow the money

Past the pitch, ask plainly how the business earns and keeps a dollar. What does it cost to win a customer, how long do they stay, and where does the profit actually come from. A clear, honest answer is a good sign. A vague one is a warning.

Look for durability

Good results are easy to admire and hard to keep. The question that matters is what protects them: a brand, a network, a hard-won position, a real cost advantage. A business without something durable is renting its success, and the rent comes due.

Judge the people

In the end, you are backing the people running the company. Are they honest, capable, and clear about what they do not know. Do they treat their customers and their team well. Strong businesses can survive a rough patch with the right people, and weak ones rarely survive the wrong ones.

The bottom line

Read a business by following its cash, testing its durability, and weighing its people. Get those three right and the rest of the analysis gets a lot easier.