Robert Kiyosaki: Think Big, Think Expansion
I grew up with two dads, and two very different perspectives on money and investing. My poor dad, my real father, was a well-educated, hard-working man who served as the superintendent of education for the state of Hawaii. He was a well-paid employee who ultimately died broke. My rich dad, the father of my best friend Mike, quit school in grade school but used his street smarts and entrepreneurial spirit to become one of the wealthiest men in Hawaii.
My rich dad taught me about “thinking big,” even though he did not talk about it. Instead, the words he often used were leverage and expansion. When he taught his son and me to think about the differences between leverage and expansion, he used the McDonald’s franchise as an example. He would say, “When Ray Kroc bought McDonald’s from the McDonald brothers, he leveraged himself. When he franchised McDonald’s, he expanded his leverage.”
This idea brings me to the concept of the Cashflow Quadrant (see the image above). The letters in each of the quadrants represent:
B Business owner
Each of us resides in at least one of the four sections of the Cashflow Quadrant. Where we are is determined by where our cash comes from – pay cheques or passive income.
Though financial freedom can be found in all the quadrants, the skills of a business owner and investor will help you reach your financial goals more quickly.
When Kroc purchased the hamburger stand, he leveraged himself because the burger business could make money with or without him. And this is where most S-quadrant business owners stop: they keep their businesses small. When Kroc developed a franchise system for the small business, he expanded the hamburger business into the B quadrant.
You may notice I used the words franchise system, the key word being system. In my book Before You Quit Your Job, written for entrepreneurs, I write extensively about the B-I Triangle. The B-I Triangle is the diagram my rich dad used to focus my thinking and to teach me about the eight parts that make up a business.
Many entrepreneurs fail simply because one or more of the eight pieces of the B-I Triangle is weak or nonexistent. Whenever I look at a struggling business, I use the B-I Triangle as an analytical reference.
Notice that the word product is used to label the smallest section, and the word mission is one of the largest sections – as well as the foundation for the Triangle. This is because the product is the least important item in the B-I Triangle, and the mission is the most important. The mission is the spirit of the business; it is the heart of the business. Without spirit and heart, most entrepreneurs will not make it, simply because the road ahead is a hard one.
The world is filled with great products that fail. The products fail simply because they do not have the power of the B-I Triangle behind them.When you study most successful businesses, you will most likely find a complete and vibrant B-I Triangle in action. A great business will have a strong mission, great leadership, a competent team of managers who work well together, excellent cash flow and financing, clear and effective sales and marketing communications, systems that work efficiently, clear and tight legal documents and agreements, and of course, a great product.
Most of us can cook a better hamburger than McDonald’s. But few of us can build a better business system than McDonald’s – which brings us to the word system again. One of the biggest differences between an S-quadrant business owner and a B-quadrant business owner is systems. Typically, the S-quadrant business owner is the system, which is why he or she cannot expand.
Far too many businesses are people-dependent. McDonald’s, on the other hand, is system-dependent. And it has well-designed systems. Regardless of where you go in the world, the McDonald’s business is pretty uniform. Most important, the company’s business systems are often run primarily by people with just a high school education. That is how good and how sound the systems are.
I have looked at so many businesses that are top-heavy, staffed by highly educated and highly paid people who are working hard and accomplishing little. In most cases, these types of businesses focus primarily on people and not on developing great systems. A great team of highly paid people will fail without great systems.
What is the difference between an entrepreneur and a CEO? Making it as simple as possible, an entrepreneur is like a person who builds great race cars. A CEO is like the driver of the race car. If you have a great race-car driver but a poorly built race car, the great CEO will lose every race. Rarely will you find entrepreneurs who are great CEOs. Donald Trump is one of those people. So are Bill Gates, Michael Dell and Steve Jobs. These men can build great race cars and drive them.
In The Rich Dad Company – a Scotts-dale, Arizona, education business that teaches personal finance and business to people worldwide through books, seminars and educational products – we have three people who are both CEOs and race-car builders: Kim Kiyosaki, my wife and co-founder of the business; Sharon Lechter; and myself. Sharon, also a co-founder, is excellent at both building and driving the race car. Kim and I are better at driving, but we do build parts of the car. I often say that I am the horn of The Rich Dad Company, and Sharon is the engine. I would definitely say Rich Dad is a team enterprise.
I have met many people who have become very rich in the S quadrant. Many are small-business owners who are excellent builders and drivers of small businesses. There are also people in the E and S quadrants who become very rich attaching themselves to B-quadrant businesses. For example, Tiger Woods is an S (and, in his case, S stands for superstar as well as self-employed or specialist), but much of his wealth comes from his endorsements of B-quadrant businesses. The same is true with some movie stars. They are S-quadrant individuals but associate themselves with B-quadrant businesses, such as Sony or Warner Bros.
Donald Trump says “think big,” and he builds giant buildings and megahit television shows. My rich dad said to expand, and he meant expanding the way McDonald’s did. Both are forms of thinking big.
Donald Trump: Think Expansively
Robert’s explanation of “Think Big, Think Expansion” is great and totally on point. But let’s take it one step further. Let’s not just think big, let’s think expansively. To entrepreneurs, thinking expansively includes seeing what is possible and making it happen. Entrepreneurs see the vision and call it good sense and inevitable. The rest of the world calls it innovation.
Recently, I read with interest about an innovation that was attributed to me. I was surprised because I had never thought of it as an innovation; I considered it just a way to combine two elements that might work well together. Years ago, when I was doing the first Trump International Hotel & Tower at 1 Central Park West in New York City, I decided it might be a good idea to build a condominium and a hotel together. It turned out to be an amazing success and has been duplicated by me and many others since.
So many times, innovation really results from common sense put together with uncommon thinking. It’s creative, but it’s about innovative assembly more than anything else.
Thinking expansively is just another way to innovate. Sometimes I ask myself, “What else can I include in my thought process to make it more comprehensive? Is there anything I can add that might enhance the project or idea I’ve got spinning around in my head?” Many times, I will tell myself that something isn’t quite right yet, because that automatically opens the door for more ideas to enter. I ask myself, “What am I not seeing? What else is possible?” Sometimes the answers wind up being innovative ideas. It’s not necessarily some secret process, but it is a process, and it requires concentration.
Robert, Kim and Sharon recently visited me at my golf course in California. I shared this story with them: my club has a beautiful ballroom overlooking the Pacific Ocean and the number-one golf course in California, but the room held less than 300 people. We were unable to accommodate many events (such as weddings) because our capacity was too small, so my management team’s answer was to enlarge the building. They came to me with plans to remodel and expand the ballroom, which would cost millions of dollars and lots of time. We would have had to go through the permitting process and close for many months during construction, thus losing millions of dollars in business revenue – on top of spending millions of dollars to remodel!
As we were standing together looking around the ballroom, I noticed a woman having trouble getting out of her chair. The chair was very large, and she had difficulty moving it away from the table so she could stand up. In fact, the room was filled with these huge chairs. I had an immediate vision: we needed new chairs – smaller chairs!
This one idea not only saved me millions of dollars, it even made me money. We earned more money selling the old chairs than it cost us to buy the new gold Chiavari chairs. We are now able to comfortably seat more than 440 people in the ballroom and have increased the number of large events we host as well as the revenue we receive. No expansion of the building was necessary, and we had no downtime. So, I turned a project that could have cost me millions into a profit!
That’s the first step to visionary status – seeing something and knowing it could be different or better.
As I’ve said before, learn your lessons from as many sources as you can. Think and learn expansively. It won’t be expensive, but it can give you some big returns.
9 Ways To Get Employees To Buy Into Your Vision
Your business is your dream come true, now it’s time to include your employees in your vision to drive future success.
Your vision statement is the foundation of your business. It is the baseline against which all strategic planning is assessed and the benchmark against which all results are measured. However, as important as it is to have a vision when it comes to business success, it is equally important to get your employees to buy into this vision to ensure that success.
Here are nine ways to get your employees to buy into your vision by making it their dream, as much as it is yours…
- It must be believable – Your company vision needs to be within the realms of possibility otherwise people just won’t believe in it. It must be steady, achievable and relevant.
- It must be inclusive – Employees need to see how they can play a part in achieving this vision to make it relatable and inclusive. If they don’t understand what the business does, they won’t care how well the business does.
- It must be reinforced – Talk about your vision all the time. Don’t assume everybody has read it or is familiar with it as new people may not have seen it and older people may have forgotten. Constant communication is critical to ensure everyone is, literally, on the same page.
- It must be transparent – Make sure your communication around your vision is open and clear. Talk about it with clients, with all staff members, at all meetings and keep on talking until everyone understands it. When a vision is tangible and accessible it is far more achievable than when it is ethereal and vague.
- It must be practical – Don’t make flamboyant statements that are almost impossible to achieve like, ‘We will be number one in X!’. Be practical. It doesn’t matter if you’re not number one, it does matter that your vision is practical.
- It must be shared – Connect people’s careers to the vision by creating opportunities for them. Show them how the work they do is tied back to the vision and the business. If the business is only about profit and customer, then employees often don’t see how they fit in or why they are important. Create opportunities for them and they will be inspired to achieve your vision.
- It must be people-centric – People make up the core of your business. It is bigger than just one person or one idea. So, give them something to aspire to with a realistic, practical and human company vision.
- It must have purpose – Embed your vision and its values into the way you do business. The way you treat your employees and your customers and the choices you make should all reflect your vision. Take it beyond just ‘We want to make money’ and show how your vision positively affects your community and others.
- It must be visible – Put your vision on doors, in emails, on letterheads, in proposals. Show what you stand for at every opportunity. Employees need to feel that there is a cohesive plan for the future. This will not only drive engagement but it will keep them steadfast when times get tough – they believe in the ship too much for it to sink.
What’s Your Number? How To Unpack Company Valuations
Business is booming. Investors want in. But how do you put a price on the value of the company you have built with your own hands?
Company valuations is such a hazy part of the scale-up journey of a private company. Putting a price tag on a business is both art and science. At the end of the day, the number that makes the headlines (if ever disclosed) will be where willing buyer and willing seller meet.
But how do you , as business owner, go about setting your asking price? Before approaching investors, it’s a good exercise to determine your own valuation range for the business. Choosing the right valuation method is the first big question. The answer has many parts to it, but the most important driver is the stage of the business.
Let’s look at some of the most commonly accepted valuation methods in our market:
Applicable stage: Established, profitable companies
Listed companies, institutional players and private equity investors normally invest in a company for its cash flow profit that can contribute to their portfolio income. More often than not, companies will be valued based on their current earnings (bottom line profit after tax).
This method can only be used for companies that consistently make a profit. A multiplier will be chosen based on the company’s perceived risk. Younger, more risky businesses will likely have lower multipliers (as low as 3 and 4) and high growth, well established, lower risk companies will get higher multipliers (8-15).
Sometimes small adjustments are made to current year earnings (like non-standard, non-repeating income statement items) after which the valuation is set at Earnings times multiplier equals company valuation.
Discounted Cash Flow (DCF)
Applicable stage: Post-revenue start-ups, growth companies and established businesses
The most commonly used method in practice, the DCF method argues that a company’s value is determined by the future cash flows that it will yield to investors.
The starting point is creating a five to ten year cash flow forecast for the business. This is no small feat. In order to create a full financial model – income statement, balance sheet and cash flow statement – for the next decade requires a lot of work, both from a strategic and technical perspective.
Investors love this model because if forces the owners to put a clear strategy and expansion plan for their business into numbers. It will include dozens if not hundreds of assumptions – all of which can be scrutinised for reasonability. The result of financial model will be five to ten years’ worth of projected cash flows. These amounts are then discounted to present value at a discount rate that reflects the company’s risk and expected cost of capital.
The sum of the discounted future cash flows plus a terminal value (that represents the value after the five or ten year period of the model) then represents the valuation of the company after some final small adjustments for things like existing debt in the business.
A revenue multiple valuation approach is focused on the market for similar businesses and is underpinned by your company’s current turnover. It seeks out the sales price of other similar companies in the country or worldwide, adjusted for size, stage and market differences.
A company that sold for R100 million at a turnover of R50 million would have a two times revenue multiple (valuation/revenue). If the average revenue multiple for similar companies is in a certain range, this multiple is then slightly adjusted and applied to your business.
If the average sale in your industry has been two times revenue but you are growing much faster than the average with a better competitive advantage, you can argue that two and a half times revenue is a more applicable number for your business. Revenue multiples are often used as a reasonability check in the market for the current asking price.
Most established companies are valued using one or a combination of more than one of the above three methods. At start-up stage, there are a number of other methods like Cost to Replicate or the Scorecard Method that early stage investors look to. When a company is simply in too early stage to practically value it, seed stage investors would also consider SAFE Agreements (Simple Agreement for Future Equity) – an instrument that determines that the percentage of the company the investors are buying with their investment. This is only determined when the Series A round is raised at a future date and under certain conditions, generally at a discount to the price the series A investors are paying.
Company valuations are complex. Many of the above technical factors play a role. A lot of it also comes down to the salesmanship of the owners and the negotiating capabilities of the parties. In ‘How Yoco Successfully Secured Capital And The Importance Of A Pitch’, the Yoco team speak about the importance of the right approach in their recent R248 million fundraising
Don’t go into this process without seeking some kind of expert advice. The price of the wrong valuation is simply too high. Make your numbers and your arguments bulletproof and you will be on your way to defending a strong and exciting valuation for your next raise!
3 Keys To A Vision Others Can Own
Trying to get others to buy into a vision that is all about you getting more money is not going to excite people.
I get really excited about my dreams. Over the years, as I have led my team, I have realised that they aren’t as excited about my dreams as I am. I own two restaurants and employ minimum wage employees. In the early years of owning my restaurants, turnover killed me. I used to fight for them to have the same passion for my goals and dreams as I had and as a result I had extremely high turnover. Confused and frustrated, I knew I needed to change the way I was leading a team.
A few little changes have created a committed team and extremely low turnover. If you don’t have a passionate, committed long-term team, check these simple vision casting strategies.
Often our vision that we cast is shallow and self-serving. A vision that is all about you getting more money is not going to excite people. Take some time to uncover what you are trying to accomplish. When you can cast a vision beyond your selfish desires, others can sink their teeth into the vision. For my company, I wanted to raise up leaders to change the community.
My focus changed to my crew and they could feel the shift in perspective, which also helped me to earn a bi-product of more money, my original desire.
Our deeper vision helps us keep and build a team, but it’s still our vision. We need to really understand the goals and dreams of our team to find untapped potential and loyalty. No one will ever care as much about our vision as us because it’s ours. The more focused you get about helping your team and their wants and desires, the more they will care about yours. In my restaurant I had a young lady who wanted to be a teacher. I thought about what it takes to be a great teacher and how I could help her toward that. Find out what they care about and dig deeper to see what is behind that desire.
Marry the Two
If you have a team running around caring only about their vision they may be loyal and passionate, however, they will not be united in one direction. Magic happens when we combine our vision and their vision. At the points of intersection, our interests and theirs are united to accomplish more. I want to encourage leaders who can change the community.
As for the employee I mentioned above who desired to be a teacher, I trained her toward being a better teacher so that she could raise up young leaders to change the community. Now she is one of my top supervisors and teaches many other crew members. She will be an awesome teacher someday, but in the meantime, she is a valuable team member.
Caring for a team and helping them see how your vision and their vision can help each other will change everything. Growing people is the business no matter what business we are in. Care for others and they will care for you. Care only for your own wants and you will never get the most out of your team. Find a deeper vision, figure out your teams’ vision, and combine the two and your business will transform.
This article was originally posted here on Entrepreneur.com.
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