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One aspect that my professors stressed in college business courses is that there are two purposes of business: making money and increasing shareholder value. I disagree. I think it's building wealth and making money. But let's really think about it. Businesses are absolutely nothing more than a vehicle to make money and build wealth for the people who are behind them.
So to narrow it down, let's examine the two main ways that entrepreneurs expect to make money and build wealth.
Generate Income
Many people who run companies are only interested in making a good living, and don't really ask for much more. This is the typical mindset in smaller companies like law firms, mom & pop delis, coffee shops, and retail stores. These folks may work 60-hour weeks for 20-30 years and either sell or shut down their company when they're ready to retire. Even if their concept was good enough to franchise out, they wouldn't because they're satisfied with what they have.
The Goal: to make income
Exit Strategy
The exit strategy is where things get fun... we're talking big bucks. Forget about income, the goal is to build wealth in one big bang. Exit strategy means selling or taking your company public. Many executives who hope to sell-out or go public take a minimal salary, just scraping by until the big pay day.
These guys and gals want to take it to the top, and they build their company around their exit strategy from the beginning. When they come up with their company concept they ask themselves... "Will I be able to take this company public, or should I sell it to a bigger company that will want something we have?"
The Goal: to build wealth and get rich
Example
The first Boston Chicken store was opened in 1985 by two guys not far from Boston in Newton, MA. They weren't the "big business" types... their goal was just to work for themselves and generate a modest income. They had success, and sold the company to George Naddaff in 1988.
Nadaff had plans to build a big business by franchising, and that he did. He was thinking big, and wanted to build the company strong and quick, and sell out for a nice profit. This was his exit strategy. He sold the company to a few Block Buster Video executives in 1992 with 34 stores and $21 million in sales. Nadaff made millions through his exit strategy.
So why did the Block Buster guys buy the company? Well, they knew that Boston Chicken was special, and they had even bigger plans in mind for capitalizing off Boston Chicken--they wanted to take Boston Chicken public. So just one year later they took BC to an initial public offering, and their stock was worth tens of millions.
Many people think that companies operate to perform a service, give us a great product, and so on. But don't be fooled by the "customers come first" routine. We have to remember that businesses are run by people, and people want to make money. They just want to provide a good product or service so they can make money.
A classic example that involves both goals, to make income and to build wealth, lies in the story of Boston Chicken.
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