The three pillars of cashflow (Part 3)

This issue is the final part of a three-part series on the “three pillars of cashflow.”

These are my core rules of thumb to tell whether a business is worth investing in, no matter the industry.

You can read the previous two parts here:

• The three pillars of cashflow: Part 1

• The three pillars of cashflow: Part 2

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Last but certainly not least, we’ve got:

Pillar #3: Barrier to entry

Every good castle needs a big, impassable moat to keep invaders from scaling the castle walls.

The same thing applies to businesses and industries.

(Metaphorically, of course... don’t go digging trenches around your property just yet!)

In other words:

When you buy a business, there should be some factor that makes it hard to compete against you.

Let’s say you have an accounting firm.

It’s not easy for other people to just start an accounting firm on a whim. You need education, experience, and a license.

This is a natural “moat” around the business.

On the flip side, many other industries do not lend themselves easily to having a moat.

Landscaping is a perfect example.

If one of my students were trying to buy a small landscaping company for $100k-$200k, I’d caution against it.

Landscaping companies only have a moat when they get to a certain size and can take on bigger exclusive jobs, like tending to an HOA community.

But at a smaller scale, anyone can go buy a mower at Home Depot, mow someone’s lawn, and get paid.

So it’ll just be a race to the bottom where everyone else is undercutting your prices.

The key takeaway here is...

Make sure your industry and business has a moat!

The bigger, the better.

This can take the form of:

• Licensing (and other educational requirements)

• Geography (not a big enough population for competitors to bother trying to take your clientele)

• Years and reputation (some businesses you look at will be 50+ years old — it’s tough to steal those customers if they’re loyal over multiple generations!)

Your moat can be anything else that gives you a competitive advantage like this.

So keep an eye out while you’re looking through potential deals.

Recapping the three pillars of cashflow

That’s a wrap on this miniseries!

To recap, the three pillars of cashflow are:

• Recession resistance

• Recurring revenue

• Barrier to entry

This applies to every industry.

And if a business has all three of these traits, that’s a good indicator that it will keep bringing in healthy cashflow after you close the deal.

Happy deal-hunting!

And speaking of deals...

Fill out the 2-minute survey below, and I’ll put you on my Interested Investor list.

Any time I come across a potential acquisition I think my subscribers might be interested in, I’ll send you an email with the details.

👉 I want to buy (or invest as a silent partner into) a small business

If you have a small business you want to sell, tell me more about it below. We’ll reach out if we find a potential buyer:

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Onward,

— Ben Kelly