This paper introduces “The Lane” – a fundamentals-based investor guide for identifying and better understanding the basic elements of a business, and, it follows, whether an investment in that company is a better private investment alternative.
Applying the Lane’s simple framework to investment analysis and due diligence helps organize what is, arguably, the most demanding type of investment analysis – evaluating a private company.
Every business is both complex and unique. Its “business model” represents a build-it-as-you-go puzzle that the enterprise creates, implements, and continually evolves to generate profits.
So, how can a prospective investor efficiently identify and then adequately evaluate a given company’s business model?
Fortunately, despite their many differences, every business is based upon two ingredients: Products (or services) and the Customers it sells them to. Simply put, a business will thrive or fail depending on its ability to:
- Identify and attract enough Customers with a similar need (a business Opportunity);
- Create and profitably deliver a compelling Product (a business Solution) to those Customers.
If this sounds basic, it is. But it’s also the essential first step toward understanding a business.
Too often, an investor, in his or her analysis of a private company, gets distracted by random details without first identifying the primary elements of the business. Details are critical to thorough due diligence, but one must prioritize them to evaluate them in relation to fundamental business drivers.
Some businesses are inherently better than others. They focus their resources on a very good business “Lane” that efficiently delivers their Products to targeted Customers.
Better businesses generate greater sales, with better profit margins, and over longer periods. When well executed, better businesses are more likely to provide investors with the rate of return they expected when they invested in that company’s securities.