Should entrepreneurs always "Follow the numbers"?
Should you be led by the numbers in your business buying and selling decisions? Let's deal with that today.
Having previously bought various properties, I'm now considering selling one A selling or buying decision around any asset, including property, or a business is a lot of the same sort of thing.
So you're buying an asset or selling an asset, which has a capital value, and then it will, if it works well, generate cashflow, sometimes negative if you get it wrong.
So should you be led by the numbers?
I've been on a train with a Google sheet, working out the capital gains of selling a residential property versus keeping it.
What's interesting is how one arrives at decisions in business the nice thing about business is numbers guide you. Should they lead you? Should they guide you? Should you ignore them?
Let's take one extreme at a time and examine how it works.
Thesis: Ignore numbers (go with your gut)
Extreme number one is to ignore the numbers and go with your guts, follow your intuition.
There's a difference, between your guts and immediate instinct.
Instinctive reaction to pain causes short-term decisions
Running a business or owning property.
Can be painful. , there's legal liability people hassling you, spending your own money and time and regulations always increasing. Both in business and residential property. My experience in the uk, Amazon selling is not getting any less full of regulations particularly if you sell in the eu or you know, if you're looking at Amazon's legal changes.
Okay, so gut reaction might be just sell the damn thing because it's painful, but anything worthwhile can be painful. That's probably not a good plan.
Now, what about intuition? If your intuition says, it's hard work, but the pain is not worth the gain. You might be right. Intuition can, misguide us because we overrate immediate pain and underwrite future pain. So if we do something now that makes them the easy but cost you a lot of pain in the future, that's not a very rational way of making decisions.
Pure instinct or intuition has its dangers. So in the pure form, probably unwise, although one should not ignore one's intuition as an entrepreneur,
Antithesis: Being led purely by the numbers
Here's version two, led by the numbers, not guided by the numbers, but just led by them.
The classic example of that mistake is in the the lockdown period or just after that, a lot of aggregators, private equity companies with a lot of money went out shopping for e commerce businesses based on Amazon. They made multiple mistakes, but one of them was based simply on following the numbers.
A lot of very smart people, many of whom I interviewed for the podcast at the time, were involved in that, but they didn't have Amazon common sense or e commerce common sense they were good at, number analysis. So they analyzed the numbers but what they didn't take out was any kind of common sense.
Why did the aggregators get it wrong in 2021-22?
If you look at the root cause of the massive increase in revenue and profits of e commerce businesses around 2019, 2020, was obvious. The pandemic and lockdowns particularly in the UK and US. Were extreme.
I was in the UK at the time, so yeah, that is in retrospect, I guess, very obvious what was, was going on there. Even at the time it wasn't rocket science to think there would be some kind of aversion to shopping in a physical location after the Pandemic, how much was going to be hard to call, but it wouldn't be zero. And there was going to be some reversion to spending discretionary earnings.
So consumer spending, you could spend on whatever that isn't just your rent or mortgage on some services such as entertainment, going out to pubs. Technically they're buying products, but they're kind of consuming them immediately. So it's kind of a service or other services like going to the cinema or going...
