Three-Legged Business Stool

A framework for understanding the three critical components needed for business success, based on Shaan Puri's experience running businesses.

The Three Legs of Business Success

• Growth - Expanding the business
• EBITDA (Profit) - Earnings before interest, taxes, depreciation, and amortization
• Free Cash Flow - Actual cash available after expenses and investments

Order of Priority

1. Product Market Fit

   • Verify people want what you're making
   • Ensure market pull exists

2. Growth

   • Focus on doubling revenue yearly
   • Prioritize growth before profitability
   • Easier to optimize profits after achieving scale

3. EBITDA/Profit

   • Set appropriate EBITDA margin targets (10-25% typical range)
   • Create EBITDA budget allocating revenue percentages
   • Find extra margin points across departments

4. Cash Flow

   • Ensure profits convert to actual cash
   • Manage working capital (inventory, receivables)
   • Focus on free cash flow to owners

How to Shift to EBITDA Focus

1. Research industry standards

   • Talk to others in same space
   • Determine realistic margin targets
   • Aim for 60th percentile of industry

2. Create EBITDA budget

   • Break down revenue allocation by category
   • Analyze last 12 months spending
   • Identify areas to cut for margin improvement

3. Communicate relentlessly

   • Share new priorities with leadership
   • Make EBITDA the primary metric
   • Have departments create margin improvement plans

4. Align incentives

   • Tie bonuses to EBITDA targets
   • Remove caps for exceeding targets
   • Make profitability everyone's responsibility

5. Regular cost reviews

   • Do monthly "spring cleaning"
   • Cut unnecessary subscriptions/expenses
   • Keep finding new areas to optimize