The process · Step 4 of 6
Business model
Do you really understand how the company makes money?
Why this step
The first three steps are largely fact-based. Step 4 cannot be summarised in a single metric and requires real understanding instead of pure data evaluation — which is exactly what makes it one of the most important steps in the whole process.
The six guiding questions
- Which one or two factors drive the bulk of revenue or project value?
- How concentrated is the customer base?
- How capital-intensive is the business model, and how is future capital demand financed?
- Is there a recognisable competitive advantage, or does the company compete on price?
- How cyclical is the business, and in which phase is the sector right now?
- How high is the key-person risk?
Result
At the end, the investment thesis should be expressible in one or two sentences. If that is not possible, the business model is either understood too complexly or too little.
Typical mistakes
- Confusing the story from presentations with the actual business model.
- Skipping this step because the metrics in step 3 were already green.
- Accepting a complex, multi-page explanation as 'understanding'.
Example logic
Example (no reference to a real company): "The company earns its money mainly with one major customer, has a structural cost advantage through a long-term supply contract, and the biggest risk factor is losing this single customer."
Frequently asked questions
Why does the business model come after the financial traffic-light?
Because a weak balance sheet is an objective, quickly verifiable fact, while understanding the business model requires interpretation.
What if the one-sentence thesis cannot be formulated?
That is itself a result — usually more research is needed, or the business model is too complex for a reliable assessment.
How much time should be planned for this step?
Considerably more than for steps 1 to 3 — this step requires reading the annual report.