What do investors look for? A founder who genuinely believes every word of the pitch, a story that hits the problem in the first minute, a team that can actually execute, and a clear answer to where every dollar goes. Kevin Harrington, an original shark on Shark Tank, says the passion gets you in the room, but the team and the use of proceeds get you the check.

Kevin has taken thousands of pitches. His official bio credits him with creating the infomercial, pioneering the As Seen on TV brand, launching more than 500 products that produced well over $5 billion in global sales, and building 20 companies that each topped $100 million in revenue.

I wanted the inside advice a lot of entrepreneurs need right now. How do you approach investors, and what really matters when you’re presenting your business idea? Here’s what he told me.

What investors look for in the first 10 seconds

Before you’ve said anything useful, Kevin is already doing what he calls the old 10-second look. How confident are you? How do you present yourself? Are you delivering this in a powerful, passionate way?

Most of all, he wants to know you believe the words coming out of your mouth. “Too many people, someone’s written them a script.” He wants the real deal, not someone reciting a deck they didn’t build.

How to pitch to investors: tease, solve, seize

At one pitch contest, founders had eight minutes each. One guy took seven minutes to even mention his product. Kevin had to tell him straight: if you’re taking eight minutes of all these valuable people’s time, learn to deliver a reasonably good pitch. “You lost us.”

His structure is simple, and he slowed down to make sure I got it:

1. Tease. Open with an attention-getting problem.
2. Solve. Show how you solve it, with demonstrations, “magical transformations,” testimonials and documentation, plus a little competitive analysis.
3. Seize. Close with an irresistible offer.

Kevin points out he hears pitches for a living, but most people you pitch don’t. If you don’t grab their attention with the problem first, you’re probably not going to land, “especially if you’re looking for money.”

Why investors stopped betting on the jockey

I asked Kevin whether he’d ever backed someone on attitude alone. Somebody who walks in with so much certainty that you just want to work with them. His answer surprised me. Not anymore.

He used to bet on the jockey, the entrepreneur. He’s been let down too many times. Plenty of gung-ho founders with all the passion in the world have driven a business into the ground because they couldn’t execute. Maybe they had one skill set, but no finance or operations, and they never surrounded themselves with people who did.

The person, their passion and their belief still weigh very heavily. But if someone wants half a million dollars, Kevin wants to see the right structure, the right team and the right expertise behind them first. “I’ve seen entrepreneurs run through the money real quick and say, ‘Well, sorry, we just didn’t make it.'”

Tony Robbins once told me your business will eat as much money as you throw at it. Kevin agreed. That’s exactly why investors want counterbalances around a passionate founder.

Use of proceeds: the question that kills deals

One of the big questions on Shark Tank was always: what’s the use of proceeds? In plain English, if I write you the check, where does the money go?

Kevin told me about a founder who wanted a quarter of a million dollars. The plan was a down payment on a building, office furniture, a copy machine and printers. That was the whole $250,000. Kevin was out. Where was the marketing plan? The rainy day fund? The budget for public relations, advertising or a launch? “You can tell pretty quickly that they really haven’t thought out how they’re gonna really launch this business.”

A good operations or finance person makes you think through the cost of hiring and the cost of weathering the opening months of cash flow, because cash flow doesn’t come out of the box. It builds.

Then there’s the office. Kevin once visited a company with about five employees in 7,000 square feet of expensive space, complete with a ping pong table and a Skee-Ball machine. “You don’t need a ping pong table until you become Facebook.” I see so many people trying to pimp out their office space. Get the profits coming in first, then deck it out later.

Same goes for the funding announcement. A lot of people celebrate millions in investment, money that isn’t theirs, without a plan for it. Kevin’s point: nobody wants to give you $5 million that’s supposed to last 18 months and see you back in six or eight months asking for more. Unless your numbers have changed dramatically, that second round gets very hard.

Get investor-ready before you ask

Kevin’s biggest early mistake was being a young, cocky entrepreneur who thought he could do it all himself. He started with $25,000 and assumed that once he was successful, people would throw money at him. It doesn’t work like that. He ran out of capital.

So he hired a former bank president who knew how to raise money. The first thing that man asked was, “Where’s your contract file?” Kevin didn’t have one. With 30 products on air and eight or ten contracts per deal, writers, producers, directors, hosts and inventors, they had 300-plus contracts scattered everywhere. A lender wants to see every one of them, and wants to know there are no contingent liabilities like possible lawsuits waiting out there.

They spent 90 days getting ready before they asked anyone for money. Then they raised $3 million, which Kevin says gave them enough capital to grow to $100 million in sales. Whether you’re raising on a SAFE, a convertible note or a priced round, the diligence starts the same way: show me what you’ve signed.

My takeaway? Ignorance isn’t always bliss. And if you don’t have a strength in a certain area, find someone who does. It’s the lesson almost every first-time founder learns the expensive way.

Bring in experts whose track record helps you raise

When Kevin launched a beauty business with the model Kathy Ireland, he admitted beauty wasn’t his world. He does gadgets, fitness and kitchen products. So he brought in an executive who had spent a decade running a major beauty company, first as a consultant and then as president and COO.

That hire did two jobs. The company got real expertise, and Kevin used the executive’s resume to go out and raise capital for the new venture. The right people help you run the business, and they help you get the right money to grow it.

Prove it before you bring investors in

Kevin likes being first to market, but he’s honest that pioneering is riskier. As an investor, he prefers to get in when something is safer and more proven. As an entrepreneur, he expects to fail more than he succeeds, so he tries to fail fast and fail cheap, then get to the big winner.

That’s why he’ll often keep 100% ownership of a new idea until he’s proven it, and only then bring in investors if he needs to raise big money. “I don’t have to write every check, but I’ve proven it out now, so it’s a little safer investment.” To me that’s calculated risk, the same way Richard Branson likes to negotiate the downside before he jumps.

And proof is exactly what investors are looking for. For every company of his that hit $100 million, Kevin says, two or three didn’t succeed. I love that he said it out loud, because it gives people permission to be okay with failing on the way to a win.

Run a dollars-per-minute check on your day

One more habit worth stealing: how you spend your time. Kevin learned it from Home Shopping Network, which schedules tomorrow’s airtime based on today’s sales per minute. If a product was expected to do $2,000 a minute and did $1,000, they’re not happy, and the schedule changes.

He runs his day the same way. If he’s got three things he could do in the next hour, which one has the highest profit potential for the time? Some people waste half their day on things that generate no revenue, then wonder why they’re out of cash. My view: a founder who manages minutes like that will probably manage an investor’s money the same way.

What investors look for: a pre-pitch checklist

1. Can you say the problem in your first 30 seconds?
2. Do you have a demo, a transformation or a testimonial that proves you solve it?
3. Is there a clear, irresistible offer at the end?
4. Who on your team covers finance and operations?
5. Can you show line by line where every dollar goes, including marketing and cash flow?
6. Are all your contracts in one file, with no surprise liabilities?
7. What have you already proven with your own money?

Kevin closed with a quote from Paul J. Meyer that he lives by: “Whatever you vividly imagine, ardently desire, sincerely believe, and enthusiastically act upon, must inevitably come to pass.” I’d add one thing. Knowing what investors want won’t get you funded. Walking in with every answer on this list will.

FAQ

What do investors look for in a startup?

A confident founder who believes in the idea, a team that covers finance and operations, proof the product works, and a clear plan for the money. Shark Tank investor Kevin Harrington says passion alone no longer gets his check without the team to execute.

What do investors look for in a pitch?

Kevin Harrington wants a tease, solve, seize structure: open with an attention-getting problem, solve it with demonstrations, testimonials and competitive analysis, then close with an irresistible offer. Don’t wait seven minutes to say what the product is.

What does use of proceeds mean?

Use of proceeds is exactly where an investor’s money will be spent. Investors want it tied to your business and marketing plan, with room for marketing, hiring and early cash flow, not just buildings, furniture and equipment.

Why do investors bet on the team, not just the founder?

Passionate founders without finance or operations support often burn through capital before the business works. Harrington says he’s been let down too many times betting on the jockey alone, so he backs founders surrounded by people who can execute.

How do you prepare your business to raise money?

Organize every contract in one file, clear up possible liabilities, build a use-of-proceeds plan and bring in experienced help. Harrington’s company spent 90 days getting ready before raising $3 million.

How to build a brand from scratch starts with a blunt question every buyer will ask you: why do I need you? Answer it by going straight to the end customer, earning proof from someone your market already trusts, and treating every no as information. That’s how Joe Foster took Reebok from a secondhand-machinery shoe shop to the world’s biggest sports footwear company, by his account.

Joe co-founded Reebok with his brother Jeff in 1958, and the family’s shoemaking goes back to their grandfather, who pioneered the spiked running shoe in 1895, according to Joe’s official site. His grandfather’s shoes were on the feet of Harold Abrahams, Eric Liddell and Lord Burghley, the athletes immortalized in Chariots of Fire.

A lot of people see the glory, but they don’t hear the story. Most guests give me tip number one, strategy two, principle three. Joe gave me the journey, and the lessons are all through it.

Start by refusing to let the business plateau

Reebok exists because the family company was dying. Joe’s father and uncle had inherited a world-class business and just kept it ticking over. No marketing. No plan. They fought more than they talked. “You need to drive a business forward. It can’t plateau. It will go down if you don’t drive it forward.”

Joe told his dad they had to change. His father’s answer was that when he and Uncle Bill were gone, the company would be theirs to run however they liked. Joe’s reply: “Dad, firstly, we don’t want you to go. But secondly, this business will be gone long before you.” After three years of trying to persuade him, Joe and Jeff walked out and started their own company.

Bootstrap the first version

They didn’t have investors. Before they left, they took evening classes in shoemaking, made friends in the trade and picked up advice. That network let them buy secondhand machinery, which was cheap once the industry’s technology moved on. Joe laughs that even their old machinery was newer than what the family firm had.

If you want to bootstrap a brand, that’s the lesson. Learn the craft, build relationships before you need them, and start with the gear you can afford. They called the company Mercury Sports Footwear and started making money.

Pick a name you can actually own

Eighteen months in, their accountant told Joe to register the name before someone else used it. Too late. A big shoe company had already registered Mercury and would sell it to them for 1,000 pounds. For two brothers who were barely afloat, that was impossible.

The trademark agent said bring me 10 names, not one, so we can test them all at once. Joe went to the Webster’s Dictionary he’d won in a running race as an eight-year-old. He liked the letter R because it felt like a strong start to a word. In the R section he found Reebok, a small South African antelope. Two syllables, strong, and it fit a running shoe company. He put Reebok at the top of the list and told the agent, “We’ve gotta be in love with this. It’s gotta be our passion.”

It was the only name on the list that came back free. Even then it went into part B of the register, because it was an animal’s name. Twenty years later the registrar moved it to part A, because by then everybody knew Reebok was a shoe, not an animal.

Answer the question “Why do I need you?”

This is the part I’d tattoo on every new founder. Joe would walk into sports stores with a bag of shoes and say, “I’m Reebok.” The store owner would say, “Reebok? Who?” Then, “I’ve got Adidas, and I’ve got Dunlop. Why do I need Reebok?”

Joe’s honest answer to himself: you don’t. Their shelves were full. So he realized he was selling to the wrong person. “I should be really selling my shoes to the athlete.” The retailer was just somewhere in between.

The UK’s Amateur Athletic Association had a handbook listing three or four hundred affiliated clubs, with the name and address of every club secretary. Joe wrote to them. He offered a 15% discount from retail, which a club member could keep as an agent or put toward club funds. He got a lot of agents and sold a lot of shoes.

Then the retailers started calling him, asking him to stop selling direct so they’d stock Reebok. He said no, he’d keep selling to clubs, but they could have it at wholesale. Joe says 60 to 70% of them started stocking the shoes anyway. Going direct raised the bar for the brand. “Our brand suddenly became a desirable brand.” Reebok stopped being just another name on a shoe.

What I love here is that Joe moved close to the heartbeat of the market. He went and found the people with influence instead of waiting for permission from the middleman.

Go where your brand can win, then keep showing up

Joe was honest that some doors were already closed. His grandfather once supplied 96 football and rugby clubs, but by the time Reebok started, Adidas owned football. Too expensive and too big to fight. So he looked at America, where every college had a running coach and athletics could get you into university.

His first trip to the big U.S. sporting goods trade show was 1968. People liked the shoes and asked where to buy them. “England.” “Is that New England?” Nobody wanted the hassle of importing. They’d try it when he had a U.S. distributor.

He went every year. He didn’t land his distributor until 1979. “That’s 11 years.” In that time he had at least six failed attempts with different partners.

Earn proof that someone else hands out

The break came from a magazine. Runner’s World was the bible of the U.S. running boom, and it ranked shoes. A number one ranking created demand nobody could supply, so the magazine moved to a star rating, with five stars at the top. Joe saw the opening immediately. “We’re a running company. What we need now is a five-star shoe.”

He designed the Aztec specifically to earn five stars. Kmart wanted 25,000 pairs, but Joe wanted a real distributor. Paul Fireman, who ran a small Boston outdoor goods distributor, was keen, but only if Reebok had a five-star shoe. Joe couldn’t guarantee it. When the shoe issue came out, he called Paul at 7am Boston time and told him to get to the kiosk. The Aztec got five stars. So did the Midas and the Inca. “That was our entry. That was the difference. That was the hook.”

For a new brand, borrowed trust beats anything you can say about yourself. Find the rating, the award, the review or the expert your buyers already believe, and build the product to win it.

Listen to the people closest to the customer

The move that made Reebok huge didn’t come from Joe. Arnold Martinez, a tech rep in Los Angeles, saw his wife coming home buzzing from aerobics classes. He went along and saw instructors and students in running shoes, plimsolls or bare feet. His idea: a soft glove-leather shoe with a cushioned sole.

Paul said no. Running was booming, so why play around with shoes for a dance class? Arnold didn’t take no. He went round the back to the production people and talked them into making 200 pairs, then handed them to instructors. Reebok suddenly became a fitness brand. Jane Fonda wore them in her workout videos. Sigourney Weaver wore Reebok high-tops. The competition called it a phase.

That phase took Reebok from $9 million to $30 million, $90 million, $300 million and then $900 million in successive years, Joe told me. By the time he retired, he says, Reebok was doing $3.8 billion and had overtaken both Adidas and Nike as the number one sports footwear company in the world. Timing helped too. Nike had hit a wall, so Reebok could fill factories in the Far East.

Treat every no as a learning curve

When I asked Joe what aspiring entrepreneurs need to get their head around, he went straight to the nos. “No is not an answer. No is only just a little hiccup on the way. No is something to get round.” Every problem means you’re learning something else. When retailers wouldn’t take him, it forced him to find another way to the customer, and that made the brand stronger.

If you’ve ever let rejection stop you, think about this. Someone once asked me: if you knew for sure all you needed was 10,000 nos to make a billion dollars, would you do it? Most people would say yes, because they’d know a yes was coming. Joe’s version is just as blunt. “An entrepreneur is another name for a risk-taker, because if it’s certain, everybody will do it.” His advice when people ask whether they should go for something? “Just go for it, because you’ll only regret it if you don’t. And if you fail, so what? Get up. Go on again.”

Know who’s the visionary and who’s the integrator

Jeff loved being in the factory and making the shoes. Joe did everything else: design, marketing, sales and all the travel. Joe was the visionary and Jeff was the integrator, and they played strength for strength.

That partnership got tested at the worst moment. Just as the five-star breakthrough hit and the volume problems started, Jeff got sick with stomach cancer and died very quickly. Joe had to do the Far East trip himself and bring in other people to run the factory. They got through it. Know your role, but build a team that can carry the business when life hits.

How to build a brand from scratch: the Reebok checklist

1. Write down the honest answer to “Why do I need you?” before a buyer asks.
2. Find a direct line to your end customer, the way Joe used the club secretaries list.
3. Register a name you love and can own, early.
4. Pick a market where the giants haven’t locked the door.
5. Identify the rating, review or expert your buyers trust, and build to win it.
6. Give your reps and front-line people a way to test ideas small, like 200 pairs.
7. Count your nos as lessons, and keep showing up.

Joe’s parting advice was three words repeated: “Enjoy life. Have fun, fun, and fun.” I’d add one thing. Knowing his story won’t build your brand. Writing those letters, making that call and showing up for the eleventh year will.

FAQ

How do you build a brand from scratch?

Start with a clear answer to why customers need you, then reach your end customer directly, earn trusted third-party proof and keep testing. Reebok co-founder Joe Foster sold to running clubs, built a shoe to win five stars and treated every rejection as a lesson.

How did Reebok get its name?

The brothers’ first name, Mercury, was already registered. Joe Foster searched a Webster’s Dictionary he won in a childhood race and found the reebok, a small South African antelope. It was the only name on his list of 10 that was free to register.

Who founded Reebok?

Brothers Joe and Jeff Foster founded the company in 1958 as Mercury Sports Footwear and renamed it Reebok soon after. Their grandfather, Joseph William Foster, pioneered the spiked running shoe in 1895, according to Joe’s official site.

How do you get retailers to stock a new brand?

Create demand they can’t ignore. Joe Foster sold directly to athletic clubs at a 15% discount, and once customers wanted the shoes, he says 60 to 70% of the retailers who had passed started stocking them at wholesale.

How long does it take to build a brand?

Often longer than founders expect. Joe Foster went to the U.S. trade show every year for 11 years and had at least six failed partnerships before landing a U.S. distributor, then the brand’s growth accelerated quickly.

How to grow your business in a recession comes down to adapting faster than your competitors, getting more done with less instead of only cutting, and keeping your team focused on the two or three things that actually make money. Dave Liniger, co-founder of RE/MAX, says the company went through eight recessions in 50 years and made money in every one except one. That’s the playbook I wanted to pull apart.

If you don’t know RE/MAX, you’ve almost certainly seen the sign. Dave and his wife Gail started it in 1973, and it has grown to more than 140,000 agents in over 110 countries, according to his official site. He started with one agent, no money and no partners. When I asked him to sum up his life in one word, he said adventure. The biggest adventure, he said, was taking an idea with nothing behind it and ending up in a hundred-and-some countries.

So I asked him straight: when the leads slow down, do you cut costs, double down on sales or get more resourceful? Here’s what he told me.

Eight recessions, one losing year

Dave put it plainly. Over that 50-year run he lived through nine U.S. presidencies, “a couple were geniuses, a couple were out and out crooks and a couple were pretty stupid,” and his summary of the business side was simple. “We went through eight recessions and we made money in every recession except for one.”

Most people treat a recession like weather. Dave treats it like a test you can study for.

And it wasn’t overnight. In the early days he made a lot of management mistakes. “It was my fault. I was very naive.” They stuck with it, and within five years RE/MAX was the number one real estate company in Colorado.

Why adaptability beats strength in a downturn

For years RE/MAX said it won because of the quality of its agents. Dave now says it was really their adaptability. The agents who lasted were the ones who took on a changing industry and a changing economy instead of staying in the same old groove.

He framed it with the famous line about survival: it isn’t the strongest of the species that survives, it’s the most adaptable. Dinosaurs were strong. Mosquitoes are still here. Quick note for the record, though. That wording isn’t actually Darwin’s. The Darwin Correspondence Project traces it to a 1963 paraphrase by management professor Leon Megginson. The idea still holds up in business, and Dave’s conclusion is the part that matters: “Embracing change and not being afraid of change is a cornerstone of anybody’s big, big success.”

My take? In a slow market you’ve got to be able to think quick on your feet and have the courage to take risks when other people are holding back. Most people throw the towel in way too early.

Don’t just cut costs. Use the theory of more

Dave read The Magic of Thinking Big by David Schwartz and copied one paragraph onto a plaque in his office. He calls it the theory of more. Progressive farmers look for more bushels per acre, more eggs per hen, more pounds per cow. Manufacturers try to make more widgets with less waste.

When most people hear the word recession, the first thing they do is cut costs, lay people off and get the budget under control. Dave doesn’t say that’s always wrong. Businesses get fat in good times. But he calls it a knee-jerk reaction. “You should be looking at your balance sheet all the time.”

Then he flips it. If the market’s bad, it’s bad for everybody. So what can you do to take advantage of it, and how can you take market share from the people who aren’t making good changes? That’s the question. How do you get more done with less?

Before you touch anything, know your runway. Know how many months of cash you actually have, then decide what to trim and where to push. A good mentor of mine once said there’s the economy, and then there’s your economy. The headlines don’t get to decide how you think.

Leaders sell hope, especially when the news is bad

I asked Dave which leadership principle mattered most. His answer: all great leaders sell hope. They inspire people to believe there’s a better way.

In his case he was selling real estate agents the dream of a better compensation model. In the early 1970s the standard deal was a 50% commission split, and nine out of ten people who got a license didn’t have it two years later. RE/MAX let agents share office costs and keep most of their commission. The industry hated it. It worked anyway.

And he didn’t sell it from a corner office. Dave was the company’s number one trainer for over 40 years and traveled at least 200 days a year. “I was the chief cheerleader of the company more so than a CEO.” When people are nervous, that’s the job.

Shrink your business down to two or three things

Dave says there’s no such thing as total balance. The real skill is setting priorities, and that means focusing on two or three simple things.

At a Darren Hardy seminar, Hardy asked the room to describe what they do in one sentence. Dave and his CEO put their hands up at the same time and said it together: we sell franchises, we recruit and retain sales associates, and we collect the money. That’s it. You can get lost in a hundred services, but if those three things stop, the company stops.

His warning about shiny objects is even more useful in a downturn. Everyone chases the newest app. Dave says focus on the service you give your clients. Give outstanding service and clients send you customers, so you don’t have to go out and prospect. If you struggle to stay focused when every tool and trend is screaming for your attention, start there.

The team you start with is never the team you end with

Early on, you’re the chief cook, bottle washer and janitor. But Dave says the minute you’re profitable, you need to hire talent that’s better than you.

Then he admitted a mistake. For 38 years in real estate he bragged that no officer had ever voluntarily left the company. He was proud of it. Now he says he was wrong. Many of those people didn’t keep up as the company grew, and he let them tag along too long. In a recession, carrying people who’ve stopped growing is expensive.

Raise your circle and watch your own behavior

Dave quoted the Jim Rohn idea that you become the average of the five people you spend the most time with. You pick up their work habits, their attitudes and their drive. His golf example: you play better when you’re with serious golfers. You play up to your competition.

I believe your association determines your destination. You start acting like the people around you without even knowing it.

The same thing runs the other way inside your company. Dave calls it boss watching. “If you are the boss or you’re the supervisor, no one ever stops looking at you.” Be kind and professional and you build that culture. “If you’re a jerk, jerks will join your company.” When a downturn hits, your team copies whatever you do with the pressure.

Improve 100 things by 1%

Dave’s book The Perfect 10 is named after gymnastics and diving, where a perfect score almost never happens. His answer for small business owners is kaizen: improve 100 things 1% at a time, not one thing 100%. “Don’t seek perfection, seek continual improvement.”

His advice is to ask yourself every day how you can do this a little bit better and a little bit less costly. Stack enough small wins and a lean year starts to look like progress. I summed it up to him like this: you can have it all, just not all at once. He agreed.

Turn fear into normal, then go again

Dave started racing NASCAR in his 50s after Bill Marriott invited him to a two-day driving school. By the end of the first day he was beating the professional drivers’ times. Soon he was testing at Daytona at over 200 miles an hour, terrified for one lap. By the second lap he knew he just had to keep his foot in it. Within a year the fastest tracks felt like a freeway. “I never lost a single race. I just ran out of laps.”

That reminded me of working in the deserts of Western Australia before I started my business. I was catching snakes and lizards with the environmental team, and snake handling scared the pants off me at first. My teacher told me your knowledge has to reach the level of your fear. The fear doesn’t vanish. Your knowledge just goes beyond it. Recessions work the same way. Know your numbers and your customers, and the headlines rattle you less.

Grit when everything stops

The hardest part of our conversation was the day Dave said he’ll remember forever. He went into the hospital thinking he had a herniated disc. An hour later he was in toxic shock, on a ventilator, and his organs were shutting down. His official site describes it as a staph infection along his spine that left him paralyzed. He told me eight doctors recommended hospice. His family and best friend said give him a chance.

He came out of a coma three months later as a quadriplegic. Told he’d never walk again, he gave himself 15 or 20 minutes of a pity party, cried, got angry and said, “Screw you, I’m gonna walk out of this place.” He begged his therapists never to let him give up. He went home in a wheelchair, worked for another year, and finally hit 10,000 steps a day.

At a RE/MAX convention he asked the whole room to stand up, then told them he’d give every dollar he had to do what they’d just done. That’s what real wealth is. You think you’re having a bad quarter? You’re still breathing, and if you’ve got your health you can do anything.

How to grow your business in a recession: a quick checklist

1. Check your balance sheet now, not when sales drop.
2. Cut real fat, then ask where you can get more done with less.
3. Sell your team hope, and show up as the chief cheerleader.
4. Write your business in one sentence and protect those two or three things.
5. Put service ahead of the newest tool so referrals keep coming in.
6. Hire people better than you and stop carrying people who’ve stopped growing.
7. Find one thing to improve by 1% every day.

I hope you’re taking notes on this, and more importantly, putting it into action. Knowing this stuff won’t save your business. Applying it might.

FAQ

How do you grow your business in a recession?

Adapt faster than competitors, watch your balance sheet constantly, and get more done with less instead of only cutting. Dave Liniger says RE/MAX made money in seven of eight recessions by focusing on its core and taking share from slower rivals.

Should you cut costs during a recession?

Cut genuine waste, but don’t treat layoffs as the only move. Liniger calls automatic cost-cutting a knee-jerk reaction. Watch your costs all the time, then use the downturn to improve efficiency and win customers from competitors who aren’t adapting.

What is the theory of more?

It’s an idea from David Schwartz’s The Magic of Thinking Big: progressive farmers and manufacturers keep finding ways to produce more with less. Liniger kept it on a plaque in his office and applies it to growing a business when markets get tight.

Did Darwin say the most adaptable species survives?

No. The Darwin Correspondence Project traces that wording to a 1963 paraphrase by management professor Leon Megginson. The business lesson still stands: companies that adapt to change tend to outlast those that stay in the same groove.

What is the official definition of a recession?

Two consecutive quarters of falling GDP is a popular rule of thumb. In the U.S., the NBER’s Business Cycle Dating Committee officially dates recessions using a broader look at a significant decline in economic activity.

Cash vs accrual accounting is a question of timing. Cash accounting records income when the money hits your account and expenses when you pay them, while accrual accounting records income when you earn it and expenses when you incur them, even if no cash has moved yet. Most one-person businesses can start on cash, but you should switch your management books to accrual once unpaid invoices, bills or inventory start hiding what’s really going on.

You’ll also see this asked as “cash basis vs accrual basis,” “cash method vs accrual method” or “which accounting method should my small business use.” Same decision. This is education, not tax advice. Changing your tax accounting method is CPA territory, so loop one in before you file anything.

What’s the difference between cash and accrual accounting?

Here’s the simplest example I can give you. Say you finish a $10,000 project for a client in December. They pay you in January.

• Cash basis: the $10,000 shows up in January, because that’s when you got paid.
• Accrual basis: the $10,000 shows up in December, because that’s when you earned it. Until they pay, it sits on your books as accounts receivable.

Same money. Same client. Two different pictures of December. The IRS lays out both methods in Publication 538, and the definitions there are worth reading once so you’re not guessing.

Why cash accounting feels great and then lies to you

Cash basis is simple. You look at your bank account and you basically know where you stand. For a freelancer who gets paid the day the work is done, it’s honest enough.

The problem starts when timing gets messy. You land a big client, do three months of work and get paid in month four. On cash basis, months one to three look like you’re broke and month four looks like you’re a genius. Neither is true.

It works the other way too. You collect a year of prepaid subscriptions in January and feel rich. You haven’t earned most of that yet. You still owe the customer eleven months of work. Spend it like profit and you’ll feel it in October.

That’s the gap I keep pointing at: knowing the number in your bank account isn’t the same as knowing your business. You can’t make good calls on hiring, pricing or ad spend if the report you’re reading is off by a quarter.

When should a one-person business switch to accrual?

This is the part most guides skip. Here’s the switch list I’d use for your management books, the numbers you run the business on.

1. You invoice and wait to get paid. If you regularly have more than a few weeks of unpaid invoices, accrual shows you what you actually earned.
2. You have bills you pay later. Contractors, software on net-30 terms, a big annual expense. Accrual matches costs to the month they belong to.
3. You sell physical products. Inventory ties up cash before you make a sale. Accrual shows real margins.
4. You take prepayments or retainers. Cash basis makes money you haven’t earned look like profit.
5. You plan to raise money, borrow or sell. Investors, lenders and buyers usually want accrual financials. Starting late means a painful clean-up right when you’re busiest.
6. You hired help. Once payroll and contractors are in the mix, the timing swings get bigger and more expensive.

If none of those apply, cash is probably fine for now. Don’t add complexity you don’t need. But be honest with yourself about number five. Most people say “someday” and then scramble when someday shows up.

Cash vs accrual for taxes: the rules that matter

Running your business on accrual and filing your taxes on accrual are two different decisions. People mix them up all the time.

For taxes, plenty of small businesses can use the cash method. Under the gross receipts test in tax code section 448(c), a corporation or partnership qualifies for tax years beginning in 2026 if its average yearly gross receipts over the prior three tax years don’t exceed $32 million, per IRS Revenue Procedure 2025-32. That number is adjusted for inflation each year, so check the current figure when you file.

A few things can still push you toward accrual for tax:

• A C corporation, or a partnership with a C corporation partner, that fails that gross receipts test
• Entities treated as tax shelters, which can’t use the cash method at all
• Inventory rules, though smaller businesses that pass the same gross receipts test have simpler options

Some owners keep monthly management reports on accrual while their CPA handles the tax return on cash. Whether that setup works for you is a question for your CPA, because the IRS expects your tax method to be used consistently and to clearly reflect income.

How do you change your accounting method with the IRS?

Changing your tax accounting method usually means filing Form 3115 to get the IRS’s consent, along with an adjustment that catches up the timing difference between the old method and the new one. Don’t try to DIY this. A CPA can tell you whether your change qualifies for automatic consent and how the catch-up hits your taxable income.

Who should keep your books once you switch?

Accrual books take more work. You’re tracking who owes you, who you owe and when revenue is actually earned. That’s usually the point where a bookkeeper stops being a luxury. If you’re not sure who to hire first, I broke down the accountant vs bookkeeper decision for small teams.

Your software can usually run reports either way. Most popular accounting tools let you flip a report between cash and accrual so you can compare. Do that once a month. The gap between the two reports tells you how much of your “profit” is still sitting in someone else’s bank account.

And if reading those reports still feels like a foreign language, start with the basics on how to understand your business finances before you worry about the method. A clean set of books on either method beats a messy set on the “right” one.

My take

Start simple. Cash is fine when you’re getting paid on the spot and the business is just you. The moment invoices, inventory, prepayments or hiring show up, move your management books to accrual so you’re steering by the truth, not by your bank balance. Then let a CPA decide what your tax return should use. Most owners who get blindsided by a cash crunch weren’t short on revenue. They were reading the wrong report.

Frequently asked questions about cash vs accrual accounting

Which is better, cash or accrual accounting?

Neither is better for everyone. Cash is simpler and fine for many very small businesses. Accrual gives a truer picture of profit once you have invoices, bills, inventory or prepayments.

Can a small business use cash accounting for taxes?

Often, yes. For tax years beginning in 2026, corporations and partnerships generally qualify if average gross receipts for the prior three years don’t exceed $32 million, though other rules can apply. Confirm with a CPA.

Do I need IRS permission to switch from cash to accrual?

Usually, yes. Changing your tax accounting method generally requires filing Form 3115. A CPA can tell you whether the change qualifies for automatic consent.

Does accounting software use cash or accrual?

Most accounting software can show reports on either basis. The method that matters for taxes is the one you file under, not the report toggle.

Do businesses with inventory have to use accrual accounting?

Not always. Smaller businesses that pass the gross receipts test have simpler inventory options. Larger businesses with inventory generally use accrual for purchases and sales.

What is modified cash basis accounting?

It’s a hybrid used for internal reporting that tracks most items on cash but records some, like fixed assets or loans, on accrual. It isn’t a separate IRS tax method, so ask your CPA before relying on it.