6 min read

Mental Models for Business Analysis

The five frameworks I use to understand any business in 30 minutes. Simple tools for complex analysis.

You don't need an MBA to understand businesses. You need a few good mental models and the discipline to apply them consistently.

Here are the five frameworks I use for initial business analysis:

1. The Moat Framework

Every business exists on a spectrum from "commodity" to "monopoly." I ask:

  • Can customers easily switch to a competitor?
  • Does the business get stronger as it gets bigger (network effects)?
  • Are there high switching costs?
  • Does the business have pricing power?

Businesses with strong moats can raise prices without losing customers. This is the most reliable predictor of long-term profitability.

2. The Unit Economics Framework

Forget the income statement initially. Focus on the fundamental unit of business:

  • What does it cost to acquire a customer (CAC)?
  • How much does that customer spend over their lifetime (LTV)?
  • Is LTV/CAC > 3x?

If unit economics don't work, scale just accelerates losses.

3. The Incentive Framework

"Show me the incentive and I'll show you the outcome." I ask:

  • How is management compensated?
  • What are they optimizing for?
  • Are their incentives aligned with shareholders?

Misaligned incentives explain most corporate failures better than market conditions or competition.

4. The Optionality Framework

Great businesses create options for themselves:

  • Can they enter adjacent markets?
  • Do they have unused assets or capabilities?
  • Is there hidden value the market isn't seeing?

Optionality is often mispriced because it doesn't show up in earnings.

5. The Kill the Company Framework

I imagine I'm a competitor trying to destroy this business:

  • What would I attack first?
  • Where are they vulnerable?
  • What emerging technology could make them obsolete?

This adversarial thinking reveals weaknesses that optimistic analysis misses.

Putting It Together

No business scores perfectly on all five frameworks. The goal is to understand the trade-offs and ensure you're being compensated for the risks you're taking.

Spend 30 minutes on each framework. By the end, you'll understand most businesses better than analysts who've spent weeks on them.