License To Print Money? 10 Ways To Evaluate Business Potential

25-September-2012
25-September-2012 14:02
in Start Up Business Advice
by Colin Smith

So, you've come up with a great business idea and on the back of a fag packet it looks as if it will make you richer than Bill Gates and Warren Buffet combined.  If you are like two thirds of small business owners, that's as far as you get with any critical analysis of your idea.  Instead, it's all hands to the press to use your new found license to print money.  Sadly, the vast majority of these impulsive small businesses will not exist by their fifth birthday.    

No matter how perfectly you execute your business idea, if the idea is fundamentally flawed your business will eventually fail.  As someone who has had personal experience of both small business success and failure, I strongly recommend that you work out as many of the kinks in your business concept as possible before launch.  It may well be that on closer inspection, there are some weaknesses in your bulletproof business idea.  If the opportunity does not stack up, either work on it on paper until it does or discard it and find a new one. 

In my experience there are no shortge of business idea.  There is, however, an acute shortage of prospective entrepreneurs that think their ideas through and challenge it enough to see if it's robust before launch.  Believe me, no idea is perfect initially.  However, a good idea that has been thoroughly and carefully thought through can become the perfect opportunity for you and may even eventually become the license to print money that the fag packet foretold.  The more mistakes you make on paper, the fewer you'll make after launch when they really matter, so please be rigorous in your initial evaluation.

Here's a list of ten ways to measure the potential of your business idea.  That way, you'll know before betting the farm whether or not there really is any likelihood of success. 

1. Establish Entry Costs

Is it economic to get equipped for your business?   Business is like mining.  If the coal is near to the surface, you will only be able to extract a small seam.  The big questions are can this be done profitably and how long will it take to recoup entry costs at that level of profitability?  One of my most bitter failures in business was a venture in which we grossly underestimated the entry costs and overestimated the size of the window of opportunity.  The venture was hugely profitable but when that window of opportunity began to close, we scrambled to get out ending up having to dispose of the business assets at fire sale prices.  We ended up making alot less money than we thought we would.  In fact, if we had known at the start what we knew at the end, we would have pursued another business idea instead.  Nobody has a crystal ball, but we should have been better prepared at the start and reacted more quickly when problems became apparent.  Take the time to do this as thoroughly as possible.

2. Examine The Status Quo

In anything except emerging markets, you can only grow at the expense of one of your competitors.  It's important to consider who or what you will be displacing.  If you think you have no competition, think again.  There is always something else that your customer could do or buy to fulfil the same needs.  A number of years ago, I set up a sports-themed bar and grill.  We bet that our offering could dispace the experience of viewing sport at home.  This was just at the time when the on trade began the sharp decline that it has experienced in recent years.  We bet on the wrong horse.  Thankfully, we quickly adapted and re-launched the venue as a less formal alternative to traditional function venues.  This was the right offering at the right time and over the next three years we displaced an awful lot of traditional wedding venues and Conservative Clubs in the locality.  Turnover quadrupled in that time.  Always remember that what you are offering has to be significantly better than the altenative.  Cheap supermarket booze in front of the TV at home was what the market wanted for that experience, with the sole exception of the biggest sporting events.  However, the market was ready for a less stuffy alternative wedding venue and a more modern, stylish place to hold private parties.  Ask yourself honestly how you compare with the alternative.  Will people change?

3. Single Transaction or Repeat Purchase?

If the financial success of your business is determined by the number of customers x average profit per sale x average purchase frequency, then it should be clear that businesses with greater purchase frequency need to attract fewer customers at comparatively lower profits than other single transaction businesses.  The fewer customers required to build a successful business, the easier it will be to get where you want to go.  That said, please be careful to avoid over dependency on a very small number of customers.

4. Is Your Niche Big Enough?

You may want to sell sandals for hamsters but the more important question is does anyone other than you partner and mum want to buy them?  By all means focus on a niche but make sure that your niche is large enough to sustain your business.  If you insist on improving life for our hamster friends, you may need to broaden your offering to include all hamster accessories or perhaps custom-made hamster habitats.  Perhaps you may need to include gerbils as well.  Maybe the real buzz in the market place is around stoat accessories.  Who knows?  The serious point is that targeting a niche that is too small will lead to business failure.

5. Are External Factors a PEST?

PEST analysis encompasses all those political. environmental, social and technological factors in the wider world that might influence the medium to long term potential of your idea.  Government legislation can destroy a market overnight, as it recently did with the cigarette vending market.  It's best to just take a peek at relevant future trends before ploughing your life savings into you business idea.

6. Where is your Product or Service in its Lifecycle?

A product or service in the maturity or decline stage in it's lifecycle needs to be approached with caution.  It's normally hard to displace the established names in the market at this stage in the lifecycle of the product or service.  Would you for example want to start a business today selling fax machines?  I very much doubt it as the technology has been largely superceded by e-mail.  The chances of success are much greater in the introduction and growth stages.  If a market is still very much in its initial development stage then it comes with its own unique set of risks and rewards and should probably be approached with caution by all but the most competent businesses.  It's important to understand when assessing the opportunity where the product or service is in the lifecycle as this will have very important implications for strategy.

7. Will This Business Stretch Me Financially? 

All other things being equal, you would be better served with a business reliant more upon your time and expertise than your capital.  If this business idea stretches you financially, then the right step might be to scale the business down and grow it organically out of cashflow as and when the business can afford for it to grow or simply to discard it altogether.

8. Could This Type of Business Be Successfully Sold?

If selling your business is on the agenda at any point for that business, you need to run it differently from day one to how you might run a business that exists simply to provide an income for you each month.  Steven R Covey in his classic book The 7 Habits of Highly Successful People said one of the habits we ought to develop is the habit of beginning with the end in mind.  If an IPO or more likely a trade sale is part of the plan, however distant it might seem right now, that will make a huge difference to everything to do with your business.

9. What's Driving You?

Your motivation for starting your business will definitely affect its potential.  many people for example start a business to prove something to a former employer.  This might help you saty motivated but it also might cloud your judgement.  Just be sure to assess the business on its merits.

10. Is This Really You?

In the previous point. I asked you to assess this business on its merits.  This includes of course the financial merits of the business idea.  However, potential financial rewards are not enough to keep you interested forever.  Don't forget to evaluate if you want to do this or not.  To stay interested and happy, you need to know that this opportunity will be a good match for your talents and interests as well as know that there is a market there to exploit. 

 If after evaluating the potential of your business you are still excited about the business and the scale of the opportunity, then its time to plan the business launch.  Please understand, we do not need to know everything before we do anything, but often a pause for thought at this stage helps avoid wrong turns and cul-de-sacs further down the road.  If you want to help to stay on track, please contact us here at Continuous Business Planning today and discuss how our business and project support services can help you develop that winning idea into a profitable business.

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