Entrepreneurs often begin with innovative ideas, but succeeding in a new business also requires objective assessment procedures. If your gut tells you a product, service or existing business is a risk you want to take, use objective measurements to better determine its likelihood of success. The bottom line is profitability. By using a number of business assessment tools, you can reduce your risk of buying or starting an enterprise that fails.
Financials
Assess the company’s financial performance or potential financial performance. Evaluate historical sales revenues, profit margins of products and services, recent sales trends and cash flow. Examining cash flow lets you determine when you will get your money in and how much credit you might need to obtain. For example, your business might have excellent sales, but if the customers don’t pay for 60 days, you might have to delay your salary, operate using your savings while you wait for your bills to be paid, or take out a loan to buy materials. If you are launching a new business, look for trade association data that shows financial trends for similar companies and expected trends for the coming year.
Sales
A thorough sales assessment will give you insight into how sales have taken place and where you might improve them. Spot trends by analyzing where products are selling and to what types of customers. For example, if a business is selling exclusively through independent retailers, you might have a chance to grow market share by entering mass retailers. Items with high profit margins might be producing most of the company’s profits, but causing it to lose sales. Adding low-margin items might help it expand. Certain geographic territories with low sales may not be underperforming, but are simply underserved, offering opportunities to grow the business.
Market Data
Researching the marketplace will help determine if it is being underserved or possibly saturated. Detailed demographic data can show that even if the marketplace contains significant competition, you have an opportunity to successfully introduce a new business or improve the performance of an existing one. Demographics such as gender, age, race and marital status will help you better understand who your potential customers are. Analyzing the price points of your competitors will also give you insight into why people might be buying a particular product or service. Look at market trends, such as sales during the last three years, and look for advances in technology that might affect the marketplace. For example, a shift from PCs to mobile devices causes a decrease in demand for traditional hardware and software and more demand for smartphone apps.
Assets and Liabilities
Look at the assets of an existing business to determine how it depends on them. The business might depend on a recipe, trademark, copyright or patent for its unique selling proposition. A company’s location, specific manufacturing process, grandfathered agreements or no-compete agreements with a supplier might be giving the business an edge, without which it would struggle to compete. A franchise might be thriving because of a restricted territory it owns or specific benefit it has been receiving from the owner’s status as a minority. Check the assets of any business you plan to purchase to determine what would happen if you lose them. Look for liabilities, such as debts, lawsuits and expiring contracts and assets.
Relationships
Key factors in a small business’s success often include personnel, endorsements and relationships. Key personnel, such as a well-known chef, IT whiz or top sales performer can make or break a business. Having a professional sports league or a celebrity endorse a business might be key to driving its sales. Having official sponsor, supplier or partner status of a trade association or other organization can also boost sales. Assess the impact of losing a key relationship on sales and revenue, and look at contracts before you buy a business that relies on any.
Opportunity Costs
Look at what entering a new business will cost you, in terms of lost revenue, personal time or sales connected to other business or opportunities you have. For example, using your cash to buy a business reduces your ability to pay down debt, lower interest payments, improve or upgrade current facilities, increase advertising and make other investments with that cash. You will need to devote your personal time to the new business. Accurately assess the number of hours you will need to spend on a new business venture and calculate the revenue your time would generate spent on another opportunity.
