How to assess your next business opportunity

The following column, on assessing entrepreneurial opportunities, was published in the Sept. 30, 2013 Financial Post. It drew a lot of favorable comments, including this one from a longtime business consultant:

"Your 30 Sept column rang true. I see dozens of Business Plans (and even help write some), and that column of yours is the best short summary of what is needed to bring a new product/service/venture to success."

So I figured I'd better share this story with my blog readers, PDQ.

Some people believe they could be great entrepreneurs if only they could find the right opportunity. But the most successful entrepreneurs see so many beckoning business niches that they have to separate the winning opportunities from the merely promising.

When two friends told me about an opportunity they were looking at, I offered them the following tool for evaluating whether this potential business would be the best fit for their time, their skills, and their expectations.

If you’re considering investing your money or energy in any new opportunities, ask yourself questions like these:

What is the size of the opportunity? Estimate the potential market for the product or service you  want to bring into the world. Know who your target market is, and identify significant secondary markets. What share of the market do you think your business can reasonably capture by the end of the first year, the second year, and after five years? Is this market big enough, and sufficiently open to new entries, that the reward is worth your effort?

Do customers just want this product, or do they need it? A few products — well, the Pet Rock — may succeed even though no one ever wanted one. But exceptions can’t be planned for. The best opportunities lie in markets where potential customers are actually looking for new solutions. And while it’s nice to sell into a market where buyers want your product, success will come faster if they ache for it. The more pain your customer is in, the more likely they are to buy into your solution.

What is the pain point this product addresses? Be able to articulate how your product solves a searing market need. This is your elevator pitch. Even if you don’t need to justify your business plan to investors or partners, getting this right will be a huge help in planning your butt-kicking marketing campaign.

What are the capital requirements? Whether or not you need outside capital, you need to assess the true costs of getting into business. Include raw materials and product costs, salaries, rent, consultants’ fees, distribution and transportation charges, taxes, web design and hosting costs, and so on. Take into account that the bills will pile up faster than the cheques, so make sure the startup costs align with available resources.

What kind of profit margins does this sector enjoy? When your business reaches cruising speed, what kind of margins will it generate? (Make sure you talk to several people with experience in the field, so you know exactly what the rewards are likely to be.) Don’t be the person who gets a business up and running before realizing that the entire industry runs on razor-thin margins. Ask yourself: what could I do to wring out even higher margins? It’s not how much you sell, it’s how much you keep.

What are the three most difficult problems expected in establishing this business? How well do they align with the founders’ skills and resources?These are the areas where you will spend most of your time and effort, so make sure they fit with the skills and resources you (or your team) bring to the table. For instance, Bill Wood may excel at building pine furniture, but if marketing, sales and shipping are the biggest challenges, he might want to consider a line of work more closely matching his skills.

Is this business easily scalable? “Scalable” refers to a business whose marginal costs shrink drastically as volumes increase. Consider e-books and online courses: once you’ve paid for the content and the marketing infrastructure, every sale is almost pure profit. How might you make this business more scalable?

Does this solution offer opportunities for spinoff products and services?Your best customers are your current customers. Great businesses provide numerous opportunities to sell accessories and spinoff products to the market that already loves your brand. Creating a family of products will give you many more opportunities to serve customers, with lower barriers to market entry.

Are there positive social values attached to this product or service?Whether or not you care about being a force for good in your society or industry, customers and employees increasingly prefer to do business with organizations whose values match their own. Having corporate-responsibility objectives will enhance your company’s credibility and help develop healthier long-term relationships.

Do you (and any other founders) enjoy doing this work? Running a new business is hard. If you don’t love what you’re doing, how can you jump out of bed every morning and inspire others to give their all? If you have a choice of business opportunities, select one where your day-to-day efforts align most closely to the work you love to do.

Imagine these questions are traffic lights. How many are shining green to you right now? Remember: On any dashboard, a red light indicates caution.