Evaluating Your New Small Business Idea

You've got a great idea for a new small business.

Will this business idea lead you to a new life as an entrepreneur with a successful business venture? Or will it put you on track to join the long line of startup businesses that fail in the first five years?

Evaluating a business idea involves research, analysis, and intuition. This article helps you evaluate a business idea effectively to determine if it's worth pursuing as a new business.

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Good Questions To Ask When Starting a Small Business

Before you get ahead of yourself with a business startup, take some time to evaluate your business idea. Ask yourself the following questions:

• Can you make it work with your knowledge, skills, and effort?
• Is this type of business something the community or customers need?
• Can you get what you need to be successful?
• Is the competition manageable?
• Can it be financially successful?

Only you can answer the first question. The last four questions can be answered by doing the research needed to create a business plan. Let's explore these questions so you can answer them before doing business.

Do You Have the Time, Money, and Skills To Start This Business?

Brainstorming ideas for a business is fun, but is entrepreneurship right for you? Not everyone enjoys starting a business. It's financially risky—particularly at start-up. Your income stream may be inconsistent, or you could lose money. If you can't afford to take that risk, now might not be the right time.

Common Self-Employment Considerations

If you can live with the risk, then ask yourself:

• Are you a self-starter?
• Can you afford to not have a salary or stable income for at least six months?
• Do you have a clear vision of what needs to happen?
• Are you well organized?
• Can you stick with a project, day after day, despite slow progress and many problems?
• Are you good at making decisions under pressure?

Let's say you have a great temperament for business. Does the particular business you're considering fit your skill set and interests? Most new business owners start a business in a field they know well.

But even if you want to start a business in an unfamiliar industry, you could still succeed if your work fits well with what you bring to the table. If you aren't sure, talk to business owners similar to you.

Skills Needed for a Successful Business

Make a list of the skills you need to own and manage a business, particularly in the industry you seek to enter. Remember that you don't have to know everything right away — you can hire employees or managers to do what you can't. But you do need to be able to afford unemployment insurance and secure an Employer Identification Number (EIN) from the Internal Revenue Service (IRS) if you hire.

Finally, make sure the business idea excites you. You will work on this new business venture for some time to come. Running a business is hard and takes long hours, especially at first. Your idea needs to energize you so that when you explain it to others, they get excited, too.

Potential Startup Risks

You should consider startup risks:

• Losing money: There is a real possibility that your business won't succeed. The money you invested won't be seen again. Some businesses are particularly vulnerable to competition.
• Getting sued: Some businesses have more inherent legal risks than others. A builder may be sued for poor work, injury at the job site, or using defective materials. A dog walking business can be sued for losing a dog. Or they can be sued if a dog in their care bites someone else. Choosing the right kind of business structure and liability insurance can limit risks.
• Personal sacrifice: Getting a business operating consumes most of your time and energy. You may not have much time for family or friends. Are you ready to make some personal sacrifices to create a successful small business?

Now that you've looked at the personal factors, let's turn to the issues where you can do some research to back up your decision-making. If you're considering several business opportunities, you may not want to write an entire business plan at this early stage. Do enough research on each business idea to get a good sense of its chances of success.

Do Others Need This Business or Product?

Before taking out business credit cards or filing for incorporation, ask yourself if customers would pay for what you want to sell.

• What problems does your product or service solve?
• What new opportunities does it present?
• Why does it exist?
• Are there other existing businesses of this type?
• What are your potential customers' business needs?

Look at the industry as a whole and conduct a market analysis.

Market Analysis

A market analysis is a part of any business plan.

• How large is the market for this product or service?
• What trends are occurring in this industry?
• Is it a growing market, or is it stagnant or downsizing?
• Is your product best for a niche market?

Every state offers resources to startup small business owners to help them with industry research. Here are some links to help you conduct research:

• Your state's Small Business Administration (SBA) or www.sba.gov
• Your state's Small Business Development Center (SBDC)
• Statista.com can help you find statistics in the industry
• United States Census Bureau has demographics in your state, including personal income averages, and across the nation

Almost every business has indirect or direct competition.

Competitor Analysis

Get to know your competitors, but don't worry about their existence. Worry about your ability to compete and what makes you different.

• How will your product be distinct from the competitor's product? Do you do it better?
• What is your pricing strategy?
• What are your unique selling points (USPs)?
• How much of the existing market is unhappy with the existing product or service?
• Would consumers prefer using your product or service?

If you need more information about how your product or service would be received, you may want to invest in direct market research with surveys or a focus group. While you can pay focus group companies, you can also survey family, friends, or people in social media groups for free.

Who Are Your Prospective Customers?

Market research can provide information about a particular segment of the population (demographics), customer preferences, and geographic areas. You can use this information to identify your ideal customers and your target market.

Create an ideal customer persona by answering these questions:

• Who are your potential customers? Define them as clearly as possible.
• What is their average age and education level?
• Where do they live?
• How will they find or use your product or services? Online businesses should focus heavily on answering this question.
• What social media do they use?
• What issues are most important to them, especially about your product?
• How, when, and why do they use your product or service?

You can have multiple ideal customers based on each product or service. You should create a marketing plan for how to acquire customers and keep them engaged.

Can You Get What You Need to Run a Successful Business?

You may have a great business idea, but you need to be able to bring it to fruition.

• If you make a product, do you have access to raw materials to make it? If not, can you find an affordable manufacturer to work with?
• If you sell a product, do you have logistics figured out? Can you find suppliers, shippers, truckers, vendors, or a vendor platform? You could also use a drop-ship company.
• If you're selling a service, can you afford hiring employees?

It's important to factor in local, national, and even global issues that may affect one's ability to obtain the necessary resources.

• Are there employment shortages, supply chain issues, shipping problems, or a shortage of raw materials?
• What are the risks or problems associated with starting at this time?
• Is there real estate available for your business location?

Is your local government currently issuing business licenses or permits for the type of business you want to start? For example, some industries like cannabis business and food trucks can have a limit on the number of permits issued.

It may be worth waiting to start your business until you can ensure you succeed with the resources available.

Is Your Business Idea Good Enough To Be Financially Successful?

If you've been working through the parts of a business plan, now it's time to dig into financials to determine if you can make money with this business.

Start-Up Cost Considerations

One of the first barriers to starting a business or launching a DBA is start-up costs.

• Are the startup costs manageable? Startup costs include licenses, permits, legal fees, accountant fees, intellectual property fees, inventory, security deposits, and advertising.
• How will you cover them?
• Can you use your savings or take out a personal loan?
• Will you need a business loan? That can be difficult to secure before you have an operational business.

You may want to consider crowdfunding from friends, family, or strangers. Be careful, though. If you start offering securities, you must follow federal Securities and Exchange Commission laws. Carefully consider business loans to see if that's an easier regulatory option for you.

Break-Even Analysis

Once you have a sense of your start-up costs, conduct a break-even analysis. This will help you determine whether your small business will make money. Even a good business idea may not work financially.

A break-even analysis projects a year's worth of income and expenses. Then, it looks to see if your business will make enough money to pay expenses.

A break-even forecast includes:

• Projected sales
• Fixed operating costs, like rent or insurance
• Gross profit
• The sales revenue you need just to keep your business running (your "break-even point" or "break-even revenue")
• Estimated amount of income tax, business tax, federal tax, and sales tax you pay yearly

If your business easily generates more sales revenue than it needs to meet its expenses, it stands a good chance of making money.

Thinking through these important issues before going all-in will help you decide, at the end of the day, whether your small business idea is worth pursuing.

Profitability Assessment

The fastest way to know if your business idea is worth investing in is to consider the potential profitability of your business. Are you able to scale it to open multiple locations or franchise it? If you create a unique name, you can trademark it. This builds value into your business to increase its valuation in case you want to sell the company or license the name to others.

See FindLaw's Starting a Business section for more helpful articles and resources.

Legally Form Your Startup

Before you offer your goods or services, form a business entity for your new business.

What Type of Business Structure Do You Need For a Startup?

The type of business structure you choose determines the amount of liability protection you need personally. Most startups begin as a limited liability company (LLC) that allows members no personal liability. You could also operate as:

• Sole proprietorship (owner is personally liable as a sole proprietor)
• Partnership (general partnership or limited partnership)
• Corporation (owner is typically not liable)
• Nonprofit corporation (you can't operate for profit)

Your business name should be unique. But it should let customers know what you do. You can see if anyone else is using the name in your state and register your business entity at your state's secretary of state office.

Generate Tax Identification Numbers

Your business needs a federal tax identification number if you wish to open a bank account, file a tax return as a corporation, or pay sales tax. If you hire employees, you will need an Employer Identification Number (EIN) from the Internal Revenue Service.

Here are some helpful EIN frequently asked questions (FAQ):

• How To Get an EIN
• Does a Sole Proprietorship Need an EIN?
• How To Get an EIN for an LLC

Your identification number identifies you to pay sales taxes with your state Department of Revenue.

Need Help With Your Startup?

There are many ways that a small business attorney can help you think through the viability of a new company. Take advantage of that expertise.