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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?

This article discusses how to evaluate a business idea to determine if it's right for you, right for the market, and right for the time.

How to Evaluate a Business Idea Before Taking the Plunge

Before you get ahead of yourself with a business startup, take some time to evaluate your business idea:

  1. Can you make it work with your knowledge, skills, and effort?
  2. Is it needed by others?
  3. Can you get what you need to be successful?
  4. Is the competition manageable?
  5. Can it be financially successful?

The last four questions can be answered by doing the research needed to create a business plan. Only you can answer the first question.

Does This Business Work for You?

It's fun to brainstorm ideas for a business, but is entrepreneurship right for you? Not everyone enjoys starting a business. It can be financially risky and particularly at first, 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. If you can live with the risk, then ask yourself:

  • Are you a self-starter? 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 lots of problems?
  • Are you good at making decisions under pressure?

Let's say you have a great temperament for business. Does the particular business you are considering fit your skillset 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 find great success if your work fits well with what you do bring to the table. If you aren't sure, talk to business owners. Make a list of the skills you need to own and manage a business, particularly in the industry you are seeking to get into. And remember that you don't have to know everything right away — you can hire employees to do what you can't.

Finally, make sure the business idea excites you. You are going to be living and breathing this new business venture for some time to come. Running a business is hard and takes long hours, particularly at first. You need to be energized by this idea so that when you explain it to others, they get excited too.

Potential Risks

Although you can reap many benefits by starting your own business, there are definitely some risks:

  • Losing money. Whether you raid your savings account, hit up friends and relatives, or borrow from a bank, there's a very real possibility that your business won't succeed and that money won't be seen again. Some businesses are particularly vulnerable to competition. Ask yourself whether you're willing to gamble your retirement, your friendships, and your good credit rating on your business idea.
  • Getting sued. Some businesses have more inherent legal risks than others. A builder may be sued for shoddy work or poor materials. A bar can be sued for serving someone too much alcohol if they later get in an accident. Choosing the right kind of business structure can mitigate risk, as well as adequate liability insurance
  • Personal sacrifice. Getting a business up and running will consume 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 are 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.

Is This Business or Product Needed by Others?

Describe your prospective product or service. What problems does your product or service solve? What new opportunities does it present? In other words, why does it or should it exist?

Take a look at the industry as a whole. Part of any business plan is a market analysis. 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. Your Small business Administration or Small Business Development Center can help.

Almost every business has indirect or direct competition from companies with similar products. Get to know your competitors but don't worry about their existence. Worry about your ability to compete.

  • 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 and would do better using your product or service? That is your potential market share if you can reach them.

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.

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. You can find some of this information from state resources, but you should also review industry news sources.

Who are your potential customers? Define them as clearly as possible.

  • What is their average age, gender, and education level?
  • Where do they live? How will they find or use your product or services?
  • 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?

Can You Get What You Need?

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

  • If you are making a product, you need to be able to get raw materials and you may need to find a manufacturer to work with.
  • If you are selling a product, you need suppliers, shippers, truckers, vendors, or a vendor platform.
  • If you are selling a service, you may need skilled employees.

It is important to factor in local, national, and even global issues that can affect your ability to obtain the resources you need. Are there employment shortages, supply chain issues, shipping problems, or a shortage raw materials? What is the risk or problems associates with starting at this time?

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 see if you can make money with this business.

One of the first barriers to entry is start-up costs. Are the startup costs manageable? 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 and family . . . or strangers who are interested in your business product.

Once you have a sense of your start-up costs, take a look at a break-even analysis. This will help you determine whether or not your small business will even make money. Even a good business idea may not be financially workable.

A break-even analysis projects income and expense estimates for a year to determine whether, in theory at least, your business will make enough sales revenue to pay its expenses.

A break-even forecast includes the following:

  • How much your business will earn over a specified period of time (your projected sales revenue)
  • Your fixed costs, such as rent and insurance
  • Your profit after deducting the direct cost of the product or service you provide (your gross profit)
  • The sales revenue you will need just to keep your business running (your "break-even point" or "break-even revenue")

If your business can easily bring in more than the amount of sales revenue you need to meet your expenses, then your business 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.

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

A Small Business Attorney Can Help

Entrepreneurs typically wear many hats, but "lawyer" shouldn't be one of them. 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. Talk to a small business attorney in your area.

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