How to Evaluate a Business Idea

You've got a great idea for a business, well, you think it's good anyway. How do you know? How do you evaluate a business idea and when in the evaluation process do you decide whether to move forward or ditch the idea and look for another opportunity?

I work the idea viability analysis as a continuous pass-fail process. What I mean by that is I continually evaluate the idea and make it pass, or move on. For folks who are looking, there are way more ideas than time to evaluate them. So it's important to be honest with yourself and pass on everything that doesn't meet your evaluation criteria or your needs.

When evaluating a business idea, start by doing a little research. Understand the market, how business is conducted, and the competition. Consider how the current trends in the industry will affect how business is done in the future. Identify your target customer and determine if the market is large enough to support another competitor of your size. 

Next, think about how you will position your company and products in the market. Determine how much budget you'll need to accomplish your revenue goals and create a basic marketing strategy.

Now comes the hard part. Based on your preliminary research and marketing strategy, how many units of revenue do you expect to achieve? Create a sales projection for a couple of years, by month. Yes, I realize that anything past about 3 or 4 months is a guess, but at least it's an educated guess. You need to understand the profitability and cash flow model in order to evaluate the idea. So, give it your best guess. Make sure to consider how normal industry or seasonal cycles will affect your projections. Don't take a yearly projection and divide it by 12. Think about what the revenue will look like each month. 

The rest is just math. How big an organization is needed to support a business with that revenue level? Subtract the cost of generating that kind of revenue, subtract it from the net sales to get gross margin. Then, subtract operating expenses to determine net income. Next, figure out the cash flow implications. If everything seems to make sense, then continue with your evaluation. If not, abandon the idea and move on.

This is a quick and dirty top level evaluation to determine whether to move forward with an idea. It's not a business plan. It's not a full-fledged marketing plan. It's just a go/no-go first evaluation, before you spend weeks or months working out the details, forming the partnerships and spending money building a business idea into a company. 

If you need help evaluating your great idea, give us a call.

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We're Quite Optimistic

According to a March 13th Gallup Poll, Huntsville ranks fourth among cities in the United States according to satisfaction about where they live and the direction of their community. In other words, we like it here and think we're headed in the right direction as a community.


The Gallup-Healthways Well-Being Index tracks community satisfaction and optimism on a daily basis and reported the averages for 2011. The top five communities for 2011 were:


1. Provo-Orem, Utah
2. Lafayette, Louisiana
3. Raleigh-Carry, North Carolina
4. HUNTSVILLE, ALABAMA
5. Greenville-Mauldin-Easley, South Carolina


The index is based on 353,492 interviews with residents in 190 metro area across the United States conducted between January and December 2011.


Mayor Tommy Battle was quoted about the survey in the April 2012 Huntsville/Madison County Chamber of Commerce magazine initiatives, saying " It's no surprise that the citizens of Huntsville are optimistic. We live in this beautiful area, filled with green mountains, parks and rivers, and we have a welcoming city that is both affordable and financially sound, with a strong economy and bright future. We have much to be grateful for."


And the congregation said: "Amen!" 


I couldn't agree more Mayor Battle. 


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Networking at Kindergarden

I saw this quote the other day in a book on connections by Jeffrey Gitomer, Little Black Book of Connections:
  
"Your mother taught you everything you need to know about connecting before you were 10 years old:
Make friends, play nice, tell the truth, take a bath, do your homework." ~Jeffrey Gitomer
  
I really liked this quote. And it's so true. The first rile of networking is make friends. Try to make a personal connection with people before trying to sell them. If you start selling right off the bat, people are going to turn you off and categorize you as either a pest or an amateur. In either case, they aren't going to be interested in having a professional relationship with you. 


Play nice is the equivalent of bring them value. Do something to help the other person realize value out of the relationship. By doing this, you make yourself valuable to the other person. Hopefully, they'll want to bring you value as well. 


Tell the truth, even if it hurts. How wants a relationship with someone who can't be relied upon to be truthful. The even if it hurts part means, even if you've done something stupid and have to fess up. It takes a strong person to admit that they've screwed up and take ownership and more importantly, find a way to fix the problem so it doesn't happen again. Learning from your mistakes is one of the most valuable parts of making them. 


Take a bath. Enough said!


Do your homework before you waste someone's time. If you invite someone to have coffee or a meal with you, make sure you do a little research beforehand. Not only does it show respect on your part, it also makes the meeting more productive. If you know a little about the other person, you can ask valuable questions and not waste their time nor yours.


It's just basic networking. 

Rules for Success

Many years ago, a friend/mentor gave me a sheet of paper with his 5 rules for success. I've kept that paper over the years and was inspired to create my own rules for success several years ago. It has changed over the years in small ways. The words have been shifted, but the overall meaning has remained the same. Each year I get the document out, dust it off and make an attempt to mentally refocus on it. Here it is:


Chris’ Rules for Success

1. Never gamble with things you can’t afford to lose.
2. Decide what’s really most important to you and never lose sight of it.
3. Define the end result. Make a plan, prioritize and take action.
4. Focus on accomplishing your goals and moving your plan forward, not completing tasks.
5. How you think is everything.  Always be positive, think success, beware of negative environments.
6. Don’t do business with dishonest or unpleasant people.
7. Surround yourself with the best people and professionals.
8. Create value for others in every relationship.
9. Never quit learning.
10. Be honest and dependable, remember The Golden Rule.

What are your rules for success? If you don't have a list, maybe you should consider writing it down. I'm sure most of you have a mental list, but just haven't taken the time to write it down. Send me an email with your list. I'd love to know your thoughts.

Maybe You Should Just Get a Job

We’re talking about some of the key questions entrepreneurs should ask before deciding to start a business.  We’ve already discussed figuring out how much cash do you have to invest in your new business and how much cash you need to survive while you’re starting your business.  In this post I’ll discuss whether you’d be better off financially getting a different job than starting a business?

For many people, their dreams could be accomplished without having to start a business.  Could you accomplish the same goals by getting a different job or trying for a promotion at your current place of employment?  Would spending an extra couple of hours a week at work give you the advantage you need to get the promotion?  That might be a better strategy and one that probably has significantly less risk.

  

This question really goes back to the question in a previous post, ‘why do you want to start a business?’  Well, why do you?  If the answer is to create more family income, there may be an easier way to do it than starting a business.  What about a part-time job on Saturday mornings?  What about teaching a class in the evenings for a local community college?  Do you have any special skills that will allow you to generate other cash for your family?

  

Unless you have a burning desire to start your own business, then try to figure out other options for generating income.  For many people, starting a new business means taking a pay cut, not getting an increase.

Business Plan Template

The follow-up book to my #1 Best Selling Business Start-up 101: From Great Idea to Profit...Quick! is now out on my book site www.BusinessStartup101.com and Amazon.  The book is Business Plan Template and is a how-to guide for writing a business plan for any business.

  

   

The book is available in Kindle e-book format and will be available as a paperback on Amazon within the next week.  Please check it out and give me your feedback.  I love to chat with entrepreneurs.

    

Click on this link to buy the book.

The 5 Deadly Sins of Entrepreneurism

The dream of business ownership is like an addiction running through the veins of entrepreneurs.  We crave the start-up and break out into cold sweats at the very thought of a new business opportunity.  When done properly, a start-up is a wonderful thing, blooming with profits and gushing cash flow.  When mismanaged, the beauty tarnishes and becomes a kudzu in our flower bed.

  

So what causes us to lose our way and take what we thought was such a wonderful idea and turn it into such a mess?  For many unenlightened entrepreneurs, they take their eye off the contest and start coveting the prize.  Instead of focusing their serious intention on building an enterprise, they lose focus and just create a job.  Or worse yet, they fall prey to the 5 deadly sins of entrepreneurism:  fame, fortune, leisure, travel and possessions.  Let’s look at these in more detail.

  

1.  Fame

   

You dream of walking into any room in town and being instantly recognized.  People whisper behind your back, ‘say, isn’t that the guy who started that successful business that’s taking the market by storm?’  The mayor takes your call and congressmen call you for your opinion.  That the sort of fame you got in mind?  Well, the reality is that you’re at work so much that your dog doesn’t even remember you anymore and growls when you enter the front door.  

  

2.  Fortune

  

You’re treating everyone in town to dinner at the best places, throwing lavish parties and watching your bank accounts skyrocket.  You’re thinking about opening one of those Swiss bank accounts to shelter your income.  HA!  Most likely, you’re taking a pay cut.  You made pretty good money as a mid-level manager at your former company.  Maybe you were an engineer or salesman and you did pretty good with salary and investments and retirement funds.  But now, you’re employees are making way more than you and your wife is concerned about making the mortgage next month if something doesn’t change.

  

3.  Leisure

  

Do you see yourself in a James Bond movie, relaxing by the pool with bikini-clad supermodels?  Maybe you’re doing something simple like coaching a youth sports team or doing a mission trip to Africa for a few months.  The reality of starting a new business that you’ll be stuck in the office way more nights and weekends than you ever dreamed possible in your worst nightmare.  In fact, in July, you slept in the office more than you slept at home.

  

4.  Travel

   

See the world from your luxury yacht.  You and Robin Leach are sipping champagne and eating caviar in all the best destinations.  Is that your dream?  How about a dream crushing 90-minute commute twice a day in your 2004 Honda?  Will that do?

  

5.  Possessions

   

Possessions tend to be all over the map, depending on the individual.  While some prefer expensive suits and Rolex watches, others want a Bentley or Rolls Royce.   What you’re more likely to get is accounts receivables, inventory and bad debt.

   

There is nothing wrong with wanting nice stuff.  That’s one of the reasons we started these crazy businesses in the first place.  I put myself into that mix with the rest of you.  The problem is, many hopeful entrepreneurs take their eye off the start-up and start focusing on the prize, before the enterprise is even established.  For these people, the prize becomes a poison and bitter reality instead of the comfort.  They dive into the prize before they have earned it.  Instead of keeping their attention focused on creating an efficient enterprise that will generate profits and cash flow without your constant supervision; they spend the new credit line on a ‘much deserved’ vacation or leathers and a hog Harley. 

   

Don’t let the prize get in the way of creating a business enterprise.  Get the work done first and then enjoy the fruits for many years to come.

What are your business start-up goals?

Why do you want to start a business?  Many people want to start a business for all the wrong reasons.  See the previous posts on that topic.  Let’s change the topic slightly.  What do you hope to accomplish in starting a business.  In other words, what are your business start-up goals?

  

Are you starting a business just so you can get money for stuff?  Extra income for:  cars, boats, houses, travel, hobbies?  What about college education for your kids, medical expenses or retirement?  These are all good goals, but will your new business actually allow you to get there?  And what about time frames?  Over what period of time do you expect to reach these goals?  Does starting a business REALLY help you achieve your goals?

  

Spend some time thinking about your goals.  Why do you want to start a business?  What do you hope to get out of it?  Many would-be entrepreneurs thought that by starting a business they wouldn’t have to work for the ‘man’ any longer.  What they found was they traded one ‘man’ for another.  The new boss is probably much harder to work for and requires significantly longer hours and a much higher quality of work than the old ‘man’ required.

  

Think about your motivation for wanting to start a business.  Discuss your thoughts with your spouse and family.  Make sure that everyone is on the same page and that page isn’t a fairy tale.  Talk with a business coach or mentor to get a reality check on your plans and goals.  If you do the proper planning up front, the end result may be exactly what you wanted.  But a lack of planning may put you worse off than when you started.

Why do you want to start a business?

Starting a new business is a scary and risky proposition.  Starting a new business can be extremely time consuming and may require participation from your family or your absence from family events.  Starting a business may require you to use your life’s savings or borrow money from the bank for which you’ll be personally responsible.  So why do you want to do this?

  

For some people, it’s just a no brainer.  They HAVE to start their own business.  They’ve been working for ‘the man’ for too long or are just tired of seeing a business run into the ground.  For others, they have an idea that just needs to get out.  If not them, who?

  

For still others, they want to start a business out of necessity.  That is, they don’t have a job and have no good prospects for finding one anytime soon.  They see starting a business as a necessary evil.

  

If you plan to make your fortune in a few months and start living the good life, think again.  Most new business owners make little or no income for the first few years in business.  In fact, many times, your employees will make more than you until your business is well established and financially stable.  You need to clearly understand your motivation for starting a business and then decide if starting a business will help you achieve your goals.  

The Big Idea

So you’ve got a great idea for a business, now what?  The question you’re really asking is how do you turn a great idea into money?  It’s the question inside the question that entrepreneurs are afraid to ask out loud.  I wonder why that is?  Isn’t that what creating a business is all about, making a profit to support you and your family in a lifestyle you can grow accustomed?  As far as I’m concerned, it is.  I’m not sure why many people now consider profit a bad word.  We need profit to grow businesses, hire employees and make charitable contributions.  Without profit, we’d have none of that.  The answer can be summed up in one word: entrepreneurship.  In other words, turn your great idea into a business.

Merriam-Webster defines entrepreneurship as:

           “one who organizes, manages, and assumes the risks of a business or enterprise.”

The concept that a person can take an idea and turn it into a profitable business and achieve financial security is the embodiment of the American Dream.  For years, individuals have been developing ideas into businesses.  Some have taken really harebrained ideas and become overnight successes.  Can you think of any harebrained business ideas that turned into financial windfalls?  I'll talk about a couple of well-known ideas that worked out in a future post.

There are all kinds of statistics from government and private sources about how many businesses survive and how many fail.  Generally speaking, roughly 80 - 90% of new businesses fail.  And there’s a good reason.  Depending on which publication you read or which organization you believe, there are literally dozens of reasons start-ups fail.  I generally categorize business failures into three groups:

1. The idea behind the business was a silly non-star aligned harebrained idea
2. The real idea behind the business wasn’t sufficiently studied and planned
3. The individual starting the business screwed up.

In fact, operator error is the root cause of almost every business failure.  The owner didn’t understand the market, the capital requirements, the complexities of partnerships or the seriousness of cash flow.  Oh, the cash flow, that vital nourishment of all small businesses.  Perhaps the market turned sour and the owner didn’t have enough capital to sustain though the bad times.  Could we add a fourth category or fifth or tenth?  Sure.  But I generally categorize anything not a 1 or a 2 as operator error.  You can make the case (it’s semantics really) that the economy turning isn’t something that the owner can do anything about.  I could argue that the owner should have foreseen lean times and had a reserve.  Does it really matter?  I think you get the point.

If we look back to the definition of entrepreneurship, it suggests that someone is organizing and managing a business.  That someone is you.  It’s the organizing and managing that tends to get in the way of most people being successful.  That’s the part that makes starting a business such a risky proposition.  However, the statistic that you don’t usually hear is that for people who get some business education and coaching, the statistic turns upside-down.  Entrepreneurs who get business and financial education and who work with a mentor or coach tend to succeed at an 80% rate.  Now that’s more like it. 

Michael Gerber Visits Huntsville

Best-Selling Author Michael Gerber

    

    

Best-selling business author Michael Gerber visited Huntsville last week to help promote his WBCNA-Library Foundation event scheduled for September 15, 2010 at the Von Braun Center.  In the picture above, Michael paid a surprise visit to the Women's Business Center of North Alabama FastTrack New Venture Entrepreneurship class.  He spoke to the class about his E-Myth principles and how to apply them.

  

Tickets to the September 15, 2010 event are available on-line at www.WBCNA.org.

In the picture below, Michael Gerber visits the WBCNA's Entrepreneurs Book Club, who are currently reading his book, The E-Myth Revisited.  Michael is pictured with APEX Business Center's Kellie Andrews.

APEX Business Centers Kellie Andrews poses with Best-Selling Author Michael Gerber