The tux fits perfectly. The boutonniere is jauntily pinned to your lapel. All of your friends and family are patiently watching and waiting for you… and then you see her, waiting at the other end of the aisle – it’s your new business.
Much like expectations of wedded bliss upon getting married, high hopes and expectations abound when you are starting a business. But, like so many others in life, starting your very own business is a lifelong commitment. Before making the plunge, here are 10 questions to consider:
1. Is it a viable business? This is the big one… that’s why I put it first. So many people rush into a business just because it sounds like a good idea or it’s something they really want to do. The question to ask yourself is “Do I really want to risk hundreds of thousands of dollars on a hunch or a feeling?” The answer will come from your due diligence.
• The idea
First, is it a workable business? For example, you can’t mine for diamonds on Pluto. No one even knows if there are diamonds there, and unless you have a spaceship handy, you can’t get there. Similarly, you can’t grow oranges in Alaska. As much as you may want to, they just won’t grow there. Go to Florida or California instead.
Your business has to be based in reality. It has to be doable, and it has to have a large enough market willing to pay the price for your product or service.
• The market
For example, take a store filled with fancy dog collars. Yes, dogs wear collars. But will you really find 10,000 people a year willing to spend $100 for a bling-ed out dog collar in a town of 1,000 people? Doesn’t sound like a good bet to me!
As I stated above, you need a target market that is large enough to sustain you-plus the ability to convert enough of that market into customers on a continual basis.
• Profit Potential
OK, so if the idea is workable and there’s a market, that’s great. Next you have to see if it will be profitable. It’s not enough to open the doors. The only thing that’s going to keep those doors open is customers-lots of them.
This is going to require a little more work to figure out. You need to estimate as accurately as possible every single expense involved in this business-from the rent to the inventory to the marketing to the payroll, even the licensing fees.
Usually, you’ll have start-up and operating costs. As in, it takes $1.5 million to open the doors of a typical McDonald’s. What it takes to run it every month-that’s additional. And so you’ll have to make enough money every month to not only cover those monthly expenses but also to recoup your investment plus turn a profit. It can be a tall order! So that leads me to the other side of the equation-projected sales or revenue (the money you will be bringing in). Since there are so many hands in your pocket as a business owner (the employees, the taxman, the utility companies, your inventory suppliers… you name it), you get to keep only a fraction of every dollar you make. That’s why it’s critical to find out what that profit margin will be. Thirty percent? Twenty percent? Ten? The answer is: It depends on the business.
Let’s take a look at the latest information available as of this writing. Of course, it only includes publicly traded companies, as private companies tend to keep their information, well, private!
First, if you take the information all together, the median profit margin across all industries in the United States is currently about 4.6%. The average is a little lower, at 4.4%. That’s right, less than 5 %! Meaning that the average business makes about 4 cents profit out of every dollar in sales. That’s not so great, is it? You’d have to do a huge volume of sales-or have an extremely high-priced product (4% of $1 million isn’t too bad) to get by on that profit margin.
Now, obviously, some businesses are more profitable than others. Near the top of the list are Internet Information Providers with an average profit margin of 22.7%. Hmmm… very interesting! Could it be because of the low overhead required for that sort of business? Most likely-with lower expenses, you get to keep more of the money that you make.
How about your McDonalds? While I’m not sure what your individual store would do, overall the restaurant category had a 9.1% average profit margin. It beat the 4.4% average profit margin!
This-and any other general information you may find-can give you a rough idea of your profit margin.
But it’s no guarantee.
I should know. I had a home-improvement store (I call it a hardware store, but whatever). According to the latest numbers, the average home-improvement store has about a 4% profit margin. Well, I didn’t. In fact, in my last full year (2009), I lost $100K… which put my profit margin in negative territory. Because of where my store was located and what was going on in my area’s economy, I lost money in a big way. I was not alone. Other industries that are in negative territory right now include music and video stores, residential construction, radio broadcasting, surety and title insurance, recreational goods, and resorts and casinos. And that’s just the short list!
• Do Your Due Diligence
So as you can see, there is A LOT that goes into determining whether your business will be viable or not! But it’s important to take the time to find out nonetheless. And better now than later when you’re struggling to pay the bills. When you’ve spend your life savings. When you’re in debt up to your eyeballs!
Obviously if the business is already running, this whole process is much easier. Still, don’t make assumptions based on what you see and hear. Do your due diligence on any business you are interested in buying. That basically means that you need to find out everything about it:
A complete financial picture-You need to know about everything. Gross sales, expenses, profit margin history… going as far back as you can get. Don’t take someone’s word for it. Get the tax returns and actual financial records of the business (this will also ensure that they’ve been honest with the government-you don’t want to get sacked with a huge, delinquent-tax bill). This also includes any debts the business owes, the insurance they carry, the licenses they must hold, etc.
Legal Matters-Is the business involved in any lawsuits? Has it received any “cease and desist” letters? Does it have a checkered past? Check it out yourself.
Labor Issues-You need full disclosure on the employees’ salaries, benefits, contracts (even verbal promises made), history, etc.
Property-Do they own the property or rent? How long is the lease for? This expense can mean the difference between profitability and poverty, so make sure you can afford it. Beware of a lease that may be expiring soon. You’ll need to negotiate a reasonable new contract in writing so that you don’t get whacked with an increase that you cannot afford.
You just can’t be too thorough when you’re determining a business’s viability. So take your time and get it right. Remember, don’t wait until you are up and running to find out what is wrong. It’s better to walk away than to make a mistake that has lifelong ramifications. Don’t rush it!
2. Is it recession proof?
You may be thinking that there is no such thing as a recession-proof business. I suppose if the world economy were to permanently collapse and there were no recourse, it would be true. But somehow, somewhere across the globe I think we’d find a way to get through it.
The point is that there are some businesses that are more recession proof than others. It’s really a continuum. One extreme would be a business that is highly susceptible to economic conditions, for example, construction. It seems that one of the first things people do is stop unnecessary projects. The other extreme would be food… as in a grocery store or a restaurant. People have to eat. And the way our society is right now, most people can’t grow or catch or raise enough to feed themselves. Therefore, they have to buy their food.
So where would your business fall on that continuum?
One note here: Just because the business you are considering is not completely recession proof doesn’t mean that you have to toss out the idea. You just need to be aware of that vulnerability. And when the good times come, stash away a hearty reserve so that you can make it through the bad times.
3. What about the competition?
How competitive is the marketplace you are going into? Once again, there’s a continuum between a completely open market (you’ll be the only one) to overcrowded (it’s difficult for the consumer to even be aware of, much less distinguish between, all the companies out there).
Obviously, with a completely open market, you will have a larger share of customers. You will have to work hard, however, to get the word out about what you do. It may take some time and marketing dollars to gain traction in the marketplace. Once you do though, it can be a quick rise to success! With a crowded marketplace, you’ll need to do a careful analysis of the competition. See who is doing well and who is flailing. Then you’ll need to try to find out why. And you’ll need to look for a way to compete-can you do it better/faster/cheaper?
Or maybe you can find a new use for an old product and tap into an entirely new market. Either way, being able to state your competitive advantage is key to your ultimate success.
4. What about the target market?
Who are your most likely customers? Find out who they are, what they think, and what they like. Solicit their opinions on your business idea. You can use a focus group or simply run it by people you know (or people they know) who fit the demographic bill.
It’s essential to get a read on whether the target market will actually like and buy your products and services. Don’t skip this step… it’s important!
5. Will technology make this obsolete in 10 years?
Here you need to employ foresight.
Imagine being the long-time owner of a camera and film-developing establishment. People have digital cameras now, which they can pick up at WalMart for under $80. Then they transfer their photos directly to their computers and print them out on their own printers. The quality? It can be amazing! This is how a store that was profitable for decades can seemingly suddenly become obsolete in a matter of a few years (sometimes less). Travel agents are another example. Customers cut them out of the loop when they went online to book directly. It’s a dying industry now.
And that’s not all. Thanks to NetFlix and video on demand, video rental stores are biting the dust. Newspapers, yellow pages… they are in the painful throes of death, too. They just can’t compete with the Internet. Even the post office is feeling the pain with online bill paying!
Whatever business you ultimately choose, make sure it’s of enduring interest to your target market-and that, as far as you can see, it will stay relevant no matter what technological advances come our way in the next 10 years.
The next 5 questions to ask before you start a business zero in on you. A business can be viable and recession proof. It can be the only one in the marketplace or have an unbelievable competitive advantage. It can have a large target market that loves its products and is willing to pay the price for them, and it can be immune to technological advances.
But all of that means nothing unless you are ready, willing, and able to do what it takes to make that business successful, unless you have the right mindset and support.
So take a few moments to ask yourself the next 5 questions to see whether you and this business are meant to be… or if you should keep looking for the right one.
6. Can you see yourself doing it for the next 20 years? You need to love what you are doing every day. You will work harder owning your own business than you ever would working for someone else. Being passionate about your business will help carry you through the tough times.
7. What kind of commitment will it take to make the business successful?
There are 2 types of commitment: time and financial.
How many hours and days of the week will this new business require of you? 40? 50? 80? 100? Are you willing to give it that?
Also consider the location. If it’s a retail business, you’ll need to be away from your family or significant other for those hours and days of the week. Think about the impact it will have on your personal life. You need to be willing to make the sacrifice if you have any hope of having your business succeed.
Financially, can you start this business without taking a loan? I had a mortgage on my hardware business. It was almost as much as my rent, and it handicapped me to a great degree. With my new Internet business, on the other hand, I was able to cover the start-up costs in cash. Without that debt hanging over my head, profitability was a lot easier to achieve!
Even when you form a corporation that is separate from your personal finances, you still feel the burden of any business loans taken out in the name of that corporation. It hangs over your business like a dark cloud. It’s always best to limit debt in order to maximize profit. Consider also the operational expenses-what it takes to keep it running.
This leads me to the next question!
8. Can you survive for a year or more with no income?
When you tally up the numbers for start-up and ongoing expenses for one year, do you have enough to cover it? Many times, it takes at least a year to get the business chugging along to the point where a profit is made.
Do you have enough to live on for that first year while you are getting your business started? You’ll have enough pressures with running the business; you certainly don’t need personal financial issues adding to them. Having a financial cushion gives you peace of mind and increases your chance of success.
9. What’s your Plan B?
OK, so let’s say that it’s year 2, and the business is not turning a profit. You need to access your Plan B… and maybe Plans C and D. You need alternate sources of financing in place and-hate to say it-an exit strategy as well.
An exit strategy that doesn’t depend on someone else rescuing you by buying the business, either. We can’t control that. But know what you will do if the worst happens.
It’s better to think through this BEFORE you start the business. First, it’ll give you that peace of mind that no matter what happens, you know what to do. That you have resources-that you have a plan.
Trust me, lack of planning for “the bad times” has sunk more businesses than anyone would ever want to count. You can’t overdo planning!
10. Is my spouse/significant other on board?
And finally, if you are in a committed long-term relationship, it’s not just you getting into this business.
I know what you might be saying: “But it’s just my name on the business. It’s just my finances on the line.” No, it’s not!
Your spouse or significant other has to ride in the same train with you. I’m sure your income contributes to the household in some way-well there you go. No matter how you slice it, you are tied together financially.
And remember that time commitment we talked about? That affects your loved ones, too… a lot. It may be fine with you that you are spending 11 out of 12 hours a day away, but it may not be fine with the other person! You need to figure this out in advance, or you may find yourself in a situation where your business is going great-the profits are rolling in-but your spouse is resentful, growing distant, and your primary relationship is in danger. I don’t know about you, but to me that’s too high a price to pay for success.
Congratulations! Believe it or not, some people never analyze the business they want to start or buy this deeply. Just by walking yourself through these 10 questions, you are much more prepared to take on a business. It’s one of the most challenging things you’ll ever do in life but also one of the most rewarding. Here’s to being in charge of your own destiny!