5 Steps to Evaluating Business Opportunities
Like many small-business owners, you may have a finely tuned gut instinct that you trust to steer you right. If that is the case, when a new business opportunity presents itself, your instinct may be to jump at the chance. Fortunately, you're also tuned in to rational deliberation, and that's a good thing. The business opportunity evaluation process includes five logical steps in the identification of business opportunites. You and your gut instinct may need all the useful information you gather to make the best decision.
If it's been a while since you assessed a business opportunity, you may have forgotten that it's a serious business unto itself. Twenty-four states have business opportunity laws on the books, and these laws both define and regulate the sale of businesses in their jurisdiction.
If curiosity is getting the better of you, the list includes: Alabama, Alaska, California, Connecticut, Florida, Georgia, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maine, Maryland, Michigan, Nebraska, New Hampshire, North Carolina, Ohio, South Carolina, South Dakota, Texas, Utah, Virginia and Washington.
Each of these states defines business opportunity somewhat differently, but they agree in general with an umbrella definition supplied by Entrepreneur.com: It's a "packaged business investment that allows the buyer to begin a business."
Business opportunities are sometimes defined by their qualities. The states agree that the steps in the identification of business opportunities are simple to follow if:
- The sale or lease of products or services – or anything that allows the purchaser to launch a business – is at stake.
- The buyer must pay the seller a fee of at least $500 to start the business.
- The seller agrees to either provide a plausible business location or help the buyer find one.
- The seller makes two guarantees: that a market for the product or service exists and that the income generated from sales of that product or service will generate an income either equal to or greater than the cost of the business.
What type of business opportunities fit these criteria? The three most common types are:
- Distributorships, in which someone acts as an independent agent selling a product or service. As he does so, he must retain an all-important "six degrees of separation" by not commingling the manufacturer's trade name with his own.
- Rack jobbing is a peculiar term that refers to products sold on racks, usually in more than one store. A parent company often secures space in several stores in which to place racks on a consignment basis. An independent agent – fittingly called a rack jobber – takes it from there. As Entrepreneur.com puts it: "It's up to the agent to maintain the inventory, move the merchandise around to attract the customer and do the bookkeeping. The agent presents the store manager with a copy of the inventory control sheet, which indicates how much merchandise was sold, and then the distributor is paid by the store or location that has the rack, less the store's commission.”
- Vending machine route is similar to rack jobbing, except that the vending machine operator often pays the building or location owner a percentage of the sales.
Some other terms may surface as your evaluation of a business opportunity unfolds.
- Cooperative is a business that forms a network of similar businesses that operate under the same name, often to save money on advertising costs.
- Dealer is similar to a distributor except that the business often sells products directly to a retailer or consumer.
- Network marketing includes both direct sales and multilevel marketing. In the latter case, selling products is one part of the business, and recruiting sellers constitutes the other part.
- Trademark license or product license is an arrangement in which a buyer uses the seller's trade name, technology, equipment and products.
With the basics well in hand, you should be in a good position to move through the five stages necessary to evaluate a new business idea.
Like many entrepreneurs, your fiery gut instinct may be pointing you in the direction of two fundamental questions: How badly do I want this opportunity? and Can I make it work? Once again, this instinct is serving you well; you may return to these questions time and again as you move through the business opportunity evaluation process, beginning with identifying a market need.
Your line of questioning could recast this step in terms of a want, but either way, the business should fill a gap in the marketplace that is currently unmet. Smartphones and extravagant coffee drinks are good examples of wants that have morphed into consumer needs. At this juncture, your job is to:
- Validate assumptions or research provided to you.
- Insist on evidence and details.
- Identify potential customers.
It's easy to be carried away with a concept, and sometimes, the more creative or offbeat it is, the more powerfully it takes hold of the imagination. These first two steps in the business opportunity evaluation process should be in lockstep to ensure that a need and solution exist in almost-perfect harmony. To ensure you hear that "click-click" sound, you should:
- Explain with specificity how the solution will work.
- Ensure that the systems or processes exist to support the solution.
- Anticipate weaknesses in the solution.
For many would-be business owners, assessing the competition results in a moment of truth: Even if a similar competitor exists, you should be able to seize upon a key differentiator, such as a quality difference in your product, how you will bring it in front of consumers, or how you will give customer service new meaning.
You may want to consult potential customers to help you:
- Understand the strengths and weaknesses of your competition.
- Describe your competitive advantage and the anticipated reaction to it.
- Ensure there are ways to sustain it and build upon your competetive advantage.
No small business is an island, although sometimes it may feel that way. Even with outsourced, contractual help, you probably need a team of people to ensure the business opportunity succeeds. You may not have all the answers yet, but you can start nailing them down by probing:
- The professional skills you lack but that will be vital to the new venture.
- Whether the team will be part-time or full-time employees or contractual workers.
- The culture you hope to create at the new business and where you might find like-minded people..
If your team includes an accountant, put him to work right away on studying the financials of the business opportunity. The weight of the assignment belies the fact that the exercise comes down to two questions:
- Can you afford to invest in the opportunity?
- Will it ultimately pay off?
The business opportunity evaluation process isn't necessarily a risky business, but it can be fraught with overwhelming details. For this reason, you'd be wise to follow another probable gut instinct: Consult an experienced business attorney who can comb over all the details and ensure that your hands are firmly on the wheel as you steer your instincts to a smart destination.