8 Steps to Evaluate a Business Opportunity (Infographic)
Before you start any business, its important to evaluate the business opportunity to establish whether it is viable. We are constantly bombarded with problems everyday of our lives. I am always seeing these problems as business opportunities and therefore, I find myself evaluating ideas all the time. This exercise has made me realise that there are 8 steps to evaluate a business opportunity adequately.
1) Define Your Customer Base
Your customer base will simply comprise those people or entities that have a desire for your product or services that isn’t being fulfilled by other competitors already. In other words, what unmet needs are you seeking to satiate. Several questions always pop up in my mind:
- What unmet needs exist that aren’t being fulfilled by other competitors?
- Do your products or services fulfil those needs enough?
- Would your potential customers would be willing to part with money to acquire them rather than buy from the market?
- If so, what price would they be willing to pay?
- What quantity will they be willing to buy?
- How large is your market size?
- Will the customers quickly adopt your product or service or will they require a lot of convincing?
- Will they buy your product / service once or many times?
2) Determine the Scalability of Your Business
The ability to scale up your business is a key consideration. It is even nicer if you could be in a business where delivering to 1,000 people takes the same efforts as delivering to 100,000 people. For example when you write an article in a blog once, you don’t need to write again just because visitors traffic your site is increasing. That same article can easily be read by the 100,000 people who are now accessing your website. Look for a business that can be systemized, grown through good marketing and with large enough target markets that the whole exercise proves worth the effort.
3) Understand the Cost Structure
You should consider the cost structure from several angles:
- What are the costs necessary to produce your goods or services? These are also known as production costs. You need to know these costs in totality as well as per unit of sale.
- How much should your initial investment be in order to produce the right quantity and quality to fulfil customer demand? This will require you to think through the production process and come up with the initial cost outlay.
The single most important decision in evaluating a business is pricing power. If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you have to have a prayer session before raising the price by 10 percent, then you’ve got a terrible business” -Warren Buffett: Business Magnate, Investor & Philanthropist
4) Establish the Source of Financing
Once you have determined the cost, you need to know where you will obtain financing from. Are you going to finance the business fully using your personal savings? Are you planning to use debt (loans from bank, friends or family)? Or are you going to raise money through issuing out shares in exchange for capital injection into your business?
5) What is Your Business’s Context (External Environment)
Just like plants, there are many environmental factors that will affect starting up businesses. You may not be able to control them but you can adjust your business to suit your direction. As a business owner, you have to consider these key points:
- What government legislation affects your business and in what way? Some businesses are always under government scrutiny for instance alcohol production. You need to adhere to the law and keep an eye on changes to ensure compliance.
- Changes in the economy could affect your business. Is the economy weak or strong? How are the changes in inflation, exchange rates, bank lending rates and so forth going to affect your business?
- What are the trends that could affect the demand for your products or services? For example if you are in the fashion industry, you have to keep up with the fashion trends in order to satisfy your client’s needs.
- What trends in raw-material costs or technology could affect your business? The government may introduce new levies and excise duties on importation of raw materials and this will have a significant impact on your production costs.
- What new products are coming into the market that could affect your business?
6) Level of Competition
This will depend on the type of business you are going into. Regardless, it is very important to determine the level of competition in your chosen business. Several questions you need to ask yourself include:
- What are the competitive forces in your industry? Competitive forces may present themselves in various ways for instance from competition amongst suppliers, buyers, new entrants, leavers or rivalry within the industry.
- What barriers can you build to keep competition away from your customer base?
- How much will it cost you to keep competitors at bay?
7) Key Success Factors
You need to ask yourself what would be key most important things you would have to do better than anyone else in the industry to make this business succeed. These are called the key success factors for your business. Ideally, they are usually 3-5 functions, activities, or business practices, defined by the market as critical to the company / customer relationship. Examples would be excellent customer service, fast delivery, superb quality, ease of access to care centres and so forth. Do you have the capabilities and assets to execute well against these success factors.
8) Determine the Overall Profitability of the Business
Finally after you have considered all the factors above, you can now estimate your business’s profitability. This will determine whether to pursue the business opportunity or drop it:
- Your customer base should tell you the future revenue potential for your business;
- Your cost analysis should tell you how much it will cost to run the business;
- From the revenue potential and the cost analysis, you will be able to predict your future profits;
- Your competition and environmental analysis can tell you how those profits might be affected in the future when there are changes in these two factors.
If the business is profitable in the long run, then proceed, otherwise drop it. Bear in mind that businesses can take between 2-3 years before they break even.