Evaluation of a Business Opportunity

You are surrounded by simple, obvious solutions that can dramatically increase your income, power, influence and success. The problem is,

you just don't see them.-Jay Abraham

Nonquantitative Assessment

of Business

Opportunities

Nonquantitative Assessment of Business Opportunities

Goals• Examine your personal goals

regarding income from the business.• How well will the type of business

chosen allow me to achieve financial and occupational status goals.

Content of Work• Assess your suitability for the

business’s working conditions.• What type of work will the business

involve? Will it involve physical work, or considerable contact with people?

Lifestyle• What type of lifestyle will the business

allow?• Will the hours be long or concentrated

to evenings or on weekends?• Most small business’s take much more

time to operate than the owner anticipates before start-up.

Nonquantitative Assessment of Business Opportunities Cont’d

CapabilitiesIn addition to personal characteristics, at least 3 other capabilities are required.

Good health: • Business involves long hours and is

often physically and mentally stressful. • One will need good physical health and

stamina as well as the ability to withstand high levels of stress.

Expertise in Management:• Includes administration, marketing, and

finance.• Most successful business managers

have acquired these skills through self-education.

Sound Financial Base:• Most small business’s require a

minimum start-up cost of

$10 000 -$50 000.

Expertise• Lack of experience and unbalanced

experience are two major causes of business failure.

• Acquire as much knowledge possible in the industry you plan to enter.

Breaking Into The Market

You as an entrepreneur have essentially 3 ways to enter a market.

Offer a completely new product. • This involves “inventing” a product that meets a need not currently being fulfilled. Many

fad or novelty products also fit into this category, the needs these products satisfy are often emotional or subjective rather than rational.

Offer an existing product to a different market or industry.• Another way is to offer an existing product or service in the same market but in a

different age or income group, or to use the product for a different purpose.

Offer a product or service similar to those already existing.• In this case, the business owner attempts to obtain some competitive advantage over

the existing businesses or products or businesses in the industry to maintain viability.• Perhaps the market is large enough to accommodate an additional business, or the

level of satisfaction with existing businesses or products in the industry is low.

Developing a Strategic Competitive Advantage

• An important part of being successful with a start-up business is selecting an industry, a business, or a part of a business that will provide a competitive advantage.

• A competitive advantage exists when a firm has a product or service that is viewed as better than its competitors.

• An entrepreneur can save valuable time and energy by identifying the most appropriate area to develop advantage by selecting:– The right industry– The right business– The right aspect to focus on

Developing a Strategic Competitive Advantage: The Right Industry

• Industries conducive to small business success that may provide a competitive advantage over larger businesses:– Businesses or industries in which the owners personal attention to daily

operations is essential to success ex: a service business– Businesses in which owner contact with employees is important to the

motivation of staff and the quality of work done ex: specialized or custom-made manufacturing processes or service business

– Markets in which demand is small or local, making large businesses generally reluctant to pursue them.

– Industries that require flexibility ex: high growth rates, erratic demand, or perishable products.

– Businesses that are more labor intensive and less capital intensive– Industries that receive considerable encouragement from the

government in the form of financial, tax, and counseling assistance.

Developing a Strategic Competitive Advantage: The Right Business

• To identify a business that may provide greater chances of success for a small business, the entrepreneur should be aware of those areas that are predicted to grow rapidly in the future. The following are the top 10 Canadian business ventures for the near future as reported in Profit:

1. Organic foods

2. Consulting

3. Wireless products

4. Products that cut energy use and pollution

5. Anti-aging products

6. Computer-interface products

7. Home products for seniors

8. Technology training

9. International marketing consulting

10. Products that promote health

Developing a Strategic Competitive Advantage: The Right Aspect of Business

• Once the industry and type of business are selected, the entrepreneur should decide which aspect of the business they will focus on to ensure the company performs better than the competition.

• Natural advantages for the small business typically are flexibility, innovation, customer service, and product quality.

• Such aspects as price, selection, and location may also provide a competitive advantage.

• The entrepreneur should be aware of the aspect of the business that is the most important to the consumer and attempt to develop superiority in that aspect of the business.

Collection of Information

• The key to making a wise decision regarding which industry to enter and the type of business is the gathering and analysis of information.

• The more relevant the information, the greater the reduction of uncertainty about the results of this decision.

• Failure to do adequate market research is frequently cited as the most common reason for small business failure.

• Some reasons entrepreneurs commonly cite for lack of research and investigation are that it is too time consuming, too expensive, too complicated, and irrelevant.

• Although each of these claims has some substance, there are some simple , inexpensive, but effective methods of collecting and analyzing data available to the entrepreneur.

Sources of Information

Sources of Information• The first thing entrepreneurs should be aware of is the

many sources of information available to assist them in their investigations.

• The first, secondary data, consists of data previously published by another organization.

• The second, primary data, is data collected by the entrepreneur.

Secondary Data:

• reports, studies, and statistics that another organization or individual has already compiled.

• In abundance

• inexpensive, which makes it very attractive.

• provided by the federal and provincial governments and private and semiprivate organizations.

• From agencies for counseling in both starting up a business and ongoing operations.

• A major problem, however, is finding information relevant to one’s own situation, also, the secondary data available may be too general.

Primary Data:

• information collected through one’s own research.

• Three general methods that can be used to collect information through primary research are observation, surveys, and test marketing.

• usually more costly to obtain than secondary data, but more relevant to one’s business and more current.

• essential if secondary sources do not provide info required for the feasibility analysis.

• small business owners have traditionally hesitated to do much primary research because of their lack of knowledge about how to do it and its relatively high cost.

Primary Data Cont’d

1. Observations• Observation involves monitoring the who, what, where, when, and how

relating to market conditions.• This method might involve observing auto and pedestrian traffic levels or

customer reactions to a product, service, or promotion.• The observation method may be fairly expensive, as it requires that time be

spent in monitoring events as they occur.

2. Surveys• A survey is used to obtain more detailed info from potential consumers to

better understand their motivations in purchasing a product or service.• You should clearly define the objectives of the research first and ensure that

each question addresses one of the objectives.• Generally, only part of the market is surveyed.

Primary Data Cont’d

3. Test Marketing

• Test marketing involves an attempt to simulate an actual market situation.

• This method is fairly costly in that the product must be developed and marketed albeit on a limited basis.

• The main advantage of experimental research, is that it measures what people actually do, not just what they say they will do concerning the product.

Quantitative Assessment

Of Business

Opportunities

Quantitative Assessment Of Business Opportunities

• Step 1: Calculate Market Potential

• Step 2: Calculate Market Share

• Step 3: Calculate Net Income & Cash Flow

Step 1: Calculate Market Potential

[The purpose of this step is to arrive at a dollar sales figure $$$ for the total market.]

1. Determine the market area and its population.– Delineate the geographic area/target market the business will serve.– Estimate the population within that market that may purchase the product

or service.

2. Obtain revenue stats for this market area for the product or service.– Federal, provincial, or municipal governments have this information for

many standard types of products or businesses– If total revenue figures are not available for the proposed type of business

or product, but per capita or per family expenditures are obtainable, simply multiply this figure by the population estimate (population of market x per capita expenditures).

Step 1: Calculate Market Potential

3. Adjust the market potential total as necessary.– If one is able to obtain actual revenue statistics for the market, usually the

only adjustment needed is to update data.

– A simple way to update sales and expenditure data is to increase the amount of sales by the annual rate of inflation for the years involved.

– Projections should include one-year and five-year estimates to reflect trends that may exist in the industry.

Step 2: Calculate Market Share

• The purpose of this step is to estimate the percentage of the total market potential the proposed business will obtain. These methods differ depending on the type of business; retail, manufacturing and service firms.

Retail:

Proposed store selling space = Percentage Market Share

Total market selling space

Manufacturing:Production capacity of proposed business = Percentage of market share

Total production capacity

Service:Proposed business service capacity = Percentage of market share

Total production capacity

Step 3: Calculate Net Income & Cash Flow

1. Using the market share revenue figure obtained in step 2 as the starting point, calculate the expenses expected to be incurred for the business.

Some important expenses are:– Cost of goods sold and gross profit percentages.– Cash operating expenses (rent, wages, utilities, repairs,

advertising, insurance).– Interest and depreciation – a list of costs of capital items (building

and equipment).

Step 3: Calculate Net Income & Cash Flow

2. Subtract expenses from revenue to determine the projected net income from the proposed business in the first year and subsequent years.

– Once a projected income figure is calculated, you are in a position to evaluate and compare this result with other types of available investments.

– Return as a percentage of investment can be compared with other types of businesses or safe uses of money.

– The rate of return of the business should be higher than bank interest, to compensate for the risk factor that accompanies a new business.

See figure 3-6, beginning page 68, in your text book for a detailed example of the 3 steps.