Article Contributed by Jim DeLapa
One of the most frequently asked questions we receive is, “How can I be sure my new business will succeed?” Sadly, there is no crystal ball that can accurately answer that question. However, if you are serious about starting a business there are five steps you can take that will begin to give you a clearer picture. By following these steps you will gain tremendous insight into what lies ahead. Whether this reality-check convinces you to dive in, or hold back, you’ll be well served by what you learn. While we are huge proponents of founders developing a well written business plan, the steps below can be followed even before you start your small business plan.
Step 1: Write a simple elevator pitch to see if your business idea is compelling to others. If you haven’t created an elevator pitch before, you can stitch together the essentials very easily. Write a one sentence answer to each of the following questions. What problem will your company solve for its customers? Who has this problem and how large is that group? What will make your business unique so that customers will buy from you instead of a competitor? Finally, what are your qualifications to run the business? If you force yourself to write and re-write the very best one sentence answers to each of these questions, you will have the elevator pitch you need for this purpose. Now, try out your elevator pitch on 10 people you trust and respect to get their feedback and reaction to your well-formed business concept. This is the warm up for steps two and three.
Step 2: Talk to would-be customers to find out if there is a true need for your product or service. When you are thinking about starting a business, you obviously feel there is a void in the marketplace. Don’t wait until you open your business to find out if the need for another business is real or imagined. Armed with your elevator pitch, go have face-to-face discussions with future customers. You are not going to them to sell, or pre-sell. You are doing market research. After describing your business by generally following your elevator pitch, go into “ask and listen” mode. To get the information you are seeking, ask questions like, “How are you currently meeting your needs for (insert the products or services your company will provide)?” Listen carefully—this is the voice of the customer. In step one, you spoke to friends and respected colleagues. In step two, you are talking to people who currently buy products or services like those you will be selling. Select individuals who will be focused on the content of your ideas and less concerned about simply wanting to be encouraging.
Step 3: Become an expert on the competition. Identify 5 other companies that are already doing what you plan to do. Learn as much about them as you can. One of the best things to learn is if they expanding or shrinking. You want to be entering a business where the market and demand is growing! Take everything you learn and ask yourself what it says about the opportunity for your new business. If you can’t find any companies that already do what you’re planning to do, there two likely reasons: 1) There is not enough demand to support a business; 2) You didn’t look hard enough. The third possibility, and the one most often cited incorrectly, is that a genuinely new opportunity has been discovered, one that nobody else has ever thought of, and so there is no competition. Rarely is this the case.
Step 4: Develop a rough estimate of your breakeven costs. Think about the process of engaging the customer to the point of making a sale. What are all the things that you must have in place to make that sale? Do you need an office? A building? A sign? Computers? Phone service? Special equipment? Employees? Will you need to take a salary from the business from its inception? How much will you spend on marketing so that customers find out about your business? List all of the major items and estimate their costs for the first full year. Divide this number by twelve to see your total monthly fixed expenses.
To calculate their breakeven sales number, some types of businesses must also take into account their “cost of sales” or the additional cost that is incurred for each sale made. In a pure service business, such as consulting, there will be little or no “cost of sales.” A consultant sells his or her time. The breakeven revenue for this type of business would be the total monthly expenses calculated above.
Other businesses, such as restaurants or retailers have to take into account the cost of the goods they sell. For example, consider a company whose total monthly expenses are $10,000. If they sell picture frames for two times what they cost, they will need $20,000 in revenue to break even. The first $10,000 will pay for the picture frames and the next $10,000 will cover the base costs of the business.
Knowing your total costs and breakeven revenue requirements are essential in evaluating a business idea. As intended, this is a rough estimate which you can carefully refine if your business idea passes all your tests.
Step 5: Identify the person responsible for selling (and that person is probably you). Too many people start businesses without really taking into account how much will need to be sold, and who will be responsible for selling. In hindsight they say things like, “I always loved to cook, so I started a catering company.” “I worked as a carpenter for 10 years, so I decided to become a general contractor.” Upon starting their businesses, the chef and the carpenter immediately had the same goal–to become “salesperson of the year” in their respective businesses. When you start a new business, the business will fail or succeed based on whether or not you hit your sales targets. Regardless of who is doing the selling, the responsibility for seeing that the company sales goal is met falls on the founder. If you can say, “I am ready to be responsible for driving sales in my new company” then you have passed step five of the reality check.
Summary. If you take the time to put your business idea through the five-step reality check you will be well on your way to answering the question, “How can I know if my business will succeed?” You will have gathered all of the essential information to make an informed decision about starting the business. Next, take the foundation developed in the five-step reality test to start developing your business plan. You’ll find that the things you’ve already learned will give you a great head start.
About the Author
Jim DeLapa is the founder of GreatBusinessPlans.com, a leading provider of small business plan assistance for current and future small business owners. DeLapa has launched and invested in numerous successful startups and played an active role in nurturing two of those from inception through being acquired by publicly traded firms.
