Following these four simple steps can keep you from pursuing unprofitable, costly new lines of business, partnerships or business acquisitions:
- Doing the Math Really Does Matter
The first step in evaluating a new opportunity is to compute the potential gross profit margin to be earned. Although the astute entrepreneur instinctively knows when new business will provide a healthy gross profit margin, doing the math is time well-spent. And when the additional revenue from a new opportunity is significant, or, at least, sufficient enough to ultimately contribute to the net profitability of the business, it has passed the first and most important test.
Ask this Question: After paying the costs associated with producing and delivering the product/service, what percentage of the dollar paid by the customer remains to cover the operating expenses?
Compare the expected gross profit margin from the new business opportunity to your present GPM. Is it more or less? This percentage depends in large part on your particular industry, but generally speaking, if the GPM is less than 33%, it’s difficult to make a profit in the long term and is wise to consider other opportunities.
- Will the new opportunity fill a niche?
If a business has an element of exclusivity to it, it delivers a unique product or service, sources its raw materials, or enjoys exceptional authority in the marketplace, the likelihood of success increases greatly.
Ask this question: Is there some niche that this new business, product or service delivery model I am exploring will fulfill?
If the answer is no, it’s only a matter of time before the new business, product or service will become a commodity, where competition is high and prices/profit margins drop. Such an opportunity is rarely worth development.
- Never Believe that “if you build it they will come”
Many entrepreneurs fail to recognize how costly it is to start a new business while they simultaneously create market demand for its products and services. Raising the capital needed to simply start a business can be a daunting task. And creating market demand from scratch is terribly expensive and rarely achieved.
Ask this Question: Are there customers in the marketplace who have money and are asking and/or looking for this product/service now? Take the time to thorough research your market and the demand!
If you have to put a second mortgage on your house while you’re convincing the world they need your product or service, the risk is too high, and there are better ways to grow your business.
- Is the new opportunity within your realm of strengths?
Every entrepreneur has his strengths and the smart ones know exactly what they are not good at doing! Extremely successful entrepreneurs delegate every weakness they have to others who excel in the task or skill. When considering a new business opportunity, carefully consider how compatible it is to your innate skill set and personal interests.
Ask this Question: If on a given day in the new business, I was forced to step in to perform a job in one of my employee’s absence, would I be able to do it well and enjoy it or would I be in misery? Your answer says it all.
Bottom line – Be Willing to Say ‘No’
Many entrepreneurs find success with their initial business offering and many, many more do not. The business failure rates in the first five years of business ownership are staggering and well-known. Nonetheless, for those who do succeed initially, many of them think they will succeed at whatever business opportunity they chose to pursue.
Unfortunately, in the real world, successfully launching multiple lines of business in succession is a rarity, especially if launching occurs before answering these four questions.
Do your math and think it through before jumping in with both feet – sometimes saying ‘no’ to that great new opportunity is the right way to go!