How to Evaluate Your Business Idea

Are you tired of working for an hourly wage and want to be your own boss? Do you believe that you have a creative and clever idea for a product or service that is not currently being served by any existing business? You may just have an idea for a successful new business. Before you start spending your imaginary millions of dollars, however, you need to evaluate your business idea very critically and completely. You need to determine who you will serve and what need exists for your new business idea. You also need to examine a wide range of financial issues.

EditSteps

EditIdentifying the Need for Your Business

1. Review your mission statement. A successful business should base itself on a clearly worded mission statement. A mission statement is generally brief, no more than one or two sentences, that clearly states the purpose of the business. If you have a strong business idea, then your mission statement should reflect the following:^[1]
   
   • Who your company is. You should explain what you stand for and why you do what you do.
   • Who your targeted customers are and what you have to offer them.
   • The problems or needs that your company serves.
   • The kind of work environment that you support for your employees.
2. Examine your customer base. After you come up with an idea for a business, you then need to consider and who will make use of the services or products you intend to provide. It is not enough just to have an idea for a business. You need to know that your business will have customers, and you need to be able to identify them.^[2]
   
   • One way to clarify your customer base is to conduct needs surveys. You might hire a professional market analyst to conduct a widespread survey, either online or by mail. Or you can choose a much less costly route and conduct some oral surveys yourself, just by approaching people at a mall, grocery store or train depot. Wherever people tend to congregate, you might ask some pointed questions like, “If there were a new store offering customized video games, is that something you would buy?”
   • After conducting a market survey, review the results and reconsider the strength of your business idea. If your survey results do not show that a market exists to support your business, you may need to revise your idea.
3. Beware of similarity to existing businesses. For the best results, your business idea should be something new, creative or original. If it’s a familiar product, maybe you have defined a new way to provide customer support. Or maybe you have a new product that is an improvement over anything that is currently available. Identify what makes your business unique, and then plan to focus on that in your marketing.^[3]
   
4. Evaluate your location needs. For some business types, the location may not be important. If you provide a professional service to other companies, for instance, you might be able to do that from anywhere. On the other hand, most restaurants or retail sales stores will rely heavily on customer access and visibility.^[4]
   
   • You may not need to develop something completely new, if you find a location where the need is strong. For example, franchises work by repeating proven business in new locations. If a certain neighborhood does not yet have a Starbucks, for example, you might move in with that proven franchise. Or move in with your own style of a coffee house, if you think the location needs it.

EditConducting a Market Analysis

1. Identify your potential customer base. A good market analysis helps you review the strength of your business by examining your potential customer base. You should examine not only those people who currently use the product or service in question but also a wider group of those people you might be able to reach.^[5]
   
   • When you define your customer base for the market analysis, you should be as open-minded as possible. Expand your view of who your business might reach. Use the market analysis to help identify advertising needs.
   • For example, suppose you have an idea for some new athletic gear. Your first thoughts for your customers might be teens or young, active adults. However, you should expand your thinking and consider how you might market to older customers and encourage them to exercise more.
2. Analyze the trend of the market. You need to examine whether the market for your product or service is increasing, decreasing or resting stable. Look at sales or contracts of other similar companies over the past six to twelve months. Their results can provide some indication of what you may expect.^[6]
   
   • When evaluating your new business idea, you should discount the results that you review from other companies. Expect that your new business will have startup costs and other expenses that will make your results less positive than those of an existing company.
3. Visit the local chamber of commerce. The chamber of commerce has resources to help you evaluate the potential strength of your business. You should be able to get information about the local markets, population trends up or down, age groups and demographics, and contacts in similar business types.^[7]
   
   • For example, your local chamber of commerce may have periodic networking meetings of local business owners. You could use such meetings to talk with other people in similar businesses, learn about the community, and get some insights into how your business may fare. Business does imply competition, but you may also find a great deal of support from people who are not in direct competition with your new idea.
4. Review available government statistics. You can get information about your potential customer base from census statistics, labor reports and other government sources. A good source for this information is www.census.gov. This source combines information from a variety of government agencies. You can search based on your location or chosen demographics.^[8]
   
   • At the Census Bureau website, for example, you can find tables of data specifically designed to help U.S. businesses, including data about birth and death rates, employment and unemployment, and other important figures.

EditForecasting the Financial Success

1. Analyze the market share. As part of your market analysis, you need to measure the market share. Consider the total sales, in your field, and which companies are serving the current need. Do you expect to take customers away from those existing businesses? If so, how will you do that? On the other hand, if you are starting something completely fresh, then you maybe creating your own market share.^[9]
   
   • You can find information about the current market and sales of other companies by searching corporate records at the secretary of state’s office. These are public documents. You may be able to access them online, or you may need to make a request in person.
2. List your start-up costs. You need to consider what materials and equipment you need for your new business to get started. If you want to open a pizza shop, you will need to buy or lease cooking equipment, ovens, fryers and other similar tools. If you are providing a business service, you will need furniture, copiers, printers, computers and so on. Imagine a blank, empty room, and write down everything you need to make it look like your dream business.
   
3. Analyze your real estate expenses. You need to account for rent or purchase costs of your business site. Do you plan to rent a store front location, or will you operate a business out of your home? The variety of location will lead to different costs. In conducting this sort of analysis, you may find certain limitations that lead you in new directions with your business idea.
   
4. Account for supplies and inventory. As your business progresses, you will need to keep supplying the materials to keep it running. If you have a restaurant, you will need to determine the costs of the food supplies. If you want to run a retail store, you will have to consider the costs of the inventory that you wish to sell. These costs will necessarily drive your selling prices. As you evaluate your business idea, you need to know where your supplies will be coming from and how they will control your sales.
   
5. Examine your need for employees. As you turn your general idea for a new business into more of a reality, you need to assess your need for employees. How many do you need? What will they cost? Keep in mind salaries as well as benefits that may be expected.
   
6. Consider the pros and cons of investors. Unless you have a supply of disposable cash that you can use for the business, you will likely need a funding source. You could seek business loans, but then you will be responsible for repaying those. An alternative is to seek out financial investors. With investors, however, you may be giving up some portion of control over the company.^[10]
   

EditMeasuring Your Personal Involvement

1. Choose something you love. If your business is going to succeed, you need to plan to invest a great deal of time (and probably money) into it. This must be something that you truly love and will commit to wholeheartedly.
   
   • The National Federation of Independent Businesses (NFIB) estimates that only 40% of all small businesses are profitable and another 30% merely break even. Realizing this, you need to be ready to devote yourself completely to the business.^[11]
2. Decide the level of time you want to invest. Some new businesses may just be financial investments, while others may represent a whole new way of life for you. You need to consider how personally invested you want to be. Will the business be one that you intend to run by yourself, or do you want to provide the funding (and the idea) and let someone else do the work?^[12]
   
   • If you plan to do the work, then your financial investment may be lower, but your time commitment will be greater. You need to decide for yourself which is more important to you.
3. Consider the difficulty of implementing your idea. Loving your idea is not going to be enough. You need to think very practically about the actual implementation and the problems you may face. It is natural to focus on the good things about your idea and to dream about the successes that may come. However, when you are evaluating a new business idea, you need to focus more on the possible negatives.^[13]
   
   • In particular, evaluate the costs, the regulatory requirements, employment and staffing issues, marketing and shipping. In short, you should try to brainstorm everything that could go wrong and develop a response or a plan.
4. Be critical of the skillset required. Focus on your strengths, and identify your weaknesses. By noting your own personal strengths and weaknesses, you can evaluate some of the hiring needs you will face.^[14]
   
   • For example, if you have a creative idea for a new theme restaurant that you think will succeed, it might be a problem if you are not a good cook. You may still be able to run that restaurant, for example, but realize that you will have to hire a reliable and trustworthy chef to help you.

EditSources and Citations

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