Evaluating Your New Small Business Idea

There are many issues to consider when evaluating your new small business idea, with the primary goal of determining whether it has wings, needs a few tweaks, or may not work out. Since the vast majority of startups fail within five years, success is never guaranteed and even seasoned entrepreneurs experience failures from time to time. Therefore, it is crucial to find a business niche that not only has the potential for success, but one that you will enjoy and feel good about. Also, you need to be honest with yourself about whether you have what it takes to start and run a business.

Thinking through these important issues before going all-in will help you decide whether or not your small business idea is worth pursuing in the first place. See FindLaw's Starting a Business section for more helpful articles and resources.

Developing a new small business idea

The first step in developing your new small business idea is to do a break-even analysis. This will help you determine whether or not your small business will even make money. It is also wise to research business financing to determine how you will fund your new small business. After you have done this and determined that pursuing your small business idea will be profitable, you can write a business plan that details how you plan to operate and lists the benefits, risks, marketing plan, and profitability potential of your new small business.

Deciding which type of business is right for you

There are numerous types of businesses. No one can give you advice on which one is best for you, as only you can make that decision; however, you can follow these tips to help you:

  • Find something you enjoy. Your chances of success will be much greater if you invest in something you truly care about.
  • Stick with what you know. Trying to learn a trade at the same time you are trying to start a business is not feasible. If you enjoy something that you don't know a lot about, learn it inside and out before investing your time and money into making it your business.
  • Choose a profitable business. You will be able to decide the profitability of any business by doing your break-even analysis.

Types of business to avoid

Businesses that use hazardous materials, make edible goods, care for children, sell alcohol, or build or repair structures, vehicles, or other items of value come with inherent risks. Unless you are prepared to start a corporation or limited liability company and can afford adequate liability insurance (which can be pricey), you may be better off working for one of these businesses rather than starting your own.

In addition, there are some types of businesses that are particularly vulnerable to competition, including restaurants, bookstores, video rental stores, movie theaters, grocery stores, and Internet and computer service providers. But these businesses sometimes do survive, especially if they can fill a niche market and develop a loyal following.

Benefits and risks of starting a new small business

Benefits

Starting a business can be scary. But great rewards await entrepreneurs lucky enough to create successful small businesses -- benefits you may miss out on if you remain a wage earner for the rest of your life. Although only you can decide if you're ready to quit your job and plunge into running your own business, here are some of the rewards of going out on your own:

  • Independence and flexibility. You'll have more freedom and independence working for yourself. And once your business is firmly established, you'll probably have the flexibility to make sure you don't miss the moments and events that matter most to you in life.
  • Personal fulfillment. Owning and running your own business can be more satisfying and fulfilling than working for someone else. Many successful small business owners find they enjoy the respect they earn from their peers for having the courage to go out on their own.
  • Power. Don't be surprised if power is one of your goals. When it's your business, you can have your employees do it your way. If power is important to you, think about how to use it in a constructive way.
  • Money. The risks of forgoing a steady paycheck can pay off when you own your own business. You can get rich in a small business, or at least do very well financially. Although most entrepreneurs don't get wealthy, some do.

Risks

Although you can reap many benefits by starting your own business, there are definitely some risks. The most common include:

  • Losing money. You're going to need money to get your small business started. Whether you raid your savings account, hit up friends and relatives, or borrow from a bank, there's a very real possibility that your business won't succeed and that you, your friends, or the bank will never see that money again. If your business idea is risky, ask yourself whether you're willing to gamble your retirement, your friendships, and even your good credit on your business idea.
  • Personal sacrifice. Business success can come at a high personal cost. Getting your business up and running may consume most of your time and energy, including your precious evenings and weekends. You may not have much time for family or friends or the extra cash to take a second honeymoon with your spouse. Before you quit your job, decide whether you (and your family) are ready to make some of the personal sacrifices necessary for you to create a successful small business.

Evaluating the profitability of a new small business idea

Even a good business idea might not be financially workable. To learn how your idea will fare, you should prepare what's called a "break-even analysis."

In a break-even analysis, you project income and expense estimates for a year to determine whether, in theory at least, your business will make enough sales revenue to pay its expenses.

A break-even forecast includes the following:

  • how much your business will earn over a specified period of time (your projected sales revenue);
  • your fixed costs, such as rent and insurance;
  • your profit after deducting the direct cost of the product or service you provide (your gross profit); and
  • the sales revenue you will need just to keep your business running (your "break-even point" or "break-even revenue").

If you find your break-even revenue represents an amount of work your business can handle -- that is, if you can easily bring in more than the amount of sales revenue you'll need to meet your expenses -- then your business stands a good chance of making money.

Consider Meeting with a Small Business Attorney

Entrepreneurs typically wear many hats, but "lawyer" shouldn't be one of them. While it's usually a good idea to at least consult with an attorney before opening your business, you likely will need legal help at some point. Consider talking to a small business attorney in your area for professional advice and guidance.

Next Steps

Contact a qualified business attorney to help you navigate the process of starting a business.

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