Professional Documents
Culture Documents
business ideas
AUTHOR:
GILLIAN PRITCHETT, MA.CPFA.
Please, always acknowledge that I am the author and always include the following text
when promoting it or writing about it in an email, a newsletter, a sales page:
Why you should evaluate your business ideas – Author: Gillian Pritchett, MA. CPFA.
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COPYRIGHT
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storage or retrieval system without express written, dated and signed permission from the author.
This document is for informational purposes only. It has been written to provide information about
evaluating business ideas. Every effort has been made to make this document as complete as
possible. This document should be used as a guide and not as the ultimate source of information
about evaluating business ideas. There is no guarantee that using this guide will enable you to
competently, evaluate your business ideas, take an informed decision or achieve business success. It
depends entirely on your current experience and abilities.
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and Publisher does not assume any responsibility for errors, omission, or contrary interpretation of
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Why you should evaluate your business ideas – Author: Gillian Pritchett, MA. CPFA.
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Introduction
We live in a world where starting your own business, where being an entrepreneur is
increasingly seen as an option. For many graduates of business schools it‟s their preferred
career choice. For some people the entrepreneurial spirit is so ingrained that they would
never be happy unless they were putting their business ideas into being. For some, starting
a business is a way to avoid a lengthy commute to work or not having to work for someone
else. Some people need to stay at home to be with their children or to care for an elderly
or disabled family member, some people have reached an age where a conventional job is
no longer an option and some folks just like to be location independent and spend time in
whatever country currently holds their interest.
Exciting times! But, if you make the wrong choices then financial ruin and heartache can
be the order of the day.
You can buy great books and courses on creativity, coming up with business ideas (there‟s
a whole list of them on my website at www.gillianpritchett.com/resources - I‟ve even
written one of my own) BUT I seem to be the only person talking about the importance of
evaluating your business ideas.
Maybe it‟s because I‟ve worked with hundreds of people who‟ve wanted to start a business
and I know only too well how many actually launch that business and how many actually
make money from it.
Maybe it‟s because I teach on MBA programs in the entrepreneurship stream and so I read
many many books on entrepreneurship, engage in countless discussions with colleagues
who are both entrepreneurs and academics teaching and writing about entrepreneurship
and I hang out with entrepreneurs both online and offline.
But one thing‟s for sure – I‟m shouting out about it to ensure that as many businesses as
possible are successful; so that as few businesses as possible become just another statistic
– another business that has failed.
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So what do I know about evaluating business ideas?
I‟m an accountant. I worked on the legal and financial side of acquisitions for the Thomas
Cook Group for several years. I went on to become a management consultant and then
started an online coaching and consulting business which is where you probably found me. I
also teach on MBA programs at various universities and many of my students already have a
business or go on to start a business.
Until recently I was a volunteer member of the committee evaluating business plans
submitted to the Mayor of Montreal‟s Youth Foundation (www.fmmj.ca). Typically the two
biggest defects with these business plans were either the market study where the
applicant did not really have an understanding of the macro environment or their
competitors and/or they had not produced realistic financial projections. Somehow people
seem to always over estimate sales and under estimate expenses. But ....there were those
who had done their homework and went on to business success: www.lilidom.com;
www.ruzecommunication.com; http://shop.velvetmoustache.ca/pages/aboutus.
For a nine month period in 2007-2008 I worked as business coach at the not-for-profit
organisation YES Montreal (www.yesmontreal.com). Over those months I met with at least
12 clients a week who wanted advice on starting a business – that‟s well over 350
businesses. Some people abandoned their idea. Some went on to explore other business
ideas. Some took a job or stayed in the one they had. Some started successful businesses
for example: Website portals: www.zurbaines.com; www.girlports.com; Massage & reiki:
www.arcoiris.ca; Environmental technologies: www.claroglobal.com to name but a few.
But I‟m going to talk to you in a moment about two entrepreneurs, one a client and one a
personal friend. I think if you read their stories you won‟t need any more convincing that it
is vitally important to evaluate your business ideas BEFORE you dive into starting your
business – you can save so much time, money and heartache. After all, who wants to be
just another statistic? But first, let‟s take a look at some of those statistics.
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The Harsh Realities Of Business Success & Failure
Statistics on the success rate for start-up business can make for alarming
reading.
In the USA seven out of ten new employer firms survive at least 2 years,
half at least 5 years, a third at least 10 years, and a quarter stay in
business 15 years or more. Census data shows that 69 % of new employer
establishments born to new firms in 2000 survived at least 2 years, and 51 %
survived 5 or more years. Survival rates were similar across states and major
industries. Bureau of Labour Statistics data on establishment age show that 49 %
of establishments survive 5 years or more; 34 % survive 10 years or more; and
26 % survive 15 years or more.1
The figures for other countries are not dissimilar. There are many and well
documented reasons but the principal ones are:
1
Source: U.S Dept. of Commerce, Census Bureau, Business Dynamics Statistics; U.S. Dept of Labour, Bureau of Labor Statistics,
BED.
2
Key Small Business Statistics - January 2009, Industry Canada in http://sbinfocanada.about.com/cs/startup/a/startownbiz_4.htm
3
ibid
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inadequate research to determine if there is sufficient demand for a
product or service
locating a business in the wrong place
cashflow problems
not being able to raise sufficient funds to get started
not being able to repay debt
The list goes on but if you look carefully at the things in the list and think about
each one of them – all of these could be avoided if the person thinking to start
the business did some fairly basic research and asked a few key questions.
Read the two stories on the next pages for some real life examples of how one
person spared themselves wasted time and money by doing research and how
one didn’t do the research and did waste time and money. These are but two of
the tales I could tell to illustrate how some basic research to check out your
business idea is key to starting a business that has a fine chance of success.
Afterwards I’ll take you through some of the things that you need to find out and
explain why.
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Once upon a time …
There are so many stories I could tell you – they are all true and they all concern real
people and real businesses. But I‟m just going to tell you about John and about Susan. As I
mentioned before they are real people and these are true stories. One is a client and one
is a personal friend. I want to tell you about them so that you can understand why I place
so much importance on evaluating business ideas.
He wanted to start a café with a reference library for pagans. I started to ask him
questions and discovered that John had never run a café, bar or restaurant. He had never
worked in one either. He couldn‟t cook very well. He had no knowledge of the restaurant
sector. He had no idea how many hours someone who owns a café would work each week.
He had no idea how much money it would take just to set up a café. He had done no
research at all. I questionned the poor guy until at the end of the evening he looked at me
and asked if I would mind very much if he didn‟t hire me to write a business plan – he
suddenly didn‟t think his café idea was such a great idea after all.
I could have accepted to produce a business plan for John but in asking some key questions
he realised for himself that he was not the right person to open and manage a café, that it
would give him less free time rather than more, that he would need a lot of capital to
equip a café – capital that he almost certainly would not have access to. I saved him
money, heartache and time.
A few months later John wanted to meet up to discuss a new and exciting business idea. So
there we were once again at Hurleys. This time he really did have a great idea. It was a
great idea because it fitted with his skill set and it didn‟t require a massive capital
investment. It was a business that would write personal and corporate biographies. And I
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was fairly certain that there were few if any direct competitors in Quebec. I did the
research into the market, ran some numbers and we decided that this was a viable and
exciting business. A few weeks later his biographies business was launched and within a
short while John had his first client and was working on a biography of a prominent lawyer
in Montreal.
... earlier this year she announced that she was going to open a second hand clothes shop
with upscale clothing on consignment. She had grand plans – it was going to be a really
successful business model and she would open similar stores in other towns and hire
managers to run them. She was convinced there was a demand for a second hand clothes
store because the ones she went in to were always full of customers. But were these
customers buying? she didn‟t know – she hadn‟t checked this out. These shops were small,
well positioned in busy little towns but her shop was big, at the end of the shopping drag
and in a town that was only busy in summer if you could even say it was busy then.
She had not „run the numbers‟ so she really had no idea what all her expenses would be;
she didn‟t know how many customers she needed to be able to pay the bills and salaries
including a salary for herself. When we sat down to do some rough numbers she over-
estimated how much the average person would buy and then divided that into under-
estimated monthly expenses to tell me how many visitors she needed to her shop each
month. But not very visitor will buy. When we came up with the number of visitors to
generate the minimum sales to just break-even each month the figure was quite
frightening. She has never had that number of people come into the shop.
Where was she going to get the clothes from to sell? Well of course all her friends and
associates had offered to bring in clothes for her to sell. I was saddened but not surprised
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to find that the shop became a used furniture and bric-à-brac store with some clothes
because few people weren‟t bringing her clothes to sell in sufficient quantities.
Susan had a friend with a strong track record in helping people evaluate business ideas,
friends in finance and banking. We were all happy to give her our expertise but she sought
no-one‟s advice, even rejected offers of advice when they were made. She knew very little
about the retail sector and the second hand clothing sector in particular. She made a poor
choice of location. She did no financials. She had no marketing plan. She didn‟t realise how
dull it would be sitting in a shop waiting for customers. She didn‟t realise how time
consuming it would be getting stock, managing the store, doing the marketing, doing the
accounting. And the list goes on.
In March 2011 her second hand clothing store will be just another statistic – another
business to add to the list of those that didn‟t make it through the first year. Each month
it‟s made barely enough money to cover the rent, electricity and phone bill – Susan has
never had a salary and she never hired anyone. She could have avoided the heartache and
the waste of a year in her life if only she‟d done the most basic of evaluations.
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So what should you be evaluating and why?
The first step to starting a small business is to consider whether or not starting a business
is right for you - not your neighbour, colleagues, friends, your mum or partner but YOU!
Running your own business can be exciting, exhilarating but it can also be hard work and
certainly in the early stages, stressful. You will be living on the edge a lot of the time. It‟s
not for the fainthearted. You need to be driven. You need to be committed. You need to
be passionate about your business. You could also be - quite simply - desperate – you HAVE
to make it work. I say this because I know solopreneurs with young children who have to
make their business work otherwise the bills don‟t get paid and the kids get very little to
eat. I needed to make my business work so that I could spend time with my lovely mum
who lives alone in the UK and still have enough money to live on. But desperation is helped
if you also love what you do. I love what I do. It gets me out of bed in the morning all fired
up to start my day. It enables me to roll with the punches. It makes me go to bed at night
excited that tomorrow‟s another day and I can get even more stuff done for my business,
help yet more people avoid the heartache of a rushing into starting an ill thought out
business.
Do you really want to be the person making all the decisions and shouldering all the
responsibility – can you handle this?
Are you willing to work really hard and make the sacrifices that starting a business
entails? The sacrifices can be financial or not going out with friends so often or
missing out on fun things to work on your business or to finance your business.
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Do you know your chosen sector really well? This is ESSENTIAL – you will be dead in
the water if you launch into a sector that you know next to nothing about and where
you have next to no contacts.
Are you organised and self disciplined? If you‟re not – get yourself sorted out or
reconcile yourself to hiring an assistant (a Virtual Assistant – VA or a real one)
Do you have the necessary business knowledge – marketing; sales; negotiating with
suppliers, distributors; managing clients; all things financial and accounting? If not,
do you have ready access to people or small business organisations who can advice
you on the marketing, sales, financial aspects of your business?
If you‟ve answered "no" to any of these questions you need to really stop and think them
through, see if you can find a solution to compensate and if not ask yourself the painful
question “ is starting a business of my own really the right decision to be taking at the
moment?”
If you‟ve answered these questions mainly with a “yes” or you‟ve found ways to
compensate take a look at some of the challenges you may face and consider how you feel
about these.
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In my experience of business I would suggest that the following are crucial –
without them you could be struggling:
Organisational skills
Business development
Marketing / Promotion
Now let‟s take a look at your business project and see if we want to hire that too!
Clients – those people who will buy your products and services – without them you have no
business.
You need to find out some key things about your target clients so that you can sure that
they will want your services or product.
You need to discover if there will be sufficient demand and at the price point that you
have in mind.
You need to find out when they buy – or whether your product or service will be seasonal.
You need to consider whether the market can be segmented so that you can target a niche
within that market rather than trying to reach everyone.
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If all is looking good as far as demand is concerned we can look at the legal and regulatory
issues – some of these could be deal breakers.
Here I‟m talking about legal and regulatory ISSUES – things that could mean that your
business is not possible given the location or where you would incur additional expenses
that would mean your business was not financially viable or you could not afford to start it
at the current time.
I‟ve had clients who wanted to locate a business in a particular area, even on a particular
street but they didn‟t realise that most cities and towns have zoning regulations. One
client opened a designer clothing and art studio on a part of a street where there was few
passersby. In addition she wanted to have fashion show and gala evenings. She then
discovered that the local council required that no more than x people were on the
premises at any one time which precluded organising this type of special event – her
business promo plans were built on the media interest that such events would generate.
This was detrimental to her business success and within a year the doors were closed and
the lease given up. Fortunately she was talented, tenacious and started an online business
selling her original bling and other fashion designs and she seems to be doing very well.
Another client wanted to create a high class cookie business (biscuits to those of us from
the UK) supplying the hotel industry. BUT…. she was planning on baking them at home.
Regulations governing the manufacture of food products are stiff in most jurisdictions and
especially so in Quebec so she found she had to rent time in a regulated commercial
kitchen. This was going to adversely impact both her scheduling and the financial aspects
of the business. In addition she knew nothing about the hotel industry and was shocked to
find that hotels often had supplier contracts running for several years so the barriers to
entry in that market were high. Fortunately we discovered all of this before she had
proceeded very far and so whilst she was sad that her cookie business was not to be she
had not invested very much time or money in it.
Here are just some of the legal issues that you might need to be thinking about depending
on your business and its location:
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The type of business structure you‟ll need – would you have to incorporate or could
you operate as a sole proprietorship? Incorporation would add to your expenses.
Do you need to register for sales taxes etc? this might mean you had to hire an
accountant which would add to your expenses.
There will almost certainly be Zoning regulations you‟ll have to comply with e.g. for
retail, restaurants, B & B, hotels.
You need also to check this if you plan to operate a business from home. As an
example - my mum‟s next door neighbor runs an electrical business from home – the
area is totally residential. Throughout the day there are vans and delivery vehicles
coming and going. My mum could get him closed down. She chooses not to. Your
business might not be blessed with such a tolerant neighbour.
If it‟s a food business you need to find out about the regulations on food preparation,
labeling & packaging etc
Licenses required – for example to operate as a travel agent or tour operator and
issue airline tickets in most jurisdictions you need to be registered
I know – numbers can be a pain and they‟re so dull - but sorry you absolutely must find out:
your start up costs i.e. how much capital you‟ll need (and where you‟ll get this from)
how much you are likely to sell of each service and/or product
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your expenses
how much you‟ll need to sell to cover expenses and break even
and I‟d also like you to find out your CASHFLOW needs but you might need an accountant
to help you with that.
If you go through this exercise, whether you use pen, paper and slide rule or an Excel
spreadsheet – whatever works for you – you really MUST do this. If the business is not going
to break even within a reasonable timeframe, if it needs so much start-up capital that you
would not be able to raise then put this idea on the “do it later” pile and start evaluating
another one.
Cashflow is vital. Cashflow is the oxygen that keeps your business alive.
Basically it‟s physical money coming in and physical money going out. I‟ll tell you one thing
for sure – you‟ll be paying bills within the required time and you can be sure that your
clients will be paying your invoices as late as possible. I have a contract with an
international engineering firm – the contract states they pay me within 30 days – it‟s
usually around 80 days when I get paid and only then after I‟ve jumped up and down and
threatened to do no more work for them. And when you‟re a new business suppliers will
almost certainly not give you credit – you‟ll be paying upfront for things.
START UP COSTS
These are some of the expenses you could potentially have in order to launch your
business:
• Premises
• Signage
• Equipment
• Vehicles
• Computers, printer, telephone
• Furniture - desks, chairs, filing cabinets, kitchen equipment
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• Incorporation costs
• Registrations
• Domain names (s), Website, Hosting
• Logo, Business cards
• Promo materials
• Trademark (s)
• Launch party
Make sure you make a complete list. You don‟t want bad surprises later!
EXPENSES
Now you need to consider ALL your EXPENSES – avoid underestimating these and be sure
not to forget about anything. Here are some ideas to get you started:
INCOME SOURCES
Then you need to look at all your sources of INCOME. By income I mean income from your
business – not from your bank account or money from great Aunt Beth – income from your
business. The money you or anyone else puts in is an investment and should be listed as
such and it is either repaid or if you are Incorporated (Limited in the UK) then you put this
money as shares and pay a dividend on it.
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The income from your business will be determined by the price point of each service
and/or product and how many you are predicting to sell. Be careful when you determine
your pricing and avoid being over-optimistic about sales. So many start-ups think the world
will love their product as much as they do and that sales will be phenomenal – sometimes
they are but ....this is the exception.
If however it all looks good so far – no legal or regulatory issues that will can the project; it
looks financially viable and you have access to the money you‟ll need to get started then
you should take a look at the macro-environment i.e. the BIG WIDE WORLD that your
business operates within.
The Macro-Environment
The macro-environment – the big wide world that your business will operate within –
cannot be ignored. Ignore it at your peril. Trust me, it will impact your business -
positively or negatively - and its likelihood of success.
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Take a look at my diagram below – that‟s your business sitting there right in the middle.
.
At this stage you‟re not going to get into a detailed information gathering/ analysis
exercise. That can take anything up to 50 hours or more. You‟re just going to do a very
rapid environmental scan to get a feel for what‟s going on and what might occur in the
future.
Textbooks may refer to this as a PESTEL analysis (out of date ones will refer to it as PEST
or PESTE). In essence you‟re going to take a quick look at the Political, Economic, Socio-
demographic, Technological, Environmental and Legal aspects that could impact your
business.
POLITICAL ISSUES
Political stability of the country or region where your business will locate or where it
will get its supplies
Deregulation
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Trade agreements
Tariffs
Fiscal policies
ECONOMIC SITUATION
Rate of inflation
SOCIO-DEMOGRAPHIC FACTORS
Ethnic origins
Socio-demographic factors can impact how many customers you might have now and how
many in the future. For example if you are targeting mothers with toddlers and the birth
rate is declining then your business may decline. Cultural attitudes - recycling is
increasingly becoming part of our culture in many Western countries- this would open up
the market for anything linked to recycling.
TECHNOLOGICAL FACTORS
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ENVIRONMENTAL FACTORS
Growth in consumer interest in free trade goods, organic foods; clothing made with
organic cotton; ecotourism
LEGISLATION
Impact of regulations, laws and government orders on the operation of a business and
commercial transactions in the target sector
How the regulatory framework might influence future development in the sector
Legislation on recycling
These factors will not all be relevant to your business and there are many many others that
I haven‟t mentioned here – I just want to encourage you to think about what might happen
that could impact your business now or in the future. It could be a negative impact or a
positive impact. You need to identify opportunities and threats.
But don‟t forget - at this stage you‟re not getting into a detailed information gathering/
analysis exercise. You‟re just doing a very rapid environmental scan.
You‟ll need to do some research to gather some information about the macro-environment
– here are a few of the ways you could do this:
Let‟s narrow down now and look at the market – that‟s the middle circle in my diagram
above.
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The Market
You want to consider what the trends are within the sector – whether the industry is in
growth phase or in decline.
You need to consider BARRIERS TO ENTRY. How hard will it be to enter the market?
Whilst you don‟t want there to be high barriers to entry because of course you want to get
into the market you also need to bear in mind though that it would then be equally easy
for other businesses to enter the market so then the level of competition will increase. You
need to consider whether this would be a good or a bad thing.
Economies of scale
Capital requirements
Product differentiation
Trade agreements/quotas
Patents
You should also give some thought to who holds the power in the market – the suppliers?
the distributors? – the consumers?
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The Competition
It‟s important to identify your competitors and find out a few things about them – your
findings may have an impact on whether or not you proceed with your business idea or
whether you need to make some changes to it.
forecast their future strategies & decisions so that you can determine how these
might impact your business
All of these will impact your business plans and will inform your decision as to whether or
not to progress with your plans. It can also help you to identify your USP = Unique Selling
Point – that something that differentiates your business from all the others.
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And now what?
So now if everything is looking good you know you have a business idea that can translate
into a successful business.
You should really do a detailed analysis of your business environment, develop a marketing
plan and prepare financial projections.
You may need to prepare a business plan if you need to raise a bank loan or you want to
apply for a grant or attract a venture capitalist.
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Here are some of the ways I can help
If you‘ve read this report and agree that you need to check out all these things but
need to understand how to do it and where to find the information then my more
detailed report will be of help to you. Click here to reach the Resources page on
www.gillianpritchett.com
If you want an expert opinion then I can have you complete a fairly detailed
experience with start-ups I can advise you whether your project is probably worth
investigating further. You receive a report either explaining what my concerns and
reservations are or a report with my opinions and suggestions for the next steps.
Click on this link for more information about the Idea Scan service.
If your project is getting a series of green lights and you’re ready to do a full
Feasibility Study or just a Market Study then I would be delighted to guide you
through this or even to handle it all for you. If you need a Business Plan then again I
can help you or prepare it for you in collaboration with your accountant. Email me
at gill@groupgsp.com.
www.gillianpritchett.com
www.thebusinesslaunchpad.com
www.socialmediaeverything.com
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TESTIMONIALS
Gillian prepared a detailed market study of the digital signage sector for
Gillian loves research and analysis and since she is good at it too, I know
that her help and guidance would benefit many business owners and
Alex Simionescu,
Managing partner, producer
Float4 Interactive. www.float4.com
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