Episode Summary – How To Evaluate Your Idea

 In today’s show called How To Evaluate Your Idea, we explain a 3 step sequence that will:

Help you work out if your business idea will work and how to avoid some common reasons for business failures that we have seen. 

Remember, Listen Before You Leap!

 

Links and resources

Blog-Thinking of owning  a business-would you be successful?

Self Assess Your Readiness with our Business Readiness Test

Blog- 5 risks new business owners can avoid

Blog -Managing a business-tips for new owners

Blog-What does business model design mean?

Business Plan Template Australia Government Template

How To Evaluate Your Idea

Evaluate your idea using our 3 step process to make sure your business is suitable for you and viable. 

Episode Related Resources Stack

Blog-Thinking of owning  a business-would you be successful?

Self Assess Your Readiness with our Business Readiness Test

Blog- 5 risks new business owners can avoid

Blog -Managing a business-tips for new owners

Blog-What does business model design mean?

Business Plan Template Australia Government Template

Every new business starts as an idea, but how do you evaluate Your Idea to see if is it likely to work or not?

How you evaluate your business idea will depend on a number of factors such as:

  • the type of business
  • the size of business
  • buying an existing business
  • buying a franchise
  • starting a new business
  • whether investors are needed
  • if you will service local, national or international markets 
  • how much intellectual property is involved

Each case is, therefore, unique.

There is an urban myth that portrays all the upsides of business ownership and success and frequently ignores the downsides and failures that happen.

This one-sided view often leads to some people getting into business only to find out they shouldn’t have.

Thoroughly evaluating your idea will help you avoid problems.

One common reason behind many business failures is that business ownership doesn’t suit everyone.

We have heard business owners list a variety of problems such as:

  • They underestimated sheer workload and effort involved;
  • their business has become all-consuming so they can’t switch off;
  • lack of earnings when things do not go to their plan;
  • the strain their business puts on close relationships;
  • their lack of business knowledge allowed them to make some basic mistakes;
  • working harder is not the answer as they can’t work any harder;
  • the need to do things they don’t like doing;
  • not understanding the difference between cash and profit means there is not enough of either
  • unrealistic financial expectations of what the business can provide

Some or all of these can conspire to make a person feel trapped, and that’s never a good feeling.

Add to this our silly societal stigma of being a “failure”, and for owners, it’s far from the initial vision they had right back at the start.

Here are two real examples of not evaluating a business idea.

We are going to introduce you to some of our Slightly Familiar Friends. 

Our Slightly Familiar Friends are fictitious characters based upon real people or businesses that we have observed.

Why are they called Slightly Familiar Friends?

We’ve called them “slightly familiar” as who knows, you might get a glimpse of someone you recognize in them-perhaps even yourself!

Our Slightly Familiar Friends encounter all manner of situations that they have to, hopefully, get through successfully. No doubt, some will fare better than others on their journeys.

As in real life, some are resourceful and resilient, and others less so.

We will explain their challenges and possible solutions for them.

Here’s one of our Slightly Familiar Friends called Peter to demonstrate why you should not underestimate this.

Example 1: A business consultancy that failed.

Peter was a successful corporate executive who was also a qualified accountant.

He had held a Chief Financial Officer position and had business leadership experience in several large businesses. Peter was 52 and saw an opportunity to become a business consultant and use his experience to help smaller businesses. He could work from home and use his experience- a perfect lifestyle business.

Peter left his job and started to look for clients at networking meetings. He found people wanted to sell to him not buy from! This proved very slow, and so he decided he had to approach some local businesses directly to speed things up.

Following a day of internet searching, Peter identified some local businesses and got their phone numbers.

Peter telephoned 48 businesses and asked for the business owner. In 40 cases, the receptionist or person that answered the phone said: “the owner is in a meeting, so send us an email, and we will pass it on”. Peter didn’t get a single call or email reply from these 40.

In 8 cases, he did speak to the business owner who said: “We are going good, and I am too busy-we don’t need any help thank you.”

Peter felt quite depressed and was starting to get worried about his brand new business.

Peter, then decided on another tactic. He actually physically walked into the reception of 30 of the 40 companies that never replied to his email. He used his email as an excuse to” follow up” and have a chat with the owner in person.

Peter was sure that if he could just talk to the owners, they would want his help.

Of these, 30 targeted walk-in visits, Peter still had to talk to someone who was not the owner. He was told by 26 that the owner does meet people without an appointment. Peter was told to send another email to [email protected] with his offer and prices. He could also request an appointment.

In 4 of these physical walk-in visits, Peter did get to meet the owner. They said they were busy but agreed to listen to Peter’s pitch for a few minutes. They then said thanks “our accountant helps us with things like that or we are too busy.”

Forty-eight telephone calls and 30 walk-ins resulted in zero sales.

Peter found the constant rejection so uncomfortable that he simply could not face it again. The “rejection” made him feel like a failure and that no one valued him, let alone what he had to say.

He felt nervous and awkward, which didn’t help his confidence when he approached potential clients.

Peter eventually got clients through a networking referral group, but there were not enough, and they did not come quickly enough. After trying for 12 months, his business folded and he had to find another job.

Peter completely underestimated how hard it was to get clients. He also realized that he could not accept rejection and felt very uncomfortable “selling” himself.

Peters failed attempt cost him about $150,000 in costs and loss of earnings compared to his previous salary. 

Example 2: A non-food retail franchise failure.

Josh was working as a logistics manager in a sizeable business and with his partner, Jacinta, decided that they would buy a company to make more money. Josh was a well organized and competent manager with ten years’ experience. Owning their own business would also mean that Jacinta could work in the business as she was sick of her job. Jacinta was a bookkeeper, and so she could look after the new business bookkeeping and admin needs.

An opportunity came up to buy into a well-known franchise, in non-food retailing. 

The franchise is a very well-known brand name, and it has first-class products. There was also limited competition in this area, so it looked like an excellent business opportunity. The existing store had been there for several years and had a good history.

The business plan looked good, but Josh and Jacinta also got their accountant to check the plan-after all it involved a few hundred thousand dollars of capital. Josh and Jacinta bought the business, entered the franchise agreement, bought stock and took over the lease and then reality quickly set in. Neither Josh nor Jacinta had any experience in retail.

The biggest issue was that Josh realized he couldn’t deal with the general public. He couldn’t tolerate their whinging and haggling on price -people never seemed happy, even when they were happy. They always wanted something bigger or smaller or a different colour than what he had in stock. They always were after a discount and often kicked up about any delivery charges. 

Josh’s blood pressure would rise with some customers, and he knew he was not good at it. He was a larger than life type with an outgoing character but had zero experience in retailing. Jacinta was much better at the customer interface, but she had plenty of other things to look after in the business, keeping on top their bookkeeping and admin. They both became miserable. 

Somehow, they couldn’t seem to get the sales figures they had put in their business plan, nor could they match the sales the previous owner had reported.

They lasted a couple of years and hated every minute of it.

Eventually, they sold the business and lost a considerable amount in doing so, which set their family back financially.

Looking back at his character, his personality and experience Josh was taking on a risk buying a retailing business. 

This example is a textbook case of a competent and intelligent person buying a business based upon logic, that was entirely at odds with his personality and experience.

Josh and Jacinta learnt a costly lesson, and both went back into employment.

To Evaluate Your Idea, we believe that you have to evaluate your idea from several different perspectives and not just financially.

Many experts primarily focus on business financial numbers. 

This thinking ignores the crucial human aspect of owning a business. We know that the owner is the key ingredient to success as we have seen inside many companies.

Even if your business idea stacks up financially, you have to feel right about it. If it conflicts too much with you, your beliefs, comfort zones or your motivation, then it might not be the best choice for you.

Now it’s good for us to be challenged or nothing much changes or advances. These challenges might include our beliefs, comfort zones and motivations but be aware of the degree of how far and how many aspects will be challenged.

By all means, seek challenges but be realistic about your capability and capacity to deal with them, particularly if your income depends on success.

A 3 Step process to Evaluate your idea.

Step 1: How suited are you and your business?

Review those exercises we made available for your 360 Life Balance, Your Motivation and Knowledge Skills and Gaps as the first part of the evaluation and ask yourself “is this really me?”

Does this business opportunity “feel” comfortable with what you are trying to achieve and with your personality and demeanour?

As we have said many times in the podcasts, your business is intertwined with your life, and therefore you have to feel comfortable, excited and motivated by it. You are going to pour your heart and soul into it, possibly a lot of money, certainly a lot of time – it’s a huge commitment in your life.

You will most likely be doing this for a long time and therefore it has to be something you enjoy.

We’ve explored the issue of comfort zones in a previous episode, and this is very important for you to assess and acknowledge.

It is easy to gloss over this and say “yes” believing that you indeed will be comfortable being uncomfortable. We have an example of this a little later and how important it is. The two examples above should serve as a warning.

Avoiding these errors is important as they are pretty predictable if you listen for the signals.

One way to test this is “try before you buy”-but how?

If you are buying an existing business, then you could perhaps negotiate this. The seller may be happy for you to work in the business and make sure you are comfortable and understand what you are buying. Make sure that you experience those aspects that you are least comfortable with, as a test-there’s little point testing things that you like doing!

If you are buying a Franchise, then you might be able to do two things.

Firstly, the Franchisor may have a list of existing franchisees that are happy to talk to potential franchisees like you. Don’t just talk to one-pick perhaps six so that you get a range of views and a range of territories or outlets. Prepare your questions before speaking to them and again make sure you explore your least comfortable zones well. Remember, you need to see through the sales pitch, so what’s good and bad. If it’s a whole perfect story-do, you believe it?

Secondly, the Franchisor might arrange for you to work in a Franchise to get direct experience.

This might be possible whether you are buying an existing Franchise or a greenfield site.

If the buyers or Franchisors don’t agree to your reasonable request BE CAREFUL. You would expect that it’s their interest to make sure you are going to be successful.

If your idea is a start-up, then you can still do something similar, but maybe you have to be a bit more creative.

You can contact people who are doing a similar business and ask them about their experience. They will probably tell you.

If you rely on business networking to find customers, attend some networking events and see how comfortable to feel introducing yourself and explaining what your new business is going to do.

This will give you feedback on how comfortable you are in a sales role.

In Episode 5 How To Use Your Excitement To Gain Momentum, we identified some typical comfort zone hotspots:

  • Extrovert/Introvert personalities and the sales role.
  • Dealing with confrontation and conflict.
  • Procrastination.

Do not underestimate how limiting these can be.

Step 2 Make sure your idea is needed.

Another reason for business failure is that the idea is a poor one. Not every business idea is worthy.

Unfortunately, some new entrepreneurs start businesses or buy businesses without adequately evaluating their idea. This means their business survival becomes more like a lottery situation where they rely on luck to succeed.

Investing hard-earned money, borrowings, emotional effort, and time, based upon a lottery of hope is not smart. It is also will bring a higher risk and higher stress.

Let’s start with what scientists would call “first principles”.

  1. Your business needs to provide a product or service that is needed and valued. 
  2. You must attract sufficient numbers of customers who are willing to pay enough money for the product or service to cover all your costs and give you a profit margin.
  3. There must be ongoing customer demand to sustain your business and its growth to meet your business strategy and plan.
  4. You will be able to get paid promptly enough to provide cash flow to run your business.

So from the outset, if you cannot answer yes to these, you are in difficulties.

So, ask yourself these questions:

  1. What is the problem that you are solving for your customer?
  2. Why will your customer even care that you exist?
  3. What is special about your product or service that they will they buy from you and not your competitors?
  4. How much will they pay for the product or service and how many ongoing customers can you attract?
  5. How will you reach your customer, so they know you are there?

These questions need answering precisely with thorough attention to detail.

Before you say- that’s stupid every business owner knows that-we can assure you that these are some of the toughest questions and many businesses get these wrong.

Who is your customer?

At first glance, the answer to this question appears obvious but is it?

It only appears obvious because most people answer the question with a very broad customer definition.

When too broad a customer definition is used, some fundamental issues appear:

Firstly, it may contain multiple customer segments that actually value quite different things.

Secondly, your marketing message may be wasted as its “hits everybody and misses everybody at the same time”.

Thirdly, you might be missing opportunities or wasting money servicing an unprofitable customer segment.

Traditionally, we came up with a product or service we thought customers wanted and then marketed it to them in the hope they would buy it.

 This approach is still used by many, and it can be hit and miss! That means it is both costly and risky.

 A more efficient approach is to turn this on its head by designing a business around making products or services that “fit” what a particular customer segment wants.

 There are some great business model design tools (such as Strategyzer) to help businesses study their customer segments and work out how well a value proposition fits the specific customer need. When you have a “fit”, you can then shape your business to deliver the value proposition more effectively. 

 This business design thinking process also clarifies the marketing message and whether there are new opportunities that could be developed. It may also indicate customer segments that are not efficient or attractive.

 For example, let’s take two people who like coffee.

Aaron owns a business and likes to get out of the office for a coffee. He is often stressed and wants 20 minutes of peace without being pestered. He goes to a café that has a beautiful garden where hears birds and sees Koi carp swimming around in their little pond. This is his 20 minutes meditation if you like where he is reminded of our beautiful world and not his to-do list. Aaron is attracted to the café’s garden setting and pays the higher $5 price they charge gladly, even though they are not the quickest baristas because the place is always busy.

Vicki works in a busy shop, and her boss gets mad if she takes more than her 20 min break. She loves her break and wants to make the most of every minute away from the shop. Her priority is speed. The last thing she wants is a big queue and a slow barista that wastes her break. Vasiliki doesn’t see why fast service should cost a premium and keeps her eye on the prices charged by other local cafes which is usually $4. She now goes to a café which is always quiet.

Two people, buying coffees with different things they value. It’s easy to say everyone is our customer, but the frequent reality is, they are not. One cafe has 20% higher prices than the other and is always busy.

The key point is to get a very clear understanding of what your value proposition really is and who your customer really is.

 Accurately and adequately evaluating your business idea is particularly important so that you don’t waste valuable time or money on the wrong idea.

Step 3 Do your business plan homework.

The dreaded business plan that so many people just hate can be your best friend.

Rather than address the mechanics of the business plan lets address the business plan mindset.

A business plan is a tool, and like any tool, you have to learn how to use it and practice.

Think of it, not as a stuffy accountancy thing that you do for someone else, maybe the bank manager, but as a dynamic business journal that you keep up to date.

It’s the place where you capture all your plans and visions; where you organize your thoughts into certain chapters; where you can predict some critical numbers that show your future.

It needs to be dynamic because the world is continually changing, and therefore so is your business environment. That means you are continually adapting, and so should your plan. It’s not “set and forget”!

Don’t hide it away-keep it within sight and update it. Whether its online or on paper, it doesn’t matter-choose which more natural for you to use. Add pictures, photos and diagrams if it helps you. Make it for you-not for someone else-even though you might share it.

Just as you keep a journal, think of your business plan as your business journal-it has certain Chapter headings and some charts in it.

Generally, smaller businesses avoid business planning. Bigger businesses, however, use business planning and wouldn’t dream of not doing so.

A well thought out plan does not have to be wordy or long, but it has to be focused and clear. Avoid padding your plan with waffle-it’s annoying-get to the point.

There are one-page business plans that can work well in some circumstances. We will talk about them in another episode along with other tools such as business intelligence dashboards. For now, let’s talk a little more about a “full business plan”.

There are many versions and templates you can use in building your business plan, and many of them are available for free from Government websites and the like. 

The Australian Government has a good template which we will touch on – the key points should be the same in your local templates.

When filling out one of these full plan templates, the temptation is to avoid the sections that you don’t know the answers to.  

Remember, just because you don’t know the answer doesn’t mean you can ignore the question or section. It’s a prompt for you to do more research and self-education to find out the answer.

These templates in effect give you a free checklist and think of them a safety checklist.

Ignoring a section could be dangerous.

Building a plan is not a 5-minute one-off exercise. You will evolve it over some time, maybe going back to sections many times as your thoughts and research become clear.

Focus is paramount to success.

Constant focus on a business plan is a characteristic of exceptional companies. They continually focus on how they are progressing toward achieving their objective. They use a regular and systematic business review process to check their progress.

Summary of How To Evaluate Your Idea

Step #1 Begin With You and How Good A Fit Your Idea Is

Step #2 Check Your Idea Is Needed and Appeals To Your Customer

Step #3 Do Your Homework and Start Building Your Business Plan

Next Episode

In the next Episode, we will discuss the crucial topic of Marketing For The Recovery. 

Check out Money Mindset For Success and how to avoid some common traps we have seen owners fall into. We approach the subject of understanding from a very different perspective.

Thank you for joining us, and we hope you will Listen Before You Leap with us next time.

Disclaimer

The information contained in this podcast is general and does not take into account your situation. The content does not constitute legal or financial advice and should not be used as such. You should consider whether the information is appropriate to your needs, and where applicable, seek professional advice from a financial adviser or lawyer in your jurisdiction. To find out more, please go to www.ShouldIOwnABusiness.com.