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How To Evaluate a Business Opportunity

Many would-be entrepreneurs have aspired to strike out on their own, create their own business, be their own boss, but have not started for a lack of knowledge.
This article will cover the five basic elements in evaluating a new opportunity. The elements are the company, the marketplace or need, the product, the compensation/profit and the timing. These elements apply whether evaluating a franchise opportunity, a network marketing opportunity or an original opportunity.

THE COMPANY - The objective of the first element, evaluating the company, is to determine the stability of the company in terms of finances and management. If the entrepreneur is starting a new company, then the evaluation centers on the personal resources and the ability to sustain losses as the company builds revenues and profitability.

When evaluating a franchise or network marketing opportunity, the key factors to consider include the length of time the company has been in business. There has been a great deal of discussion about the merits of "ground-floor" opportunities. To summarize, the potential for enormous returns on investment are directly related the level of risk. The risk adverse entrepreneurs should consider their ability to continue in business in the event the "ground-floor" company is unable to continue in business. Ideally, the company should have substantial resources, both cash in the bank and assets sufficient to support sustainable rates of growth.

If the company is publicly owned, stock traded on a stock exchange or "over-the-counter," then there is a great deal of financial information available. Government regulations, primarily issued by the Securities Exchange Commission, mandate reporting requirements. Company quarterly and annual reports will state the amounts of cash available, assets on hand as well as debt. When evaluating a company, consider what other people are saying about the company. I don't mean looking at an internet web site created by a former, disgruntled employee or franchise owner who has an agenda to "trash" the company or opportunity. Look at what the media is saying. Third party financial newspapers, magazines and internet sites tend to be objective in their evaluations of companies. A number of magazines, Fortune for example, run annual comparisons and ranking of businesses.

THE MARKETPLACE OR NEED - Is there a need in the marketplace for a particular product or service? The need can be evaluated in terms of how the product benefits the consumer or user. Considerations include quality, availability, convenience, delivery and quantity. To illustrate this element, I'll use an example of a restaurant. Up until recently in the area I live there are numerous fast food restaurants. While these restaurants serve people who want relatively cheap food in a hurry, these restaurants do not meet the desires of people who want a more intimate dining experience. Since the fast food restaurants did not appeal to those who wanted a quiet, candlelit dinner, they had to drive miles to find a suitable place to eat. In areas experiencing population growth, the need for products and services grow proportionally. When evaluating the marketplace, consider the existing competition. Are there businesses already in the area? If you entered the marketplace, can you generate enough sales to be profitable?

THE PRODUCT Does the company offer a product or service that meets the needs of the consumer? Are there quality, delivery, quantity or availability issues? Or are there too many companies chasing a small market? Is the product or service unique? Is the cost of entry into the marketplace sufficiently high to keep out competitors? New competitors will ultimately drive prices and subsequently profits down. Are the products consumable resulting in repeat orders? If the products are durable goods, one-time buys, then the marketplace must be large enough so that enough new customers can be found (easily). How many grand pianos are purchased in a town of 10,000? How many bottles of vitamins?

THE COMPENSATION/PROFITS Does each sale provide sufficient revenue to cover costs? Or are profits dependent upon recruiting others to sell the products? Since revenue is related to the selling price of the products and services, are the products reasonably priced? Or are there less expensive alternatives for consumers?

THE TIMING Is the marketplace saturated with the product or service so that it is difficult for the company to maintain consistent growth rates? If there are no growth rates, then how will you expand your revenues? Once you have completed your initial evaluation, the next step is to develop a business plan to further refine the feasibility plan and establish long term goals. The goals can be stated in terms of revenue or profitability. The Small Business Administration has numerous articles discussing how to write business plans.

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