People reach out to me weekly for advice on whether they should diversify their business and sell an additional product or service.
There also seems to be a flurry of entrepreneurial types who see opportunity as a result of the current changes in the economy. They believe they have the next great business idea that will make them a millionaire in a short period.
Regardless of whether this is your first business or your 10th, here are five questions you need to ask yourself before you start putting too much time, money and energy into a business.
Do I understand the business model?
While this might seem like a silly question, many an entrepreneur (myself included) has started a business without thinking about how they’re going to get paid. We need to figure out all our expenses, including how much money we need to earn and what kind of profit we will need to generate to recover our investment, pay our debts and put money away for the future.
Once we know those numbers, we will need to understand how many units of our product or service we will need to sell to cover those expenses.
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So how much is a business worth?
We will need to be clear about our pricing, with a clear understanding of the value we provide for the buyers and how much they’re willing to pay for what we’re going to provide.
We will need to look at our customers, our competition, our startup costs and marketing costs to break into the market, our sales model, and the team we will need to build to make our business profitable.
Without understanding how our business is going to make money, we’re setting ourselves up for failure.
What am I willing to sacrifice to be successful in this enterprise?
All too often, entrepreneurs fail to have a clear understanding of the sacrifices they will need to make to be successful.
How much time are you going to dedicate to this business? How many hours are you going to be working each day just to open the doors?
You will need to recognize that you’re going to have to give up time with family or friends, your focus on other projects or businesses, and possibly some of your lifestyle.
Are you willing to sacrifice sleep at night trying to figure out the business, worrying about how you’re going to pay your employees, suppliers, investors or bankers?
Are you willing to take a cut in your income as you get the business going?
While you will never completely know what will be asked of you to make the business successful, you should be prepared to sacrifice your time, energy and money for the risk of a better future.
Do I have the resources to make this happen?
If you’ve looked at your business model and have run a cash-flow projection to see how long it will take before you get the business to the point where it’s earning money instead of burning it, you will have some semblance of the resources required to reach success.
However, most entrepreneurs are overly optimistic and believe they can reach profitability after their first year. Unfortunately, and perhaps one of the main reasons businesses fail, leaders often don’t recognize that it takes three years for most companies to establish their foundation.
You will need to ensure you have the money and resources to go three rounds in the ring. And you need to be prepared to face unexpected catastrophes in any of those three years.
What’s my exit plan?
Most people who get married intend to be married for life. However, with a business, one of the first things you should ask yourself once you’ve determined if it’s viable is: How am I going to get out of this?
Understanding your exit plan will enable you to be prepared for the future.
It doesn’t matter whether you plan to give the business to your children, sell it for assets or shares, or shut it down when you’re ready to retire. Having a plan will let you think differently and make decisions that will affect your business’s value and future.
Is this the right decision?
Once you’ve thought through all the previous questions, you need to answer this crucial question. To do this, you will need to have some criteria on which to base this decision.
We use an Opportunity Analyzer, which is simply a form we developed with some questions about the minimum and optimum criteria that enables you to recognize if this is the right thing to do. Email me at [email protected] if you would like a copy.
By having a set of criteria on which to base your decisions, you will find that choosing which business to start and where to put your energy and money is so much easier.
While you may never have all the answers to your questions about this new venture you’re considering, taking the time to ask these questions can save you a bundle of frustration and heartache in the future.
Dave Fuller, MBA, is an award-winning business coach and a partner in the firm Pivotleader Inc. Do you have five questions about your business? For interview requests, click here.
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