My personal experience has taught me that growing a business, whether organically or by acquisition, is never easy. Coupled with my experience working with other entrepreneurs who are distracted easily by shiny, new opportunities, I recognized the need to develop a quick way to assess or evaluate new ways to grow a business.
These five simple rules have served as a valuable tool to set boundaries for quick-start entrepreneurs by preventing them from pursuing unprofitable, costly new lines of business, partnerships, business acquisitions, etc.:
1. Doing the Math Really Does Matter
The first step in evaluating a new opportunity is to compute the potential gross profit margin to be earned. Although the astute entrepreneur instinctively knows when new business will provide a healthy gross profit margin, doing the math is time well-spent. And when the additional revenue from a new opportunity is significant, or, at least, sufficient enough to ultimately contribute to the net profitability of the business, it has passed the first and most important test.
Ask this Question: After paying the costs associated with producing and delivering the product/service, what percentage of the dollar paid by the customer remains to cover the operating expenses?
Compare the expected gross profit margin from the new business opportunity to your present GPM. Is it more or less? Generally speaking, if the GPM is less than 33%, it’s difficult to make a profit in the long term and is wise to consider other opportunities.
2 Avoid Commodities or Die by Them
I can’t take credit for this line. A very successful entrepreneur I know drilled this mantra into my head several decades ago, and it has stuck. And for good reason, it’s painfully true.
Commodities come in many forms, and it’s really important to consider carefully how a business can become commoditized if you seriously intend to grow a business. Ultimately, the gross profit margin in a commoditized business, product, or service line shrinks over time and eventually forces all but the leanest players out of business. Price competition makes it a race to the bottom!
On the other hand, if a business has an element of exclusivity to it, it delivers its product or service, sources its raw materials, or enjoys exceptional authority in the marketplace, the likelihood of success increases greatly.
Ask this Question: Is there some element of exclusivity in the new business, product or service delivery model I am exploring?
If the answer is no, it’s only a matter of time before the new business, product or service will become a commodity. Such an opportunity is rarely worth development.
3. Never Believe You Have Enough Money to Create Market Demand
Many entrepreneurs fail to recognize how costly it is to start a new business while they simultaneously create market demand for its products and services. Raising the capital needed to simply start a business can be a daunting task. And creating market demand from scratch is terribly expensive and rarely achieved.
Although I am the first to applaud disruptive industries, my experience has taught me that Apple’s iPhone success is an outlier. And you are not Steve Jobs.
Ask this Question: Are there customers in the marketplace who have money and are asking and/or looking for this product/service now?
If you have to put a second mortgage on your house while you’re convincing the world they need your product or service, the risk is too high, and there are better ways to grow your business.
4. Submit to the Strengths Test Before Firing the Green Light
Every entrepreneur has his strengths and the smart ones know exactly what they are not good at doing! Extremely successful entrepreneurs delegate every weakness they have to others who excel in the task or skill.
When considering a new business opportunity, carefully consider how compatible it is to your innate skill set and personal interests.
Ask this Question: If on a given day in the new business, I was forced to step in to perform a job in one of my employee’s absence, would I be able to pinch hit or would I be in misery?
Your answer says it all.
5. Be Willing to Say ‘No’ to the Great Opportunity
Many entrepreneurs find success with their initial business offering and many, many more do not. The business failure rates in the first five years of business ownership are staggering and well-known. Nonetheless, for those who do succeed initially, many of them think they will succeed at whatever business opportunity they chose to pursue. In fact, this assumption is so common among first-time entrepreneurs that observers refer to this type of entrepreneur’s thinking as the entrepreneur who believes he has the Midas touch.
Unfortunately, in the real world, successfully launching multiple lines of business in succession is a rarity, especially if launching occurs before answering these four questions, and particularly so when the entrepreneur is unwilling to say ‘no’ to that great new opportunity!