Evaluating Your Business Idea FAQ

There are so many different kinds of businesses -- and so many different kinds of people -- that it's impossible to give specific advice on the particular type of business you should start. Only you will be able to answer that question, but to maximize your chances of success, you should:

• Choose something you enjoy doing. It's much more difficult (and a lot less fun) to make a success of a small business that doesn't interest you -- for instance, running an auto parts store when your heart is really in graphic design.
• Choose a business you know intimately. Trying to learn a new industry or skill at the same time you're getting your business up and running will add a lot of unnecessary stress to your new venture and lower your chances of success. Sure, it might be fun to run a hair salon, but if you've spent the last ten years baking pastries and don't have any experience cutting hair, you might be better off starting a catering business or opening your own bakery. That's not to say that you can't learn a new business -- but you should learn how to run a pizza parlor before you blow Aunt Sadie's retirement money on a wood-burning pizza oven.
• Choose a business that has a good chance of turning a profit. The best way to determine your business's potential profitability is to prepare a "break-even analysis," a financial projection that will estimate how easy or difficult it will be to turn a profit. (For more information on performing a break-even analysis and determining the financial viability of your idea, see Will My Business Make Money?)

To learn more about choosing the right type of business for you, as well as how to research and evaluate your business idea, read Start the Right New Business for You.

Businesses that use hazardous materials, make edible goods, care for children, sell alcohol, or build or repair structures, vehicles, or other items of value come with inherent risks. Unless you are prepared to start a corporation or limited liability company and can afford adequate liability insurance (which can be pricey), you may be better off working for one of these businesses rather than starting your own.

In addition, there are some types of businesses that are particularly vulnerable to competition, including restaurants, bookstores, video rental stores, movie theaters, grocery stores, and Internet and computer service providers. But these businesses sometimes do survive, especially if they can fill a niche market and develop a loyal following.

Starting a business can be scary. But great rewards await entrepreneurs lucky enough to create successful small businesses -- benefits you may miss out on if you remain a wage earner for the rest of your life. Although only you can decide if you're ready to quit your job and plunge into running your own business, here are some of the rewards of going out on your own:

• Independence and flexibility. You'll have more freedom and independence working for yourself. And once your business is firmly established, you'll probably have the flexibility to make sure you don't miss the moments and events that matter most to you in life.
• Personal fulfillment. Owning and running your own business can be more satisfying and fulfilling than working for someone else. Many successful small business owners find they enjoy the respect they earn from their peers for having the courage to go out on their own.
• Power. Don't be surprised if power is one of your goals. When it's your business, you can have your employees do it your way. If power is important to you, think about how to use it in a constructive way.
• Money. The risks of forgoing a steady paycheck can pay off when you own your own business. You can get rich in a small business, or at least do very well financially. Although most entrepreneurs don't get wealthy, some do. (For more information on calculating the financial viability of your idea, see Will My Business Make Money?)

Although you can reap many benefits by starting your own business, there are definitely some risks. The most common include:

• Losing money. You're going to need money to get your small business started. Whether you raid your savings account, hit up friends and relatives, or borrow from a bank, there's a very real possibility that your business won't succeed and that you, your friends, or the bank will never see that money again. If your business idea is risky, ask yourself whether you're willing to gamble your retirement, your friendships, and even your good credit on your business idea.
• Personal sacrifice. Business success can come at a high personal cost. Getting your business up and running may consume most of your time and energy, including your precious evenings and weekends. You may not have much time for family or friends or the extra cash to take a second honeymoon with your spouse. Before you quit your job, decide whether you (and your family) are ready to make some of the personal sacrifices necessary for you to create a successful small business.

Even a good business idea might not be financially workable. To learn how your idea will fare, you should prepare what's called a "break-even analysis." In a break-even analysis, you project income and expense estimates for a year to determine whether, in theory at least, your business will make enough sales revenue to pay its expenses.

A break-even forecast includes the following:

• how much your business will earn over a specified period of time (your projected sales revenue)
• your fixed costs, such as rent and insurance
• your profit after deducting the direct cost of the product or service you provide (your gross profit), and
• the sales revenue you will need just to keep your business running (your "break-even point" or "break-even revenue").

If you find your break-even revenue represents an amount of work your business can handle -- that is, if you can easily bring in more than the amount of sales revenue you'll need to meet your expenses -- then your business stands a good chance of making money.

For more information on preparing a break-even analysis, see Will My Business Make Money?

• Determine if it's the right type of business. (To learn more about choosing the right type of business for you, as well as how to research and evaluate your business idea, read Start the Right New Business for You.)
• Use a break-even analysis to determine if your idea can make money. (For more information on performing a break-even analysis and determining the financial viability of your idea, see Will My Business Make Money?)
• Investigate business financing. (For more information, see the Business Financing FAQ.)
• Contemplate a basic marketing plan.
• Write a business plan, including a profit/loss forecast and a cash flow analysis. (For more information on writing a business plan, read Business Plan Basics.)

Read more about starting your own small business in The Small Business Start-Up Kit, by Peri Pakroo (Nolo).