If you read my section on ‘Do I Need a Business Plan’ and followed those steps, you are now ready for the next step in this process. Hopefully two important barriers have been breached in your quest to be the next new business. First, you have answered the most important questions of who am I and is this what I truly want to do. Secondly, you have jotted down some basic answers to a few straight forward questions and the answers have not deterred you from your quest.
After talking with a lot of folks, you have formulated some questions you don’t know the answers to. You need to do some research. Let me start out by saying that the internet is NOT the best source for information and what you read is not always the truth. Given this, it’s time to hit the books.
I personally prefer demographics as the primary source of information. This will tell you a lot in the form of how much money is truly spent on your product or service. You have to get realistic here. You can find information to answer the question the way you want it answered. It isn’t hard, if you look long enough you can find some source that will tell you that your product or service sold or is selling for some outrageous price. I encourage you to be honest with yourself. Most will find this difficult as they are wrapped up in the thought of success and the possible wealth it brings. But a reality check will allow you to evaluate the real potential. If your idea is a good as you say it is, then the numbers will bear it out. Also, many ideas are not about making or creating wealth but more of generating a living to support a family and doing what one does well and loves.
Now you have to research three areas to gain a real understanding of your business potential:
- Customers – how many and how much money is available?
- Competition – how many and can competition come from other alternatives?
- Supplies – will suppliers provide you with the materials you need?
There are a multitude of sources. The best is at your local university’s library or local library. Your local government puts out a lot of information for economic purposes. Read this stuff, it is interesting and it identities the wealth and resources in the community. Focus on particular zip codes as these are your most probable customers. Your state has a wealth of information as it relates to demographics of your community. Gather this information together and develop a model for the zip code or codes where you will provide this product/service.
Now research the product or service you will provide. Does the industry have growth potential? Very few industries have this available to them. Back in the mid 90’s technology was booming and there were plenty of opportunities. Communication became the new growth industry in the mid 2000’s and then apps took off in the late 2000’s. Where do the growth industries exist today? Pick up the Wall Street Journal and read about them. But for most of us, we are not looking at a growth industry but an existing industry that flexes with the change in demographics for the community. If there’s a splurge in home construction, then there’s potential in the trades industry (mechanical, plumbing, electrical, tile, carpenters, etc.). The demographics will point you in the right direction. The end result is to answer the question, ‘Is there enough money in this area for my business to get a reasonable piece of the pie?’
Now you have completed one step and that’s if there’s money to be made. You should have evidence that there is indeed money to be made. Now it is time to go onto the question of competition. Get in your car and drive the streets and write down the competition. Where are they? How many? Are any performing variances or selling similar products? If retail based, how much square footage are you talking about here? If service based, look in the phone book (yeah I know it’s outdated) and write down the competition. If some form of transportation is required, how many trucks and or pieces of equipment does the competition have? Below is an example of the thought process of one of my clients in his research:
The key is to consider other alternatives in the research of your competition. You need to exhaust as many alternatives as possible to get an accurate answer to the competition issue. You need to even consider the competition from outside of your zone coming into your zone to take customers away. Once done reviewing the competition, it’s time to look at the suppliers.
Now this isn’t as critical for the service based business as it is for the retail. But still, even the service based business has to look at the supplies they will need to render their trade. I have a client involved in the veterinary trade. The doctor had a small clinic but also provided the services to the local equestrian operations. When I started out doing the accounting I was shocked at the dollar volume of supplies. I thought to myself, you couldn’t possibly buy this much cat litter. Well, it wasn’t cat litter but pharmaceuticals for the animals, specifically the horses. Furthermore, it wasn’t like you could go down to the local Walmart and purchase these high end drugs. The vet had to purchase from a multitude of sources including Canada. This in turned required special permits and since the drugs are controlled, the vet had to be registered with not only the Federal Government, but had to have special licenses and permits in the state. Then this drove the insurance aspect of the company and it further required background checks on the staff. All of this for a few supplies, now you can understand that even if service based, you must consider all the issues.
For the retailer, my main concern is the rights to the products you will sell. Are there restrictions, territorial rights, or even enough of the items in the general market? Below is an example of an issue with a client about two years ago:
Baseball is one of the more active sports in our area. One of the tournament directors found out that I not only loved the game but I was an accountant. He approached me and we talked a little about him opening a retail outlet to sell umpire gear. From the shoes to the protective equipment he thought there was a large enough market to warrant an actual retail storefront. I personally doubted it but he engaged me to get answers. After research I came to the conclusion that at best he could cover about 40% of his operating costs via the margin from the sale of the gear. This even assumed internet sales etc. He wanted to know how he could make it work. I suggested selling more than just umpire gear, include baseball products too. Pull in the baseball crowd. Marketing is done at the tournaments with the umpires anyway, so this could feed off each other.
Boy was I way off. It turns out that the major suppliers of baseball equipment use territorial contracts to of all things, limit the penetration of their product. WHAT? They didn’t want to take away sales from their biggest buyer/retailer which is a national sports gear retailer. They had some form of understanding to limit the number of little guys from having this gear. My client could substitute with some other equipment but the customer wanted the big brand names for their equipment and weren’t really interested in the off name brands.
So the above reiterates the importance of understanding the supplier for the product and services you will provide. Find out the volume discounts involved, go to one of their trade shows to learn more about the products in that industry. Trade shows offer a knowledgebase beyond your wildest dreams because others will gladly teach you as long as they know you will not be direct competition with them. I found it fascinating what others will teach you if you just ask.
At the end of the day, you need to know that you can get the supplies you need at a reasonable price to resell to your customer. If your sources are limited or have contractual requirements, then you will need to discuss these with an attorney and your CPA.
Take note this section covers the What and a little bit about the Where of the business plan as described in my ‘Do I Need a Business Plan’ article. My next writing covers the Where, When and How of the plan. Please be aware that you have not drafted an actual plan yet, we have identified issues, generated questions, and have conducted research to see if the business will be a viable operation. Act on Knowledge.