Analyzing & Choosing a Business Model

This time of year is popular for people to start making resolutions and consider starting that business they’ve always wanted to create. They reflect on their achievements so far and resolve to make THIS year the one where they finally reach all their goals.

For most of my 20s and 30s, I was a web entrepreneur. Now there is nothing wrong with being that, if you are aware of the risks involved. The problem was that I jumped into my endeavors with a lot of ignorance. I was over-optimistic on my chances of making a living from the websites I was trying to run.

Now that it’s fifteen years later, I can look back and see some of the mistakes I made. I believe if I had chosen something less risky, and more proven, I might have succeeded a lot sooner than I did. Overall, I don’t regret my experiences as an entrepreneur, because they have made me a much stronger financial planner today. Because I was exposed to so many people and experiences, I can easily relate to my clients and their backgrounds and stories. And running your own financial planning practice does require many entrepreneurial skills, which I was lucky to acquire over the years. But at the same time, I might have struggled alot less had I been smarter about analyzing the business models I was pursuing.

So in hopes that I can help you avoid the mistakes that I made in case this is the year that you finally take the plunge to fulfilling your own dreams, here is what I learned from my experiences in terms of how to evaluate the risks and rewards of the business you may be considering:

CAPITAL INVESTMENT

What kind of capital investment is required for your business? For example, if you are opening a restaurant, it might not be feasible unless you have hundreds of thousands of dollars to invest in equipment, licenses, a lease, furniture, and hiring staff. Even if you have the investment, it is important to consider the fact that you might be stuck if things don’t go well and you’ve signed a ten year lease to rent space, or can’t easily sell equipment and other assets to recoup your money in case you want to get out.

COMPETITION / BARRIERS TO ENTRY

Is there a lot of competition in your industry? How hard is it for other companies to enter if they wanted to? Do you have enough of a competitive advantage to distinguish yourself from the rest?

COMPETITIVE ADVANTAGE

If you do have a competitive advantage, what is it? Is it price (i.e. you will sell your services or goods cheaper than the rest?) Is it quality, customer service, a niche focus? Is that competitive advantage sustainable over a long period of time, or will it be easy for some new company to come along and offer the same thing cheaper than you do? Do you have significant barriers to entry such as trademarks or patents that will prevent someone from competing with you?

RECURRING REVENUE

Is this a business where you will have repeat customers and recurring revenue every year, or do you have to constantly look for new clients? For example, a consulting or wedding planner business might require you to find new clients every year. But an accounting practice usually involves monthly income from the same clients. If you choose a business model with recurring revenue, you may be able to reduce your working hours and relax after a few years of growth, while in another type of business you may be constantly having to scramble for new sources of revenue or engagements.

SMALL LEARNING CURVE / PLAYS TO YOUR STRENGTHS

Is this a business in which you already have experience? For example, if you were a daycare provider for many years and decided to open up your own daycare center, the learning curve would be less steep than if you chose to jump into a business that is brand new to you. In addition, does the business play to your strengths, i.e. are you a people person who is opening an HR staffing firm, or an intro­vert who is not going to enjoy having to meet a lot of people?

WORKING HOURS / SEASONAL / FLEXIBILITY

Are there special working hours required, such as evenings or weekends? Is this a seasonal business? Is this a deadline-oriented busi­ness (such as a catering service), where hours are inflexible if you have a family emergency? Or is this a business that does not have frequent deadlines (like a financial planning firm).

RECESSION PROOF

Is this the type of “must-have” business that will withstand recessions, like a tax firm or grocery store, or is this a business that offers a “nice-to-have” service or product that may see sales decreases in a recession?

AGE PROOF

Is this a business you can still run if you’d like to continue working past retirement? Or is this a field that requires a lot of physical labor or other skill that might not be feasible as you age? For example, my mother was in the technology field for many years, but she had to retire early because as she got older, she was in less demand. Her years of experience counted, but not as much. Companies preferred to hire young kids who would work for half the salary and double the hours, and who were coming out of school having learned the latest technology.

TECHNOLOGY AND OUTSOURCING PROOF

Is this a business that can be replaced by technology one day in the future (such as travel agencies which were replaced by sites like Orbitz and Expedia). Is it one that can be replaced by low cost labor outsourced abroad? Or is this a business that will always be in demand, such as medical care?

LITIGATION / REGULATION

Is this a heavily regulated industry such as food service or health care, which can involve high compliance and licensing costs or the possibility of litigation?

LABOR / STAFF

Is this a business where you have to hire very skilled labor that is hard to find? Or, are you going to be dealing with very unskilled labor which usually involves frequent turnover (such as in the fast food industry).

INDEPENDENT / SELF-SUSTAINING

How independent is your business, i.e. are you relying on a lot of other vendors, staff, and economic conditions to conduct business (i.e. an import-export business), or is this something that is self-sufficient (i.e. interior design).

SCALABILITY / GOODS vs SERVICES

Is this a business where you sell goods and the business can grow even without you having to be there all the time? Or is this a service based business where sales are limited to how much time you can invest in the company or how many talented people you can hire?

LIFESTYLE vs EXIT STRATEGY

Is this a business you want to run for the rest of your life, with a relaxed work environment and predictable profits, or is this something you hope to continue growing and perhaps exit through a sale or merger? If you do wish to exit, is your exit strategy reasonable and is the company still sustainable even if that exit doesn’t happen?

LEGACY BUSINESS vs CASH PROVEN

Is this a business that is very new and risky and may never make money (i.e. a website) or is this a cash proven model that can provide you a stable, predictable living (such as a franchise or accounting practice). Are you okay with returning to the corporate world if your business fails to turn a profit?

SUMMARY

If you are considering starting your own business, it is important for you to know what you are getting into. No business model is going to be perfect in every respect, but if you go into it knowing the pros and cons, and your own strengths and weaknesses, you will be better prepared to face the inevitable ups and downs as an entrepreneur.

Some factors are dealbreakers and will automatically help you determine whether a busi­ness is a viable option for you or not. Some factors are not as important. That depends on you and your priorities. But had I sat down to evaluate the web business model, I am not sure if I would have spent the number of years behind it that I did. On the other hand, I’ve always been a legacy entrepreneur. It was more important to be known for creating something new and fabulous rather than bring home a steady paycheck from a franchise business. So perhaps I would have done the exact same thing all over again, even if I had evaluated all the angles.

But what I learned is that it’s better to go into a business choosing to undergo the challenges you’ll face, rather than have the challenges choose you. If you take a moment to thoroughly evaluate and understand your potential business model, you’ll significantly increase the chances of your own success.