I love talking about choosing a great business idea because it's one of the most exciting and fundamental parts of starting a business. But thinking up a great idea is just the first step--it's critical that you take the time to thoroughly examine the idea that's to become your future livelihood. As most business owners eventually learn, it's not the person running the business, the marketing or the employees that make or break a company's success--it's the quality and profitability of the idea behind the company.
When you go into business, you have to look at the idea or opportunity driving it from a different angle than you might assume. Most people wrongly choose a business based on one of two personal biases:
- It's a business they already know. The hairdresser opens a salon, the lawyer his or her own practice and so on. Generally, a huge mistake. They're thinking about the job--not the business. Just because you're a good chef doesn't mean you know how to run a restaurant. More important, it doesn't mean a restaurant would be successful in your market.
- It's a product or service they've fallen in love with. Again, just because you love something doesn't mean a profitable business will come of it. This is especially true for first-time entrepreneurs. Learning to run a business is hard enough; you don't need to make it any harder by doing something you love rather than something customers love paying you a good profit for.
How can you be sure your intriguing idea is also something from which you can truly make a profit? There are three essential considerations:
- Make sure the product or service has a repeat buy. This is by far the most important aspect of long-term business success. You have to have a product or service that people will keep buying. It's better and more profitable, in my opinion, to have a pool cleaning company than a pool building company. Put another way, a business owner should focus on getting a customer once, but making a profit from that person for a very long time.
- Be certain you have a high profit margin. There are very few companies that can compete long term on a "we are cheaper" marketing platform. In any new business, you need to watch your cash flow--and if you're trying to work with low profit margins and make gains in volume, you'll need to have a high level of working capital to keep you running through the lean profits early on. Having a higher margin is extremely important when you're growing a business so you can self-finance your growth.
- Build a strong support team because a good idea isn't enough. The idea counts most, yet a quality idea must still have a great team of people behind it to give it wings. Time after time, when people bring me a business investment proposal or an idea they want to take to market, I ask them who's on their team and they respond with something crazy like, "Oh, we haven't hired anyone yet." Get a board of advisors. Get a team of professional accountants, coaches, lawyers and bankers. A great team will greatly improve the chances for success of any business.
So if I were going into business today, what would I choose? I would start with one premise and some hot industries. The premise is, you don't make money panning for gold, you make money selling pans. Get in the way of a buying frenzy, and you'll be a success. The fastest way to make a restaurant profitable is not by having a great chef and great décor--it's by attracting a starving crowd with money.
Once you understand this, the question is, which industries are gold rushes right now? With an aging population, health and leisure are growing industry segments. And professional advice is at an all-time high in many fields. Or as an alternative, you may want to look at my old favorite--staple products and services, think paper or plumbing, you can deliver just a little bit better than the competition.
One last point: Start with the end in mind. Look for an idea you can take national or, even better, global at some stage. It might be fun and a challenge to establish yourself locally right now, but eventually you'll want to build something much bigger.