Case Study: Should this business proceed?

One of my projects this year is helping a friend of mine start a business that he’s always wanted to run. The business centers around a common interest, and we have very complimentary (ie non-overlapping) skill sets, so it’s a good partnership, and one of his other friends is the partner in charge of the practicalities of business/legal aspects and of developing an online presence.

The first step of starting a business, of course, is to determine whether or not you actually want to start the business. We got a team together and discussed everything from location and possible promotions to the details of which products to sell and how many employees we’d need. Then we put together financial projections to figure out how much money we’d need to start, and how much money we’d need to make in order to pay that back, and whether that seemed possible. The numbers come out right in the middle: success isn’t obviously impossible, but it’s not guaranteed either.

At this point we face four possible options:
1) Drop the project entirely.
2) Modify our plans and assumptions to make success more likely
3) Proceed with caution, and see what develops
4) Damn the risk and full speed ahead!

Let’s examine them each in turn:

Drop the Project

The big and obvious advantage to this one is the lack of risk. If we don’t even try to start the business, we can’t possibly lose any investment. Just how advantageous that really is depends on how much investment we’re putting in. In this case it’ll take $20,000 – $50,000 to start up the business, and $10,000/month to run thereafter. So we’re looking at potential loss of several thousand dollars (although it’s unlikely that we would fail to make a single sale, it is possible, so that’s the worst-case scenario), which could be guaranteed not to happen if we simply stop here.

The big and obvious disadvantage to this one is that my friend will have to give up running the business that he’s always wanted to run. Just how disadvantageous that really is depends on how much he has always wanted/still wants to have this business. Despite illusions/stereotypes of coolly logical CEOs, this business decision has to be made emotionally: how much does it matter to you?

Modify our plans and assumptions to make success more likely

The financial projections provide for a salary for each of the partners; if we could get by on a smaller salary, or support ourselves in other ways while the business gets going, that would lower the financial risk, and make it easier to break even. Obviously that won’t help unless we can then increase the business’ earnings so that we can take salaries, but it does help smooth out the start-up/transition period.

We could also figure out some way to test the market: by selling our products in another store, which would provide some information on demand in the area; by getting hard data on the walk-by and drive-by traffic in our proposed location, which would help us estimate the required conversion rate; by doing surveys in the neighborhood to estimate demand; by spending some money now to start our proposed promotions and measure the resulting demand. These would let us get a better feeling for how accurate our financial projections are, and to revise them as necessary.

We could change our business model to one that’s less capital-intensive, such as online affiliate programs, online drop-ship options, etc.

The advantage of this method is that it gets us almost as little risk as option #1, but without giving up the dream.

The disadvantage is that there may be really long delays while we tweak and measure and brainstorm and adjust, in order to get the risk within acceptable boundaries.

Proceed with caution, and see what develops

This is fairly risk-intensive: it involves starting up the business as proposed, albeit making as few expenditures as possible until we have a feel for what kind of income we can expect to receive. The partners should discuss what situations we might face and how we would respond, so that we don’t get caught completely flat-footed when something comes up. We should also define the limits of our experiment: under what circumstances (number of months, certain level of income, certain number of sales, etc) will we declare ourselves finished and take steps to dissolve the business?

The advantage is that we have this plan in place, so we can proceed immediately (well, as soon as we raise the capital, anyway). And although it is risk-intensive, we know what we’re getting into, and we’re prepared to make course adjustments

The disadvantage, obviously, is the possible loss of $30,000 – $170,000.

Damn the risk, full speed ahead

Or we can proceed just as we planned, bet it all on one roll of the die and see if our current business plan is perfect.

There are no advantages to this plan; it would be stupid.

The only reason I bring it up is that most people, when they’re deciding whether or not to start their own business, create a blog, write a book, or look for a new job, think that it’s an all-or-nothing proposition. Either you drop the project entirely or you implement your ideas without any room for reassessment and adjustment.

Remember that you got this far by experimenting, observing, and learning. You can continue forward the same way.

And your final answer?

There’s no way for one person to make this decision. There’s no clearly right or wrong answer.

When deciding whether to proceed with your business, you have to consider all of the above: what’s the risk? How much do you want to do this? What could you do to adjust? How would that affect the risk? What would happen to you if the works-case outcome occurred? What would happen to your partners? What would you do in that scenario? What’s the probability of that outcome? What’s the probability of success?

And given all that, what do you want to do?