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Five questions to ask yourself before you start or buy a business

Regardless of whether this is your first business or your tenth, here are five questions you need to ask yourself before you start putting too much time, money and energy into a business.

Weekly, we get people reaching out to us to get some advice on whether or not they should diversify their current business and sell an additional product or service. Also, there seems to be a flurry of entrepreneurial types who see opportunity as a result of the current changes in the economy. They believe that they have the next best business idea that will make them a millionaire in a short period of time. Regardless of whether this is your first business or your tenth, here are five questions you need to ask yourself before you start putting too much time, money and energy into a business.

1. Do I understand the business model?

While this might seem like a silly question, many an entrepreneur, myself included, has started a business without thinking about how they are going to get paid. We need to figure out all our expenses, including how much money we need to earn, as well as what kind of profit we will need to generate to recover our investment, pay our debts, and put money away for the future. Once we know those numbers, we will need to understand how many units of our product or service we will need to sell to cover those expenses. We will need to be clear about our pricing and have a clear understanding about the value we provide for the buyers and how much they are willing to pay for what we are going to provide. We will need to look at our customers, competition, our start-up costs and marketing costs to break into the market, our sales model as well as the team we will need to build to get our business profitable. Without understanding how our business is going to make money, we are setting ourselves up for failure. 

2. What am I willing to sacrifice to be successful?

All too often, entrepreneurs fail to have a clear understanding of the sacrifices they will need to make to be successful. How much time are you going to dedicate to this business and how many hours are you going to be working each day just to open the doors? You will need to recognize that you are going to have to give up time with family or friends, your focus on other projects or businesses and possibly some of your current lifestyle. Are you willing to sacrifice sleep at night trying to figure out the business, worrying about how you are going to pay your employees, suppliers, investors or bankers? Are you willing to take a cut in your income as you get the business going? While you will never know completely what is going to be asked of you to make the business successful, you should be prepared to sacrifice your time, your energy and your money for the risk of a better future.

3. Do I have the resources to make this happen?

If you have looked at your business model and have run a cash flow projection to see how long it will take before you get the business to the point where it is earning money instead of burning it, you will have some semblance of the resources required to reach success. However, most entrepreneurs are overly optimistic and believe they can reach profitability after their first year.  Unfortunately, and perhaps one of the main reasons that businesses fail, leaders don’t recognize that it takes three years for most companies to establish their foundation. You will need to ensure that you have the money and resources to enable you to go three rounds in the ring and are prepared to face unexpected possible catastrophes in any of those three years.

4. What is my exit plan?

Most people get married with the intention of being married for life. However, with a business, one of the first things you should be asking yourself once you have determined if a business is viable is: “how am I going to get out of this?”  Understanding your exit plan will enable you to be prepared for the future. It doesn’t matter whether you are planning to give the business to your children, sell it for assets or shares, or shut it down when you are ready to retire. Having a plan will let you think differently and make decisions that will affect the value of your business and your future.

5. Is this the right decision?

Once you have thought through all the previous questions, the final thing you need to ask if this is the right decision. To do this, you will need to have some criteria on which to base this decision. We use an “Opportunity Analyzer,” which is simply a form we have developed with some questions about the minimum and optimum criteria that would enable you recognize if this was the right thing to do. By having a set of criteria on which to base your decisions, you will find that making choices about which business to start and where to put your energy and money is so much easier.

While you may never have all the answers to your questions about this new venture you are considering, taking the time to ask the questions can save you a bundle of frustration and heartache in the future. Most businesses fail; however you can set yourself up for success if you dedicate the energy necessary to ensure success.

- Dave Fuller, MBA, is an award-winning business coach and the author of the book Profit Yourself Healthy. Five questions about your business? Email [email protected]