Brimming with such excitement and enthusiasm it's easy to understand why so many entrepreneurs race to launch a business idea without performing their due diligence. So confident their idea will take flight, too many entrepreneurs whimsically stake buckets of money and years of their lives.
It's simply too dangerous to rush in. Cooler heads must prevail during the idea-research phase to ensure adequate information is collected and assumptions are sufficiently challenged. Otherwise, the entrepreneur risks building a business based purely on hope.
Following one of my seminars a few years ago, I was approached by a young man eager to obtain my advice about financing his startup. Introducing himself as Gus, he told me about the retail store selling t-shirts and jeans to teenagers and young adults he wanted to open.
Gus said he had sourced the perfect location in downtown Toronto, just two blocks from the country's busiest pedestrian intersection at Yonge and Dundas streets.
Gus asked me for advice on how to obtain a bank loan. He said he was in a hurry. "What's the rush?" I asked.
The money was needed to be used as a deposit to secure the retail space, explained Gus. The landlord told Gus he had several other prospects wanted to lease the storefront, but, thankfully, was willing to hold it for a few days because he liked Gus and really wanted him to become the tenant.
Gus needed $6,000 right away.
"Tell me about your business plan," I probed. Gus didn't have a plan. But, once he had that awesome storefront, he'd sit down write up a great one.
"Okay," I continued. "Have you negotiated with vendors to supply those t-shirts and jeans at a fair price?" Not yet, he admitted. He'd do that after he signed the lease.
I knew the answer to my next question, but asked it anyway. "Have you asked potential customers in the area what they will pay for t-shirts and jeans?"
The answer, of course, was "no." Gus admitted he hadn't completed any such homework but promised to do it once he secured the space. The landlord said other people wanted the space.
Without any form of due diligence Gus was headed for a startup crash.
Whether you plan to buy an existing business, obtain a franchise or start a business from scratch, doing your homework is a necessary step to assess customer demand, examine industry trends, probe the competition, investigate operating requirements and pinpoint business costs.
Ask customers first
Let your conversations and interactions with prospects and customers guide you on decisions such as location, pricing, inventory selection and operating hours—before and after your business opens. Simply identify your proposed customers and find out as much as you can about them.
To collect a large quantity of input data, issue surveys. For more qualitative data, try conducting one-to-one interviews or holding small focus groups.
Learn everything you can about your intended customers, including where they live, when they buy, where they buy and how much they will pay. Gus failed to interview even one customer about his proposed t-shirt and jeans store. He assumed that if he built it, customers would come.
Examine industry trends
Know what you're getting into. It's a lot easier to ride a growing trend. Go online to study trends in your industry, talk to other business owners, read business publications and collect opinions from professional advisors such as marketers, bankers, lawyers and accountants.
Study competitors
They say a business owner should know her competitors better than she knows herself. Shop, snoop and probe your direct competition. Set up Google Alerts. Become their customer. Subscribe to their blog. If you're worried about being recognized, send your Mom into buy something and report back.
Summarize competitor strengths and weaknesses. Analyze. You're looking for something you can do better. Build your marketing and branding to trumpet that difference.
Operating requirements and costs
Rent was just one small chunk of the money Gus needed to pay. He had neglected to investigate costs for inventory, professional services or operations.
Roll up your sleeves and get accurate quotes from every future supplier to your new business. Ask for written quotes (understanding that some suppliers will put an expiry date on their pricing—they can't guarantee the price today will be the same when your business launches six months from now.)
Price out utilities, computers, printers and photocopiers. Get estimates on renovations to physical space. Contact advertising salespeople for media rates. Understand wage costs and Employer Contributions. Ask lawyers and accountants to estimate their fees.
For operating requirements such as permits and licenses, be sure to contact your local government office for assistance. Most city halls or municipal offices house government-funded services to assist small business owners to identify and satisfy operating requirements. Or, check out what you'll need by visiting BizPal.ca.
Test it
Test your assumptions with actual customers. Give them a sample of your product or service, or present a something close to it. Get them to comment on pricing, delivery and service preferences. If possible, ask them to buy from you—there's often a difference between what customers say they'll buy and will actually buy.
What happened with Gus? He did not rent that storefront. He likely curses me still for throwing so much cold water on his hot startup head. I did him a favour: he was unprepared, and moving forward based on adrenaline instead of facts. He wanted to skip and skimp on his homework.
Stay tuned for Roger's advice on how to create a winning business plan on July 5.
Read "Starting Up Starts with You" and "Your Ideal Startup" parts 1 and 2 of our 10-part series on launching your own business.
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