1. Balderson 7e Copyright © 2008 by McGraw-Hill Ryerson. All rights reserved. Part 1: The Decision to Start a Business Chapter 3 Evaluation of a Business Opportunity

2. Balderson 7e Copyright © 2008 by McGraw-Hill Ryerson. All rights reserved. Non-Quantitative Assessment of Business Opportunities Goals Goals Content of Work Content of Work Lifestyle Lifestyle Capabilities Capabilities – Good health, management fundamentals, financial base Experience Experience

3. Balderson 7e Copyright © 2008 by McGraw-Hill Ryerson. All rights reserved. Breaking Into The Market Three Ways Three Ways – offer a totally new product – offer an existing product to a different market – offer a product or service similar to those existing in the same market Developing a Strategic Competitive Advantage Developing a Strategic Competitive Advantage –the right industry –the right business –the right aspect of the business

4. Balderson 7e Copyright © 2008 by McGraw-Hill Ryerson. All rights reserved. Developing A Strategic Competitive Advantage The Right Industry The Right Industry The Right Business The Right Business The Right Aspect of the Business The Right Aspect of the Business

5. Balderson 7e Copyright © 2008 by McGraw-Hill Ryerson. All rights reserved. Collection of Information Sources of Information Sources of Information Secondary data Secondary data Primary data Primary data – observations – surveys  mail surveys, telephone surveys, personal interviews, focus groups – test marketing

6. Balderson 7e Copyright © 2008 by McGraw-Hill Ryerson. All rights reserved. Quantitative Assessment of Business Opportunities Preparing the Feasibility Analysis Preparing the Feasibility Analysis – Step One - Calculate the Market Potential – Step Two - Calculate the Market Share – Step Three - Calculate the Net Income and Cash Flow

7. Balderson 7e Copyright © 2008 by McGraw-Hill Ryerson. All rights reserved. Quantitative Assessment of Business Opportunities Step One - Calculate the Market Potential Step One - Calculate the Market Potential – Determine the market area and its population – Obtain revenue, (sales) statistics for the product or service in the area – Adjust the market potential total as necessary

8. Balderson 7e Copyright © 2008 by McGraw-Hill Ryerson. All rights reserved. Quantitative Assessment of Business Opportunities Step Two - Calculate the Market Share Step Two - Calculate the Market Share Retail Firm Retail Firm – 1. Estimate the total amount of selling space in the market devoted to the merchandise the new business will sell – 2. Estimate the size of the proposed store – 3. Calculate the market share based on selling space

9. Balderson 7e Copyright © 2008 by McGraw-Hill Ryerson. All rights reserved. Quantitative Assessment of Business Opportunities Step Two - Calculate the Market Share Step Two - Calculate the Market Share Retail Firm (cont) Retail Firm (cont) – 4. Make adjustments to reflect any competitor strengths and weaknesses regarding the proposed store – 5. Multiply the revised market share percentage by the market potential estimate obtained in step 1.

10. Balderson 7e Copyright © 2008 by McGraw-Hill Ryerson. All rights reserved. Quantitative Assessment of Business Opportunities Step Two - Calculate the Market Share Step Two - Calculate the Market Share Manufacturing Firm Manufacturing Firm 1. Estimate the total productive capacity in the market for the product to be manufactured. 2. Estimate the total productive capacity of the proposed manufacturing plant. 3. Calculate the market share based on productive capacity.

11. Balderson 7e Copyright © 2008 by McGraw-Hill Ryerson. All rights reserved. Quantitative Assessment of Business Opportunities Step Two - Calculate the Market Share Step Two - Calculate the Market Share Manufacturing Firm (cont.) Manufacturing Firm (cont.) 4. Make adjustments to reflect competitive strengths and weaknesses the competitive plant may possess 5. Multiply the estimated market share percentage by the market share potential estimate obtained in Step One.

12. Balderson 7e Copyright © 2008 by McGraw-Hill Ryerson. All rights reserved. Quantitative Assessment of Business Opportunities Step Two - Calculate the Market Share Step Two - Calculate the Market Share Service Firm Service Firm 1. Estimate the total capacity of the service available in the market area. 2. Estimate the service capacity of the proposed business. 3. Calculate the market share based on the capacity base.

13. Balderson 7e Copyright © 2008 by McGraw-Hill Ryerson. All rights reserved. Quantitative Assessment of Business Opportunities Step Two - Calculate the Market Share Step Two - Calculate the Market Share Service Firm (cont.) Service Firm (cont.) 4. Make adjustments similar to those made for a retail store. 5. Multiply the revised market share percentage by the market potential estimated in Step One.

14. Balderson 7e Copyright © 2008 by McGraw-Hill Ryerson. All rights reserved. Quantitative Assessment of Business Opportunities Step Three - Calculate net income and cash flow Step Three - Calculate net income and cash flow 1. Using the market share from Step Two, calculate the expenses expected  cost of goods sold and gross profit percentages; cash operating expenses; interest and depreciation 2. Subtract expenses from revenue to determine projected net income in the first year and subsequent years.

15. Balderson 7e Copyright © 2008 by McGraw-Hill Ryerson. All rights reserved. Self Assessment for a Small Business Opportunity Personality Personality Nature Nature Abilities Abilities Experience Experience Financial base Financial base Feasibility Feasibility

16. Balderson 7e Copyright © 2008 by McGraw-Hill Ryerson. All rights reserved. Concept Checks 1. What non-quantitative factors should be considered in the selection of a small business? 1. What non-quantitative factors should be considered in the selection of a small business? 2. What are three ways of entering the market? 2. What are three ways of entering the market? 3. What are two methods of collecting information? In what situations would they be most useful? 3. What are two methods of collecting information? In what situations would they be most useful?

17. Balderson 7e Copyright © 2008 by McGraw-Hill Ryerson. All rights reserved. Concept Checks 4. What are the three methods of collecting primary data? Which is the most relevant to a small business? 4. What are the three methods of collecting primary data? Which is the most relevant to a small business? 5. What steps are involved in determining the financial feasibility of a retail store? 5. What steps are involved in determining the financial feasibility of a retail store?