7 Methods in Choosing a Business

February 14, 2013 | By | Reply More

Choosing the right business is the first step to entrepreneurial success. According to studies made by the U.S. Small Business Administration, only 66.0 percent of small businesses survive its first two years, and survival rate lowers to 39.5 percent in at least 6 years.

choosing a business

Your goal, therefore, as an entrepreneur is to find a business that stands a greater chance at success. You will need to determine what you can and cannot do, research on the potential market and how other similar businesses are doing, and what works well in your area or selected business medium.

Dr. Irving Burstiner, in his book, “How to Start and Run Your Own Retail Business” offers various approaches in choosing the best type of business. While he focuses mainly on the retail business, the methods he suggests are applicable across various types and business medium, even the Internet.

1. Less Money Out

The first school of thought focuses on the amount of resources that you have. The kind of business that you start depends on the amount of capital you can raise. If you have deep pockets, you can go all out with your business – getting first-rate equipment and furnishings, hiring employees, launching the business in grand style, and buying loads of inventory. However, if you have little capital, all you can do is to stretch what you have and start the business on a much smaller scale.

You may have a wonderful concept for a children’s bookstore with play and storytelling sections for kids, and a coffee shop for the adults. That kind of vision requires vast amounts of capital – from inventory, lease, furnishings and store décor. If you cannot finance your vision, you may need to downscale your business and instead find ways to start on this route but without the expense. One way is to start an e-commerce site where you will not have to pay for furnishings, expensive rent and other overhead that a retail store will need.

2. Novelty and Excitement

Another strategy for selecting a business is to start one that is currently hot, hip and new. In the Philippines, for example, pearl shakes – an innovative cool beverage drink in natural flavors mixed with “pearls,” or dark, spherical, chewy balls made from yam and tapioca — became the hottest craze in town. Mom and pop stalls and cafes offering this new drink popped up all over the metropolitan Manila.




You can join in the fray, and start a business that has already proven itself to be a moneymaker for others. However, there is danger in adopting a start-up strategy on prior demand–demand already created by others. What if the business runs out of steam, and the novelty and excitement that pushed it initially wears thin? You may be faced with cutthroat competition, with price-cutting as the ultimate marketing weapon of choice.

3. Safety in Numbers

As a new entrepreneur, you may also consider a business that has already proven popular, dependable with consistent demand, and can be found everywhere. Common businesses include eating places, groceries, used merchandise stores, gift and novelty stores. If these businesses have staying power and are frequently found, then they must be profitable, right?

Well, not always. There is such thing called “market over saturation.” A small town may be able to accommodate only one gift shop. Add another one and you may be stretching the market too thin, and end up in the dustbin.

4. The Fewer, the Better.

On the other side of the spectrum from those who believe in safety in numbers are those who think that they are better off in a business with fewer competitors. This is the idea behind the strategy of focusing on a market niche, which has proven to be apt, even a lifesaver, for many small and home-based businesses. Niche entails offering unique products or services to a few concentrated markets.

5. Rapid Growth

You may also want to start a business that has enjoyed fast growth in the past years. A rapidly growing business sector, where many new businesses continue to operate, shows that there is great demand for the product; the market can absorb new entrants; and if by looking at the size of businesses operating, the market may be profitable even for one-person businesses.

Using data from the Bureau of Census, you will find that the sectors that enjoyed the most rapid growth from 1972 to 1987 include the following: Gift, novelty and souvenir stores (up 216%); Hobby, toy and game shops (up 180%); book stores (up 137%); Sporting good stores and bicycle shops (up 127%); and florists (up by 108%).

The sectors that saw a decrease include: Drinking places (down 17%); Household appliance stores (down 15%); and variety stores (down 5%). The reasons for the shrinking number of businesses in these sectors include overcrowding and declining customer interest and demand.

6. Failure Rate Method

You may check the businesses with the greatest number of failure record. Dun and Bradstreet (http://www.dnb.com) publishes a yearly Business Failure Record report. This report is not merely an estimate; but represent complete tallies of business failures. D&B defines business failures as those that “ceased operations following assignment or bankruptcy; ceased operations with losses to creditors after such actions as foreclosure or attachment; voluntarily withdrew leaving unpaid debts; were involved in court actions such as receivership, reorganization or arrangement; or voluntarily compromised with creditors.”

In 1997, the businesses with the lowest failure rates (per 1,000 listed concerns) include drug and proprietary stores (33); fuel dealers (37); sewing, needlework and piece goods (41), used merchandise stores (47); and liquor store (52). On the other hand, non-store retailers (216); trucking and warehousing (208); fishing, hunting and trapping (273) are the businesses with the highest failure records.

7. Biggest Payoff

Another logical choice for choosing a business is to look for those that yields the best return-on-investment. This approach involves “checking through the operating results for different business types to find those with high percentages of operating profit.”

The best source of data that would allow you to determine an industry’s operating profit is the Risk Management Association’s http://www.rmahq.org Annual Statement Studies. This report offers financial statement ratios of small and medium-sized businesses on about 600 industries. The book costs $145 for non-members, but check with your local library if they carry the publication.

Whatever business you decide to start, the key is to put up an enterprise that fills an unmet need of the market and to look for new niches to dominate.

 
Recommended Books on Choosing a Business:

 

George Rodriguez

George Rodriguez is a writer for PowerHomeBiz.com. An entrepreneur with experience in running several businesses, he writes on various topics on entrepreneurship and small business.

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