Evaluating New Business Opportunities

Final Examination

Name ________________ Date:

Identify the differences between an idea and an opportunity for a new business? Cite an example for each.

An opportunity is best distinguished from an idea by its ability to acted upon. Typically, an opportunity is an event or circumstance which presents the means of positive change that can improve profit and or efficiency. It is important to recognize not just the opportunities, but also the window of opportunity. The problem with most opportunities is that there is a time restriction on the ability to take advantage of the opportunity. For example, an opportunity to invest in a new company will not be there forever or its capacity for profitability will be greatly diminished. For this reason, being able to determine the strength of an opportunity and if the risk is worth the reward is imperative.

In contrast to the new business opportunity is the business idea. The business idea is not an opportunity in that it is really a concept which has no real basis until it is acted upon. The business idea can also be impractical and can seem like a profitable notion at the same time. Many entrepreneurs fall prey to this issue as they believe a business idea is profitable but under close scrutiny the idea begins to reveal itself as problematic.

What is the difference between a business model and business plan, cite an example?

The business plan is a detailed blueprint for a potential company. This blueprint allows the owner or managers to follow specific parameters for building the company and giving it purpose. The business plan has specific concepts such as mission, value, purpose, and structure. However, the development of the business model is equally important due to the fact that neither is possible without the other. The business plan and model work in synchronicity in that the plan is the steps necessary to actualizing the model. For example, within a business plan the entrepreneur would create a operational process that it would use for it operations. This planning step, when carried out, creates the business model, (or at least a part of it.) This gives the potential company practical and realistic operations processes that will need to be carried out.

What are the top 3 due diligence issues in acquiring a business and Why?

There are no limit on due diligence issues that might need to be investigated before purchasing a company, but there are some that are more important than others. The three due diligence issues that need to be investigated above all others would be the accounting/profit and loss, the corporate standing, and any legal situations. The accounting/profit and loss is extremely important because it shows if the company is making any money. This should be investigated for the last three years in order to show any pattern of loss or increase in profit. The corporate standing is also important because the company’s legal standing as a corporate structure can be pivotal in its continued operations. Companies that are in bad standing with government can be targets for audit and investigation. This could be a costly problem in the long run. Finally, the legal situation of the company should be investigated. Questions should be asked such as “are there any open or pending lawsuits?” and “what are they in reference to?” Any company under litigation should be avoided if possible due to the possibility of loss.

Share an example of starting a business and what is the risk? Please explain on why it makes sense.

Many people believe that purchasing into a franchise is an excellent means for starting a business. While franchising can be a safer alternative to starting a new business, there are inherent risks with the business model. The major problem is that the business is very dependent on the franchise for advertising and for making new original products. Franchisees are often unable to make decisions in these matters. Another risk for franchising comes from the fact that franchises share problems due to their name and product sharing. For example, if a product in one store is found to have a serious problem this can reflect on all franchises whether the problem was isolated or not. People also tend to blame all stores for issues even though they had a bad experience in one franchise. However, for many people the starting of a new business can be daunting and the franchise does offer some safety and removes the problem of having to create a business plan and model. But it is still prudent to remember that franchises are still risky.

What are the top 3 sources of funding a start up business and which one would you choose and why?

There are several primary sources of business funding and these fall into the categories of friends/family, banks, angel investors, and venture capitalists. Many startup companies turn to friends/family, and banks. Friends and family can be good investors but this can also present problems if the business fails. Banks can be a source of funding but typically borrowing from banks can be difficult due to the requirements and lending standards.

Some of the other forms of finance are often difficult and expensive. Venture capitalists are individuals or organizations which use money to invest in small companies. Typically, these people or organizations are seeking large returns for the investment. Business funding can also come from angel investors. These are good investors because they typically are patient and invest for personal as well as financial reasons. However, these investors are very difficult to find.

The form of finance I recommend is to use savings or lending from banks and possibly friends and family. These sources are usually easier and more practical for businesses. For example, finding a venture capitalist can be difficult and they will have their own standards for investment which can often be more stringent than a bank and they might require the business giving up some level of control.