CHAPTER 4

ASSESSING THE FEASIBILITY OF A NEW VENTURE

1.1 Assessment and Evaluation of Entrepreneurial Opportunities:
Once entrepreneurs have developed the idea(s) for the new ventures, they must begin the process
of assessing whether or not the idea is in fact a viable business opportunity. Many new ventures
have been launched around bad business ideas. An idea can seem sound in theory but in reality it
may have poor marketplace potential. It is important to assess feasibility as early as possible to
avoid the much costlier effects of failed implementation.
So how do entrepreneurs determine if an idea is an appropriate investment for their
resources?
Assessing an idea’s potential to become a good business opportunity is absolutely necessary to
avoid the unnecessary allocation of scarce resources, including the entrepreneur’s time and
effort. Opportunity identification process begins by determining the unique needs of the industry
and market place, including what customers expect and demand that the new venture can
provide. Many ideas and opportunities exist; however, resources are scarce, and this means that
you must be very careful in your evaluation of business opportunities to be sure they can be
supported by the knowledge and information you possess or can obtain fairly easily. Figure 4.1
illustrates the movement from opportunity identification to opportunity evaluation. The
evaluation process begins with some fundamental questions to help entrepreneurs assess the
potential for the new venture to succeed. Evaluation of business opportunities should be
conducted not only just by the entrepreneur but also by as many stakeholders in the new venture
as possible: potential customers or clients, employees, advisers, investors, and suppliers.

Four Primary Areas for Assessment:

There are many questions to ask during opportunity evaluation, and they can be classified
according to four primary areas for exploration:
1. The people behind the idea: the background, talents, and experience of the entrepreneur
and the management team, employees, and advisers. Even a great idea with high market
potential requires an entrepreneur or team behind it that can effectively (and passionately)
support and grow the idea. It is then much more likely to be successful. An entrepreneur’s

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 skills and talents might have led to the discovery of the idea, but does the entrepreneur have
the resources available the competence to turn the idea into a business?

Opportunity Evaluation

Opportunity
Recognition

Industry & Market

Needs,
Expectations,
And Demands
Opportunity
Surplus
&
Resource
Scarcity

Fig. 4.1 Opportunity Recognition to Opportunity Evaluation: The Assessment Process

2. entrepreneur and the management team, including the equity and debt sources of capital
that are available and accessible, additional assistance from people with expertise needed by
the firm, and the technology required to support the idea. What relationships can the
entrepreneur or teams rely on to acquire the necessary resources?
3. The knowledge and information possessed by the entrepreneur, including knowledge of the
new venture concept, the industry, and market research. Moreover, what is not known that
needs to be known for the new venture to be successful? Information about competitors?
About customers’ preferences? How will this information be obtained?
4. The idea’s ability to generate revenue. How great the potential to sell something that will
generate actual revenues? One of the mistakes would-be entrepreneurs make is to assume
that everyone will love the idea and that people will be standing in line to buy it, once the
business opens. To what degree can the entrepreneur manage and contain the costs while
maximizing returns? These questions form the basis for the opportunity evaluation, and their

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 answers will help the entrepreneur move forward to create strategies that ultimately support
the viable business model.
Do you think entrepreneurs should proceed with an idea that has inherent weaknesses in
any of these areas?
The Business Evaluation Scoring Technique (BEST):
The Business Evaluation Scoring Technique (BEST) was developed to help entrepreneurs
evaluate a group of ideas before deciding which ones to pursue. The tool considers the various
“windows of opportunity” related to new ventures.

Answer the following questions by scoring them on a 1–5 scale: 1 = low and 5 = high.
1. Is the business really differentiated from other similar businesses?
2. Does the business have growth potential?
3. Will the business require capital? (Note: A low finance requirement receives a higher score,
while a high finance requirement should receive a low score)
4. Can financing be secured?
5. Does the business suit the individual’s entrepreneurial profile (e.g., mind-set, experience)?
The total score indicates the sum of the answers for the questions 1 to 5
Total Score Description Action
20–25 Excellent prospects Must try
15–19 Very good prospects Should try
11–14 Reasonable prospects Try if nothing else is available
10 and under Poor prospects Avoid this loser

Assessing the Feasibility of the New Venture Idea:

Evaluating a new venture idea involves testing its feasibility, the extent to which the idea is a
viable and realistic business opportunity. One of the first steps required in assessing the
feasibility of an idea is to become aware of forces and factors in the internal and external
environment that directly influence the new venture opportunity.
Factors internal to the venture include:

 The knowledge, skills, and abilities of the entrepreneur, the management team
members, employees, and advisers

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  The resources available to the entrepreneur, including people, financial resources, and
technologies that can be acquired for the launch and growth of the opportunity

Factors external to the new venture include:

 The industry: competitors, structure of the industry, barriers to entry, and trends that
affect businesses in the sector in which the new venture intends to locate.
 The market: knowledge of the preferences, values, and buying behavior of the target
market, including demographic and psychographic information necessary to
appropriately position, promote, and price the products and services.
 Social norms, values, and trends surrounding the new venture idea. Is there an
increasing need for or awareness of the product or service? Are there ethical concerns
about the product, service, or its effects? Realize that a product or service (and any of its
components) may be legal but unethical. The social environment of a new venture often
involves the perceptions—not necessarily the reality—of the opportunity in the minds of
customers and citizens.
 Legal and regulatory forces that could affect the business operations, including laws,
policies, procedures, and regulations pertinent to the industry or municipality in which
the new venture is located Conducting an environmental feasibility analysis will help the
entrepreneur prepare a strategic plan.

Fourteen Questions to Ask Every Time:

To evaluate opportunities, Allis (2003) has developed a set of questions for entrepreneurs. The
answers are helpful as entrepreneurs prepare to conduct a comprehensive feasibility analysis and
to develop subsequent strategies for the emerging venture.

1. What is the need you fill or problem you solve? (value proposition)
2. To whom are you selling? (Target market)
3. How could you make money? (revenue model)
4. How will you differentiate your company from what is already out there? (unique selling
proposition)
5. What are the barriers to entry?

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 6. How many competitors do you have and of what quality are they? (competitive analysis)
7. How big is your market in birr? (Market size)
8. How fast is the market growing or shrinking? (Market growth)
9. What percent of the market do you believe you could gain? (market share)
10. What type of company would this be? (lifestyle or high growth potential, sole
proprietorship or corporation)
11. How much would it cost to get started? (start-up costs)
12. Do you plan to use debt capital or raise investment? If so, how much and what type?
(investment needs)
13. Do you plan to sell your company or go public (list the company on the stock markets)
one day? (exit strategy)
14. If you take on investment, how much money do you think your investors will get back in
return? (Return on investment)

The Feasibility Analysis:

Beginning the Evaluation Process:
A complete industrial analysis usually includes a review of an industry’s recent performance, its
current status, and the outlook for the future. Many analyses include a combination of text and
statistical data. Some of the points entrepreneurs consider in this analysis are given below.
Current Industry Analysis:

 Describe the industry as specifically as possible. Some business ideas fall into more than
one industrial classification.
 What are the current trends in the industry?
 What is the current size of the industry? Is it dominated by large players? Are there a
significant number of small to medium-size enterprises in the industry?
 Where is the industry located? Is it local, regional, national, or global?
 What is the average sales and profitability for this industry?

Competitor Analysis

 Obtain basic information on the competitors you have identified. Who are the direct
competitors of the new venture?
 Where are the competitors located?
 What are the advantages and disadvantages of the competitors?
 What features of their products or services are similar to yours?

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  How are your products or services distinctive from those of your competitors? This is a
key part of the competitive analysis.

Sources of Information for the Industry and Competitor Analysis

There are many sources of industry analysis:

 Investment firms, business and trade periodicals
 Trade associations, and
 Government agencies.
To conduct a thorough industry analysis, include a variety of sources. As you conduct your
research, don’t neglect to record your own personal observations:
Visit competitors in a nondisruptive manner.
 What do you notice?
 What could be improved?
 How is the product or service used? Create the experience of being a customer of this
business and industry.

1.2 Legal Structures and Issues of a new venture:

LEGAL ISSUES:

Entrepreneurs, after they identify their business ideas and developing a business plan, are
expected to think about certain legal issues. They have to legalize their business and they
have to be registered for it. They have to determine the legal forms of business ownership
that he/she will establish. Besides she/he should get legal protection to their inventions or
creations. Hence, they have to get a legal property right from the concerned body.

Legal Forms of Business Ownership

The four most popular are: The sole proprietorship, partnership, Limited Liability Company and
Share Company.

A. Sole proprietorship:

This is the business owned by one individual. The individual is the business, and the business is
the individual. The two are inseparable. A sole trader is the simplest form of business to start –
all that is needed is the first customer. It faces fewer regulations than a limited company and
there are no major requirements about accounts and audits, although the individual will pay
personal taxes which will be calculated based upon the profits made by the business.

There are two important limitations, however. The first is that a sole trader will find it more
difficult to borrow large amounts of money than a limited company because lending institutions

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prefer the assets of the business to be placed within the legal framework of a company, because
of the restrictions then placed upon the business. It is, however, quite common for a business to
start life as a sole trader and incorporate later in life as more capital is needed.

The second disadvantage is that the sole trader is personally liable for all the debts of the
business, no matter how large. That means creditors may look both to the business assets and the
proprietor’s assets to satisfy their debts. However, this disadvantage should not be over
emphasized because of the widely adopted practice of placing some family assets in the name of
the spouse or another relative and because, even as a limited company, a bank is likely to ask for
a personal guarantee from the proprietor before giving a loan.

B. Partnerships:

Some professions such as doctors and accountants are required by law to conduct business as
partnerships. Partnerships are just groups of sole traders who come together, formally or
informally, to do business. As such it allows them to pool their resources, some to contribute
capital, other their skills. Partnerships, therefore, face all the advantages of sole traders plus some
additional disadvantages.

The first of these disadvantages is that each partner has unlimited liability for the debts of the
partnership, whether they incurred them personally or not. Clearly partnerships require a lot of
trust. The second disadvantage is that the partnership is held to cease every time one partner
leaves or a new one joins, which means dividing up the assets and liabilities in some way.

Generally, if you are considering a partnership you would be well-advised to draw up a formal
partnership agreement. It is very easy to get into an informal partnership with a friend, but if you
cannot work together, or times get hard, you may regret it. Partnership agreements cover such
issues as capital contributions, division of profit and interest on capital, power to draw money or
take remuneration from the business, preparation of accounts and procedures when the
partnership is held to cease. Solicitors can provide a model agreement which can be adapted to
suit particular circumstances.

C. Limited Companies (Private limited and Share Company)

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A company registered in accordance with the provisions of the Companies Acts is a separate
legal entity distinct from its owners or shareholders, and its directors or managers. It can enter
into contracts and sue or be sued in its own right. It is taxed separately through Corporation Tax.
There is a divorce between management and ownership, with a board of directors elected by the
shareholders to control the day-to-day running of the business. There need be only two
shareholders and one director, and shareholders can also be directors.

The advantage of this form of business is that the liability of the shareholders is limited by the
amount of capital they put into the business. What is more, a company has unlimited life and can
be sold on to other shareholders. Indeed there is no limit to the number of shareholders.
Therefore a limited company can attract additional risk capital from backers who may not wish
to be involved in the day-to-day running of the business. Also, because of the regulation they
face, bankers prefer to lead to companies rather than sole traders, although they may still require
personal guarantees. Clearly this is the best form for a growth business that will require capital
and will face risks as it grows. Nevertheless there are some disadvantages to this form of
business. Under the companies’ acts, a company must keep certain books of account and appoint
an auditor. It must file an annual return with companies’ house which includes accounts and
details of directors and shareholders. This takes time and money and means that competitors
might have access to information that they would not otherwise.

Advantages and disadvantages of different forms of business

Sole trade Partnership Limited company

Easy to form Easy to form Limited liability
Minimum of Minimum of Easier to borrow
regulation regulation money
Can raise risk capital
through additional
advantage shareholders

Unlimited personal Unlimited personal Pay corporation tax

liability liability for debits of

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 whole partnership
More difficult to More difficult to Greater regulation
disadvantage
borrow money borrow money
Pay personal tax Pay personal tax

1.3 Sources and Types of Capital

Capital – It is any form of wealth employed to produce more wealth for the firm. It is commonly
categorized into three groups: They are:
i. Fixed capital
It is needed to purchase the business’s permanent or fixed assets such as building
equipments, machinery etc.

ii. Working capital

It represents the business’s temporary funds; it is the capital used to support the business’s
normal short-term operation. It is current assets less current liabilities. It is used to buy
inventory, pay bills, finance credit sales, pay wages and salaries and take care of any
unexpected emergencies. It is used to offset the uneven flow cash into and out of the business
due to normal seasonal fluctuations.

iii. Growth capital

It is required when an existing business is expanding or changing its primary direction. In
order to expand an existing business, additional capital is needed to buy additional facilities.

Sources of Capital
Generally, there are two types of financing available: external and internal funds.

External sources: They are funds generated from external to the firm. Alternative sources of
external financing needs to be evaluated in terms of length of time the funds are available, the
costs involved, and the amount of company control lost. Each type of external financing falls
into one of two categories – debt financing or equity financing.

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Debt financing is a financing method involving an interest bearing loan instrument, the payment
for which is only indirectly related to the sales and profits of the new venture. Typically, debt
financing requires that some asset be available (such as a car, house, machine, or land) as
collateral.

Equating financing, on the other hand, typically does not require collateral and offers the
investor some form of ownership position in the venture. The investor shares in the profits of the
venture, as well as any disposition of assets on a pro rate basis. Key factors in the use of one type
of financing over another are the availability of funds and the prevailing interest rates.
Frequently, an entrepreneur’s financial needs are met by employing a combination of debt and
equity financing.

Internal funds: - These are the type of financing most frequently and easily employed. They can
come from several sources: profits (in a form of retained earnings), sales of assets, reduction in
working capital, credit from suppliers and accounts receivable. Another short-term internal
source of funds is obtained by reducing short-term assets inventory cash and other working
capital items. Sometimes, an entrepreneur can generate the needed cash through credit from
suppliers. While care must be taken to ensure good supplier relations and continuous sources of
supply, taking a few more days before paying the bills can also generate needed short-term
funds. A final method for internally generating funds is by collecting bills more quickly,
allowing little aging in accounts receivable.

The debt financing and equity financing can also be presented as follows:

Sources of equity capital/financing

Equity financing represents the personal investment of the owner (owners) in business. It is
sometimes called risk capital because these investors assume the primary risk of losing their
funds if the business fails.

The advantages of equity capital are:

- It does not have to be repaid like a loan does.

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 - It guarantees the investor a voice in the operation of the business and a percentage of any
future earnings.
Some common sources are

1. Personal Savings – This is money that the entrepreneur saves.

It is the most common source of equity funds/capital. It gives absolute control over the
business operation. It offers the least ability to accumulate capital. As a general rule, the
entrepreneur should expect to provide at least half of the start-up funds in a form of
equity capital

2. Friends, Relatives and Angles

The entrepreneur should treat all loans and investments in a business like manner, no
matter how close the friendship or family relationship. It can avoid many problems down
the line. Angels are outsiders in search of tax shelters who are willing to invest money in
potentially profitable ventures.

3. Partners
Are those who contribute capital together and share profits or losses. There can be
general partners and limited partners

Advantages
a. Ability to raise large amounts of capital
b. Improved access for future financing
c. Improved corporate image
d. Attracting and retaining key employees
The disadvantages include
a. Dilution of founders ownership
b. Loss of privacy

Debt capital/Financing
Debt financing involves the funds that the entrepreneur has borrowed and must repay with
interest.

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Sources of Debt capital
Not all of the sources of debt capital are equally favorable to the entrepreneur. Therefore, the
entrepreneur should understand the various sources and their characteristics in order to increase
the chance of obtaining a loan.

1. Commercial Banks
They are the very heart of the financial market, providing the greatest number and variety of
loans. They are second only to entrepreneurs personal savings as a source of capital for
launching business.

Types o loans granted

a. Short-term Loans
They are used to replenish the working capital amount to finance the purchase of more
inventories, boost output, finance credit sales to customers or take advantage of cash
discounts.

b. Intermediate and Long-term Loans

They are used to increase fixed and growth capital balances. It is granted for starting a
business, constructing a plant, purchasing real estate and equipment, and other long-term
investments. Loan repayments are normally made monthly or quarterly.

c. Installment Loans
Loans repayable on periodical payments of equal amount until the loan are fully covered.

2. Commercial Finance Companies:

They are institutions which finance consumers through companies. They lend to companies so
that they can sell on credit to consumers. But they do not directly finance consumers.

3. Savings and loan associations:

Are depository institutions established to encourage thrift among the public and create
loanable money to small businesspersons.

4. Insurance companies
They take the risks associated with doing business. Besides, they give a financial guarantee to
business persons to undertake a business.

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1.4 Buying versus Starting a Business
A firm can obtain new products in two ways. One is through acquisition® buying a whole
company, a patent, or a license to produce someone else’s product. The other is through new
product development. By new products, we mean original products, product improvements,
products modifications or new brands that the firm develops through its own R&D endeavors.
Three most common reasons why entrepreneurs buy an existing business instead of over creating
a new one:
a. Buying an existing business reduces the uncertainties involves in launching and entirely
new venture.
b. The buyer of an existing business typically acquires their personnel, inventories physical
facilities, established banking connections and ongoing relationship with trade suppliers.

c. Ongoing business may become available at what seems to be a low price.

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