How to Analyze a Business

How You Should Analyze Your Start-Up Business

You have an idea for a new business. You wonder if it has the potential to be successful. If you are like many people, you will think about it for a while, and then let the idea dissolve into the background. Everybody will agree that starting a new company is hard work. But even analyzing a new business idea to determine if it is feasible can be daunting. A business idea becomes feasible only when many dozens of conditions are met. To name just a few:

• Are sufficient customers interested in buying the product or service that the business intends to offer?
• Do customers see sufficient value in those products so that they are willing to pay price you are asking?
• Does the business have the resources (e.g., money and people) to reach potential customers?
• Are the company's expenses low enough so that it can operate profitably?
• Will competitors easily steal away your customers?

Each of the above requires a detailed analysis. This is of course a two-edged sword: if you spend too much time analyzing the situation, you will never start your company; if you spend too little time analyzing, you will incur far too much risk. The right answer is somewhere between the two extremes.

The founder of our company, Al Davis, has started many successful companies. One of the first tasks he undertakes after he thinks a company might be viable is the construction of a financial plan. Creating such a plan requires documentation of many assumptions. Although the primary goal of documenting assumptions looks at first glance like the creation of the financial plan, the secondary benefits are just as important. After all, the questions that need to be answered to create values for the assumptions are the most fundamental questions about your business's goals and strategies.

What are these assumptions that need to be made? They include:

• Will I sell my product? Or rent it?
• What will the price be?
• How will I find customers? Or how will they find me?
• What percent of people who have contact with the company will actually purchase?
• What will I pay my employees?
• And so on.

As you make “best guesses” for each of these assumptions, you will start to understand your business better, and you will be able to assess whether it has any possibility of becoming a financial success.

How Does Offtoa Analyze Your Start-Up Business?

Once you enter values for all your business assumptions, Offtoa will create all your financial statements and some additional financial reports. Offtoa then performs a complete analysis of all these financial reports:

• Pro forma income statement
• Pro forma cash flow statement
• Pro forma balance sheet
• Pro forma per unit analysis report
• Capitalization table
• Internal rate of return report

Offtoa performs an analysis of these reports looking for the same properties that many investors look for; these are properties that in many cases foretell a poor financial outcome for the company; in other cases, they indicate a low probability that any investors will invest. The primary reason for surfacing these issues is to find solutions early and to prevent problems. The primary reason for using a tool like Offtoa to find these issues is so you can either:

• fix problems rather than suffer the embarrassment of potential investors finding them, or
• understand why the problem is not a problem, so you are better prepared to defend yourself if a potential investor raises the issue. After all, you may not consider every problem that Offtoa raises to be a problem.

Whenever Offtoa finds a potential problem, it highlights the symptom for you on the financial report, and offers a list of suggested solutions, each of which describes exactly which assumptions you need to change to fix the problem. However, don't just “fix” the problem by blindly selecting one of the suggestions. That will result in you having a set of financial statements that look good but have no basis in reality. Instead, make changes to assumptions that you believe are feasible and then change your business strategy to reflect the new plan. If none of the suggestions are feasible in your mind, then perhaps you don't have a viable company .