IncQuery: In Search of the Dream Business

Advice on researching a "can't miss" idea, deciding whether to hire your first employee, and exploring various approaches to selling.

IncQuery

It's easy to get carried away with a great idea for a new business and overlook some of the biggest obstacles and pitfalls. This month we see an example of the kind of research you need to do and questions you need to ask. We also get tips on figuring out whether you can afford to add an employee and testing various ways of marketing a new product.

Hungry for Help
After a lot of soul-searching (and financial analysis), I have decided against opening up my dream business: a gourmet specialty-food store. I figure it would cost me $250,000 for the building, including renovations, and an additional $200,000 for equipment and inventory. That's more than I can afford.

Instead I am contemplating another idea. I believe that for less than $10,000 I could start a specialty-food distribution company. I wouldn't have to buy an FDA-approved warehouse, because a logistics company already has one near my home. In fact, the logistics company can also supply a truck and driver, as well as a state-of-the-art inventory-tracking system.

I have done my homework. There are no specialty-food distributors in northern Michigan above the 45th parallel, but there are hundreds of resorts and restaurants with chefs who would like to offer the best and can't find the high-quality, imported and domestic specialty ingredients that I could provide. Although I'm currently an army of one, I sincerely believe that I'm destined to launch something big. Is this it, or should I keep looking? --Emily

"You should probably keep looking, but first I'd do more research," says Ari Weinzweig, who has built seven food-related businesses in Ann Arbor, Mich., during the past 20 years, including the world-famous Zingerman's Delicatessen. "To begin with, I'd go talk to prospective clients and find out how they're getting their specialty foods now. I don't know that particular market, but specialty foods are pretty widely distributed these days. There's very little that can't be shipped by UPS. And don't assume you'll get sales just because people tell you they want such a service. They often change their minds when it comes time to pay for it. You have to go out and see for yourself if they have a real need or if there's an opportunity to create a need.

"You also have to figure out exactly what you'd be distributing. 'Specialty foods' is a huge category. Perishables may be in greater demand, but they take much more work than nonperishables. With perishables, you need to turn over your inventory faster, and you have refrigeration issues. Getting the stuff to your warehouse can be a problem as well if you're not on one of the major truck routes, and you may not be if you're that far north.

"Even if there is a market for you up there, you should be sure it's one you want to pursue. You'd be getting into a highly seasonal business and potentially a very labor-intensive one. The resorts and restaurants you mention aren't close together. My guess is that you'd wind up with a lot of small drops over a large area. I'm not a distributor, but we do sell wholesale, and I know how big a pain in the neck small orders can be. It takes just as much work to process one as it does to process a large order, and the return is much lower.

"But you should check all that out for yourself. Meanwhile, you might want to reconsider your dream business. Yes, you could fork over $250,000 for a building, but you wouldn't have to. Retail space is available for a lot less. Equipment would cost you next to nothing if you took over a place that was closing down. As for inventory, our deli carries $150,000 on a pretty high sales volume, and that's after 20 years. I doubt you'd need nearly as much starting out.

"I'm also skeptical that starting a distributorship would be less expensive than opening a specialty-food store. As a distributor, you'll have to deal with credit, collections, and accounts receivable. So you'll need a lot of working capital. A food store, on the other hand, is all cash, which makes things a lot simpler. If it's the store you really want, I'd give it a second look."

The First Employee
I have a small business that tutors people in writing. I've been running it out of my home as a sole proprietor, using independent contractors. One woman who has been editing for me wants to come on as a full-time employee doing marketing and sales. I need someone to work on those areas, and she has the right experience. Still, taking her on full-time would be a big financial commitment, requiring me to spend my savings. There's also a chance that she might generate more business than I could handle.

My revenues and profits are both modest but have been increasing slowly over the years. I know I'll have to invest to upgrade my Web site and do a few other things if I take this person on. I'm usually somewhat risk averse, but I feel I've reached a critical point and have to make some changes. So am I crazy to consider hiring her? --Sharon

"It's never crazy to hire an employee, provided you have the need and understand the financial consequences," says veteran entrepreneur and Street Smarts columnist Norm Brodsky. "In that regard, there's a handy rule of thumb you can use to determine the additional sales you'll have to generate in order to cover the new expenses you'll be taking on. You just add up those expenses over a period of time and divide by your average gross margin.

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