Evaluating a Company


Evaluating a Company to join or buy is not so easy and should not be taken lightly. The most expensive part is the time you invest if you don’t minimally heed these points.

Here are some of the key components I used for evaluation of companies and similarly for products or divisions of companies. My focus on a company is as if I was buying it or investing in it. The company must be able to withstand a rigorous examination.

1. The Industry -Is it growing, shrinking or stable? What is the current competition within the industry? Are there a few very large competitors? Is it trying to enter a market with many strong competitors? For example, if we were entering the health products industry, would we be up against billion-dollar companies? In that case, we would be looking to find a niche position in the market place. We would also have to always be on guard as our niche could become sufficiently profitable for a major company to enter the market, potentially putting us at a huge disadvantage and possibly out of business. Yes, those niches that every one talks about must be very profitable for a small company, but either unprofitable or not worth the resources for a large company.

2. The Company – Evaluation of management, experience, success record, depth, financial strength and strategy. Do the people have the experience for what they are trying to do? Is the strategy consistent with their goals, reasonable and able to be constant over a long term. If their strategy is for the next 1 or 2 years, that is not a strategy. That is a short term goal.

3. Financial Strength of Company – How well funded is the company? What does its management look like? Is it a strong company? In the case of network marketing, was the company using networking as a marketing concept or distribution system or was it purely an MLM, and possibly leveraging the MLM concept because of a lack of funding? If its first identity is as an MLM, that would be a strong negative. The latter can often be seen as companies with high product markups and with products that are either not unique or have legitimate consumer substitutes for 75- 80% less. Are there true market reasons that networking is a good model for the company? Marketing is a legitimate cost of a company, but it should not be excessive or it can’t compete.

4. Market Size – This gets tricky. You’ll often hear that XYZ industry is a $X Billion dollar industry, but where does the company fit. Is it competing against Revlon, Estee Lauder? Are similar products in GNC or Sam’s Club at 10- 20% of their price? That is, we want to see not only total size but segment size and again competition. Is it a little player in a big pond? Can it be a major player?

Is your company going after a niche as mentioned earlier? If so, how big is it? Will large companies be tempted to enter the niche you are targeting? Are there other companies or products in the same niche already? Your product may be unique, but are there other products with similar appeal or that satisfy similar consumer preferences in that market. For example, to stay healthy may be a wonderful goal and a company may have a truly remarkable product, but how will the consumer differentiate your product? For example, if the product is for weight loss, your competitors are not only the companies with similar weight loss products, but to at least some extent, all means of reducing weight. That includes, health clubs and exercise videos. They are all substitute products for the same attributes the consumer wants. The consumer’s budget is limited and choices have to be made.

If there are no large companies with a presence in the market, why aren’t there? There must be a solid reason based on size, geography, their assessment of the market, or is it truly not desirable or too new just for a large company. Then, this might be a good niche market.

Is the market growing or shrinking? If shrinking or stable, the market could be much more cut throat as everyone competes for the existing customer base. If the market is not new, the customers you are seeking will probably need to be conquest sales which makes marketing much harder. If your product are in a rapidly growing market, the product may slide into the market considerably more easily.

5. Competition – Not just other companies of the same type, but companies that compete for the same expenditures that people make. While people may stretch themselves, that really shouldn’t be part of a market plan. When budgets are tight, products that can be removed from the consumer’s monthly expenditures are more likely to suffer.

6. Consumption Patterns – Does the company fit into the normal buying habits or patterns of consumers? Do they expect consumers to change their buying habits when they get products? For example, people are conditioned to buy things as they run out. They buy replacement products normally when they are out shopping. If a product is sold to somebody on a monthly autoship basis, they will soon have too much as they forget to take it some days and the product starts to pile up. Is the product normally bought in the store, online or from salespeople? Are there similar or large substitutes for the company’s products? Are there complementary products that affect consumer choice? Complementary products that consumers feel they should or must buy along with the company’s product can be a profitable add-on or push the price out of reach.

7. Legal Scrutiny – Is there anything that would cause this company to come under extreme scrutiny? Are there state and federal agencies that either directly or indirectly regulate this market? Is the company able to perform easily without getting into regulatory trouble? The FDA and the FTC are agencies that are always looking over the shoulder of many companies

8. Timing – If you have done your due diligence on the first 6 items, you want to invest into or enter into the company or market as early as is feasible. There are some very popular companies I know out there with some great products, but they may be in a shrinking market or in competition with entrenched companies that have more resources. That is why you always hear that timing is so important in markets, real estate or business. Best of luck, do be careful with your research. It is not just your investment that is at risk, it is also your time.

There are many fine companies and this is a very small sketch of how I evaluated companies. At some point, I will expand considerably on this.

I am currently doing some work with a company because it would make sense to invest in the company. The market potential is huge, not only for the company, but for my own efforts. While it made a great deal of sense, I was first at very reluctant because it was network marketing. In my opinion, most network marketing companies are selling themselves on the idea that they are networking and not that they are first and foremost have great products that fit the criteria in items one through eight.

When doing your own analysis, first examine the company thoroughly as if you were investing in it or buying the company. Never look at how cheap the entry fee is. Remember, any stock you ever bought was an investment. You didn’t look through the penny stocks to see the entry fee. At least, I hope not. You are entering a business, not shopping at the outlets.

At my current age and with the vagaries in this economy, I want something that in a few years nobody can tell me to leave or to retire and I can sell or will to someone (see My Purpose at this time.). Something where I would invest my time also should be able to generate income separate from hours worked, that is residual income like an insurance agent. This would potentially include interest, dividend, rental, residual, or subscription income sources. It must work into retirement even when I may not be able to do much.

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About Thomas O'Grady, PhD

Thomas F. O'Grady received his PhD in Mathematical and Statistical Economics from the University of California at Berkeley. Since the age of 12 he's been interested in entrepreneurial activities. Full Details

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Disclaimer: The analysis, views and opinions expressed in this blog are personally my own and do not necessarily reflect nor are meant to imply in any way they are the opinions of Ambit Energy.I am an Executive Consultant with Ambit Energy. Analogies used are to assist with general understanding of the postings and are only to be examples.

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