How Can a Family Business Assess the Return on a New Location or Product Line?
Short answer. Assess a proposed location or product line with a written plan that estimates demand and startup and operating costs. Include cash needs and the time required to reach steady operations. Compare expected returns with risks and alternatives, then track actual performance against the assumptions after launch.
A family business can assess a new location or product line by writing down its assumptions and testing whether the expected return justifies the required money and management capacity, along with the time involved. The plan should describe the customer need, the cost to serve it, and the conditions for pausing or changing course.
Test the Market Case
Define the customer group and the problem the offer will solve. Gather evidence from prospective customers and existing accounts. Ask competitors and suppliers about market conditions. Estimate likely sales using assumptions the team can explain, not an optimistic target chosen to make the project appear attractive. Consider whether the offer could draw sales from existing products or support useful cross-selling.
For a location, assess customer access and staffing. Also estimate logistics needs and site costs. A strong location can bring demand, though it may come with a higher purchase price or operating cost. In my experience, return and risk depend on the specific investment opportunity. Owners should not treat a favorable headline estimate as proof of success.
Model the Investment and Cash Needs
Estimate initial expenses, ongoing fixed costs, variable costs, working capital, and any additional people or systems needed. Build a base case and a downside case showing how results change if sales take longer to develop or costs rise. Include the time required for the project to contribute cash. A project can appear profitable on paper while putting pressure on the rest of the company.
Compare the proposed return with other uses of the same capital, such as maintaining existing equipment or paying down debt. Improving current operations is another option. The direct deal return calculator can help organize return assumptions, while the excess cash review can frame competing priorities. Discuss tax treatment and lease terms with your CPA. Consult your attorney about financing terms.
Set Review Points Before Launch
Before committing, agree on who approves spending, what results management will track, and when owners will review progress. Choose measures tied to the business case, such as customer conversion, sales, contribution margin, repeat purchases, and cash required. Assign responsibility for reporting those measures and documenting changes in assumptions.
After launch, compare actual results with the plan and investigate differences early. Decide in advance what performance level calls for additional support, a change in scope, or a pause. This helps prevent a project from receiving more resources solely because the family has already committed to it. The goal is a disciplined decision that fits the company's customer needs and ability to fund the work.
Read next: What should owners know about the company's true profit margins?
It is important to note just how important and dynamic family objectives, values, and time horizons can be, as they each can have a dramatic effect on the investments made.
Sources: The Family Office Book, The Single Family Office. Informational only, not financial, legal or tax advice.