For an entrepreneur its like you have a tape worm in your gut. You are always hungry for an opportunity. If someone has a business opportunity then your appetite is peaked. That is part of who you are and it can be a powerfully positive aspect of your personality but there will always be far more opportunities than you have time and resources to persue. You need a set of tools to quickly assess an opportunity and give it a quick "go, no go" decision.
One of my favorite "acid tests" is a back of a napkin financial test. I did this with a client a couple of days ago, literally on the back of a napkin, to show him how quick and easy the assessment can be.
In doing this test you need to assume 1) the opportunity is real, 2) there are no immediate barriers to execution and 3) assume realistic success in generating revenue (not worst case and not pie in the sky success).
Start by listing all the products and/or services that can be sold with the opportunity. Assume you are fully selling. In other words ignore the ramp up period. What kind of reasonable revenues can you expect? List them all item by item and revenue for a year. Total up that list. This is your gross revenue estimation.
Now list all the expenses both one-time (as in start up expenses) and on-going for a year. This should include revenue shares with partners, dedicated salaries, commissions, equipment purchases, marketing expenses and even an administrative overhead percentage (I like to use 20%). Total up that list. This is your cost estimation.
Subtract your costs from your revenues and this is your base assumption on how much free cash the opportunity can generate.
NOW, don't forget you have ramp up time. Our assumptions above are based on executing full tilt immediately. Of course this doesn't happen that way. You need to list barriers to execution as a list of bullet points and then decide how long and if there are any extra expenses to executing. If the opportunity is 6 months in the future and will take a full year to get the sales fully ramped up you need to cut your free cash flow estimate by 50 to 90% for the first year and that's assuming you'll overcome all the barriers in place and sell well.
Also, you need to be realistic about free people resources you have to execute on the new opportunity. Is your sales manager free to pursue? Are your operations people ready for the tasks? How much of a distraction is this new opportunity going to be from your core business or for yourself.
Finally, what other opportunities are you passing up in order to pursue this one?
The back of the napkin number should be quite compelling, enticing even as a stand alone business. If it's not then it's probably not worth the risk. Most highly skilled entrepreneurs can only execute on a single new opportunity in a given year. If this one doesn't pass the test then move on, there will be plenty more opportunities. Deny the tapeworm that one extra meal... for now.