How to build a business case for a new market: NPV, payback and scenarios explained simply
Expansion decisions in family businesses are often made on instinct: a trusted distributor suggests a neighbouring country, or a competitor opens a branch. Sometimes instinct is right. But when the decision is large, a successor, a bank or an investor will reasonably ask: how do you know?
A business case answers that question: what you are deciding, what it will cost, what it could return, what could go wrong and what would make you stop. This guide shows how to build one and explains NPV, payback and scenarios without jargon.
Step 1: define the decision, including doing nothing
Write the decision in one sentence, such as "Should we open a sales office and warehouse in [new market] in the next 12 months?" Then list the options. Always include "do nothing": it is the baseline every other option has to beat. Others might include a distributor, a joint venture or online sales only. A lower-cost entry route can test the market before you commit the full investment.
Step 2: size the market from the bottom up
Market size is usually described in three layers:
- Total addressable market (TAM): everyone who could buy this type of product in the new market.
- Serviceable addressable market (SAM): the part you could realistically reach with your product, price and channels.
- Serviceable obtainable market (SOM): the share you can realistically win in the first few years.
Use at least two independent sources for the top-level numbers, such as government statistics or trade bodies. Then build revenue from the bottom up: customers or units multiplied by price, year by year, with a realistic ramp-up. This forces useful questions about sales staff, win rates and sales cycles that a top-down "we only need 1% of the market" forecast skips.
Step 3: add costs, investment and working capital
List upfront investment (premises, equipment, licensing, recruitment), running costs (salaries, rent, marketing, local advisers) and working capital: the cash tied up in stock and customer credit before you are paid. Then calculate the net cash flow for each year: cash in minus cash out.
Step 4: understand the three key numbers
Here is a simplified, illustrative example. The figures are in thousands of your home currency and are not drawn from any real business.
| Year | 0 | 1 | 2 | 3 | 4 | 5 |
|---|---|---|---|---|---|---|
| Net cash flow | -600 | -100 | 150 | 250 | 350 | 350 |
| Cumulative cash | -600 | -700 | -550 | -300 | 50 | 400 |
Year 0 is the upfront investment. Year 1 is still negative because the new operation is building up.
Payback: how long until you get your money back?
Payback is the time it takes for cumulative cash to turn positive. In the example, cumulative cash is -300 at the end of year 3, and year 4 brings in 350. So payback is a little under four years: 3 plus 300/350, or about 3 years and 10 months.
Payback is a useful risk measure: the longer it is, the longer your money is exposed. But it ignores everything after payback, and treats money in year 4 as worth the same as money today.
NPV: is it worth more than it costs, in today's money?
Future money is worth less than money today, because you could use it elsewhere and the future is uncertain. Net present value (NPV) discounts each year's cash flow back to today using a hurdle rate: the minimum annual return you require for this level of risk. At a 12% hurdle rate, each year's cash flow is divided by 1.12 once for each year it is in the future:
| Year | 0 | 1 | 2 | 3 | 4 | 5 |
|---|---|---|---|---|---|---|
| Net cash flow | -600 | -100 | 150 | 250 | 350 | 350 |
| Discount factor at 12% | 1.000 | 0.893 | 0.797 | 0.712 | 0.636 | 0.567 |
| Present value | -600.0 | -89.3 | 119.6 | 177.9 | 222.4 | 198.6 |
Add up the present values and the NPV is about +29.
A positive NPV means the option beats your hurdle rate after allowing for the timing of the cash; a negative one means it does not. Here the answer is "yes, but only just".
Two cautions. The example stops at year 5 and ignores later value, which is conservative; a full model would usually add a terminal value. And NPV is sensitive to the hurdle rate, so agree the rate before you build the model, not after you see the answer.
IRR: what return does it make?
The internal rate of return (IRR) is the discount rate at which NPV is exactly zero: about 13% here, just above the hurdle. Use it alongside NPV, not instead of it; a small project can have a high IRR and still add little value.
Step 5: run three scenarios
A single forecast hides the most important question: what if we are wrong? Run at least three versions.
| Scenario | Net cash flows, years 0 to 5 | NPV at 12% | Payback | IRR |
|---|---|---|---|---|
| Downside | -600, -150, 50, 150, 200, 200 | about -347 | Not within 5 years | about -6% |
| Base | -600, -100, 150, 250, 350, 350 | about +29 | about 3 years 10 months | about 13% |
| Upside | -600, -50, 250, 350, 450, 450 | about +345 | about 3 years 1 month | about 27% |
The scenarios tell a different story from the base case alone. The upside is attractive, but the downside loses a lot of money, and the base case only just clears the hurdle. The decision now turns on two questions: how likely is the downside, and can you limit it?
Also note peak funding: the lowest point of cumulative cash. In the base case it is -700, at the end of year 1. In the downside it falls further, to -750, and never recovers within five years. Check that you can fund the downside peak without putting the core business at risk.
Step 6: list risks and set kill criteria
List the key risks: slower customer wins, price pressure, regulatory delays, a key hire leaving, currency movements. For each, note what you would do about it.
Then set kill criteria: specific results that would make you stop or scale back. For example: "If we have fewer than 15 paying customers by month 12, we close the office and switch to a distributor." Kill criteria turn the downside scenario from a fear into a managed decision, and they are much easier to agree before you start than after money has been spent.
In the example, a sensible response might be a phased entry: start with a distributor or a small sales presence, set kill criteria for year 1, and commit to the warehouse only if the early results track the base case or better.
Step 7: write a one-page decision memo
Summarise the case on one page: the decision, options, recommendation, three scenarios, peak funding, key risks and kill criteria. Take it to the board, record the decision as go, go with conditions, defer or no-go, and minute the resolution. In a family business, this keeps the reasoning behind a big decision for the next generation.
Entering a new market also involves registration, tax, employment and licensing rules there. Check each with an adviser in the target market, and include their cost in the case.
Where Mula OS fits
Growth planning is Stage 5 (Grow) in Mula OS's seven-stage path, and it comes after the earlier stages for a reason: growth multiplies whatever is broken. Mula OS's free Corporate Readiness Assessment shows whether your Stage 0 to 4 foundations are ready to support expansion.
When they are, the Mula OS Business Case Builder, part of Mula OS Govern & Grow, takes each shortlisted option through market sizing, bottom-up revenue, three scenarios, NPV, IRR and payback, risks and kill criteria, and produces a one-page decision memo for the board.
Take the free Corporate Readiness Assessment to check your foundations before you expand.