Friendly environment enhances enterprise and management practice. This study analysed potentials of SMEs in relation to business environment of Lagos State; to contribute to environment-enterprise policy mechanism and regulatory framework of the State and Nigeria, industry and management practice. With World Bank's sample size model, and relevant criteria, 228 SMEs were drawn via convenience technique. Multifactor business environment-enterprise questionnaire (MBEEQ), akin to assessment tools of various agencies and institutions, was used to elicit cross-sectional survey responses. A system of simultaneous equations model (SSEM) was used to investigate environmental effects on the SMEs. Findings: legal-regulatory frameworks, policy stance and socio-cultural factors reduced potentials, competition aided innovation and growth on aggregate, the environment significantly enhanced SMEs' potentials. Recommendations: legal-regulatory and policy reformation towards SME-friendly environment, and SMEs should leverage on opportunities in the environment.