Questions to ask before investing in a small business
If you are considering investing in a small business there are important considerations that you should take into account. While small businesses can be lucrative investments investors should carefully research before making a final investment decision. The reason for this is that while small businesses can make you a lot of money they also come with a lot of risk. Small business have a high rate of failing no matter what industry they are in.
Because of the high risk of small business failure you should never invest money that you can't afford to lose. In addition, you should never consider making a small business investment with money that is earmarked for other purchase, such as: buying a house, funding an education, or some other large purchase. If you are considering this type of investment here are questions to ask before investing in a small business-
- Are you willing to do the necessary research? Successful investors spend a great deal of time researching their investment options. It is no different with small business investing. You need to take more time and make more of an effort to learn about potential investments because of the risk involved. Keep in mind that this will go far beyond reading an investment prospectus. If you feel that you do not have the time to commit to this then you may want to consider putting your money somewhere else.
- How is the business run? One of the first things that you should find out before investing in a small business is how it is run. Successful investors know that they are not really investing in the product or service of a small business but rather in the people who run the company. You should feel very confident in the people who are running the business. They should have what you feel is the right expertise and experience to make the business a success. If you for any reason you feel that the management does not have these you should consider moving on to another investment opportunity.
- How long has the business been around? The bottom line is that the newer the business the higher the risk. If you are considering investing in a fairly new business then you need to be able to accept a higher amount of risk. While being in business for a longer period of time does lower the risk keep in mind that it doesn't completely negate it.
- What are the sales and marketing plans? It is important to have a clear picture of both the sales and the marketing of any small business that you are considering investing in. A strong marketing plan will drive sales to the business and a strong sales plan is what increases profitability. If you find that you have serious concerns about either of these areas then you should probably move on. A small business that will be (and is) successful will be strong in both of these areas.
- How much do you know about the industry that you investing in?Even the most experienced investors tend to know at least the basics of the industry they are considering putting their money in. Keep in mind that while you don't have to be an expert, the more you know the better your investment will be. You should never invest in an area that you don't understand. In addition, you should never let your emotions guide your investing decisions either. Just because you love a particular small business doesn't mean that it will make a good investment. If you don't understand what you are investing in it is simply better to take your money and move on.