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Things to consider before investing in a small business

When investors are looking for a potential investment, they often consider small businesses. Because of the growth potential of small businesses, they can make a lucrative investment, if they are successful. However, it is important to note that investing in small businesses is one of the riskier types of investing, you can be involved with. Small businesses of every type have a very high rate of failure. Because of this you should stick stringently to the number one rule of investing which is: never use money to invest that you cannot afford to completely 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, or some other large purchase. If after careful consideration you have decided to get into this type of investing, here are some things to consider before investing in a small business-

  • Are you willing to take the time and make the effort to do the necessary research? Small business investing is no different then any other kind of investment. In fact, it can often take more time to research a small business thoroughly, because you will need to do far more then just read an investing prospectus. If you are not willing or simply do not have the time to do this type of research, you should consider other types of investing.
  • How long has the business been in existence? The reality is that the longer the business has been operating, the lower the risk. Small business startups or very new businesses are the most prone to failure. However, you should still keep in mind that just because a business has been in operation, for even years, that does not mean that it is a risk free investment.
  • What is the management structure of the business? Successful investors know that they are really investing in the people who are running the business and not the products or services they produce. You should feel very confidant in how the business is being run and who is running it. You want to make sure that the management of the business has both the experience and the expertise to run the business, for the long term. In addition, you should consider if the management is taking too much in salary or other benefits in proportion to the size of the business. If you feel at all uncomfortable about the management or the management style, you should take this a red flag.
  • How strong are the sales and marketing plans for the business? The lifeblood of any business is the marketing (which drives customers to the business) and the sales (which provides the profit). If you are considering investing in a small business that has problems with either of these areas, you are putting your money at risk. A successful business of any size will have a fully developed marketing plan that will help to drive sales and maximize profits.
  • What do you know about the industry that you are considering investing in? While you don't have to be an expert about what the small business does, the more you know that better your investment will go. Successful investors never invest in things that they don't understand. Do not let your emotions determine whether you invest in a small business. Just because you love a particular small business, the people who run it, or even the product they produce, this does not necessarily make it a good investment. You want to be clear on what you are investing in and what the investment strategy is. If you do not understand either of these, then you should take it as a red flag and move on to another small business investment opportunity.
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