What to Know Before you Invest in a Business

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ferfewgweIt’s not easy to know which companies will offer you good returns on your investments. If you’re searching for a secure, short-term or long-term investment strategy, follow some basic guidelines to protect your funds.

Experts

Talk to an expert. Find someone who is intimately familiar with the industry in which you are interested. Consult a professional investor or an investment banker who’s sphere of knowledge focuses on the specific category. LinkedIn is a great place to find such a person. By spending a few hours of networking you may influence your profit margin. Learn the questions that you should ask.

For instance, if you’re looking for an opportunity to invest in an online gaming concern speak to an operator of a similar site to find out how the industry works. Does the site that you’re looking at offer enough games? Give industry-acceptable bonuses? Offer a mobile option?  Is it active on social networks?

CEO

If you’re investing in a private company, your first step should be to speak to the CEO. Speaking with the CEO will give you valuable insights into the leadership’s goals and visions, as well as the ability to assess the company’s abilities to reach those goals.

Talk about the CEO’s vision and values and see how they match your own. Research the stats that the CEO presents and consider whether the leadership team will be able to execute their vision. Great business concepts arise all the time but stumble when it comes to the execution phase. When you speak to the CEO, you’ll want to consider whether s/he really understands the risks that are associated with the business launch and has planned for all contingencies.

For instance, if you’re investing in a healthcare field, make sure that the CEO is knowledgeable about the type of healthcare that he is preparing to offer. If his only concern is the balance sheet, the business is in trouble before it gets off the ground.

Growth

Find out about the company’s plans for growth. Is an existing company growing? If so, how will it continue to grow? How does a new company plan for growth? Is the workforce sufficient to support growth? If not, is there a plan to increase the staff to accommodate growth?

Customers

Talk to customers who use the item. It’s preferable to speak to more than three customers. Ask these users to explain what they look for when they make their decision about which brand to use. What do they like/dislike about their selected product/service brand? Why do they use this product/service brand?  Are they satisfied? Would they consider switching to another brand? If so, why?

Additional questions include issues of pricing and loyalty. If someone else were to offer the same product/service at a lower price, would the customer switch? actually promoting the products they’re using.

Legal Issues

Investing in private companies can be complicated. Consult with a lawyer who is familiar with the legal side of investments. S/he can steer you in the right direction so that your interests are covered. Show every document to your lawyer and solicit feedback. You may not agree with everything that your lawyer says but at least you’ll hear the point of view of someone who isn’t involved so that you can consider what s/he’s saying.

Knowledge

Invest in what you know. Before you invest in a company, study the business. Use the product Understand the ups and downs of the business. Why would you invest in a pharmaceutical company if you don’t have any background in pharmaceuticals?  Thinking of investing in an app? Do you know how an app works or why people download apps? Stick to what you know best.

Supply and Demand

One of the most important indicators of the success of any business involves supply and demand. When you investigate the potential success of a business, you’ll need to determine whether there’s a demand for the product or service that the business intends to supply and whether the business will be able to meet that demand.

You should also check out the competition and make sure that there’s a plan for meeting that competition.

Some basic questions that you need to ask yourself include:

  1. Does market research show that there’s a demand for this product or service?
  2. Does this product/service meet what seems to be a passing fad? If so, will the fad have passed by the time that the product/service is up and running?
  3. Is the product/service seasonal? (i.e. lawn-cutting, winter coats, etc)? If so, is there a plan for how the business will function during the off-season?
  4. Is the product regional? Is there a plan to expand beyond the region? Is that plan feasible?
  5. What is the competition? How does the marketing plan intend to meet that competition?
  6. Do other companies offer the same product/service?
  7. What sets this product/service apart from the competition?
  8. How will the business compete against another, a more well-established company with name recognition?

Calculate

This is where the numbers crunch comes into play. You’ll need to determine how a company’s deal structure and valuation stacks up against others in the industry. Check out the valuation as it relates to comparable companies based on:

  • revenue
  • net income
  • growth rate
  • risk profile
  • capital structure

If the valuation is too high, even a good company may not be a good investment. Warren Buffett once said, “Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good results.”

You can look forward to a good investment strategy when you follow simple investment rules.

A post by Kidal Delonix (2506 Posts)

Kidal Delonix is author at LeraBlog. The author's views are entirely his/her own and may not reflect the views and opinions of LeraBlog staff.
Chief editor and author at LERAblog, writing useful articles and HOW TOs on various topics. Particularly interested in topics such as Internet, advertising, SEO, web development, and business.

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