Courtney Myers Blog | Four Elements to Analyze Before Investing in a Small Business | Talkmarkets

Four Elements to Analyze Before Investing in a Small Business

Date: Wednesday, September 19, 2018 5:30 PM EDT

According to research, there are 30.2 million small businesses in the United States alone. Savvy investors realize that this is a substantial and growing nationwide sector and as such, are naturally interested in tapping into this vast pool of potential. Yet, how does one go about investing in a small business? Are there characteristics that make one stand out above the rest? Is a niche industry better than one with mass appeal? These are just a few of the questions you may be asking yourself before taking that next step.

If you choose correctly, there could be a significant opportunity for valuable returns within the small business sphere. Yet, if you select your investments without performing your due diligence or research first, you could be hanging your hard-earned cash to a money pit full of problems, lacking the operational infrastructure necessary to churn a valid profit. As such, today we are taking a look at four things to consider before investing in a small business. Though this list is far from exhaustive, it provides a solid framework to help curious investors jumpstart their journey.

1. Overall Gross Margin

Download or request a copy of the financial reports for the company in question. From there, pay close attention to the bottom line gross margin. In short, this is the amount that the company pocketed after subtracting the cost of goods sold (COGS) from the product’s market selling price. While a small gross margin might be expected for a small business or startup that is still in its infancy, the general pattern should be trending upward. Why? This is the income that is invested back into the company, helping it to further other initiatives, such as marketing, that can contribute to its long-term growth.

In this vein, look for business leaders who are poised and prepared to make technological investments in their companies to propel them forward. For instance, even a small business should be equipped to accept credit card transactions (learn more about the reasons why if you’re on the fence). Moreover, factory-based companies should have the profit available to buy automated machines to streamline processing and improve production times. Even if these funds aren’t available immediately, a reputable small business should have a plan in place to make sure these mission-critical investments can be made.

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