Courtney Myers Blog | Four Elements to Analyze Before Investing in a Small Business | Talkmarkets - Page 3

Four Elements to Analyze Before Investing in a Small Business

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

As such, don’t hesitate to perform reference checks and background checks before making your decision to invest. Also, spend time talking with the CEO, asking as many questions as possible to make sure you fully understand the vision, mission and future focus of the company. These initial discussions can be incredibly enlightening and help steer your choices moving forward.

4. Likelihood of Sustainable Income

We’ve discussed gross margin, but to have ideal numbers in this category, a small business has to also have repeatable sales. This usually means that its product lifecycle is short and as such, must be continually purchased by devoted consumers.

For instance, consider the cosmetics industry. Makeup products have shelf lives ranging from three months to two years, with mascara being among the quickest to expire and eyeshadow being one of the longest-lasting products. If you’re choosing between a small business that sells mascara and one that sells eyeshadow, your potential for a quick turnaround, repeatable income is higher with the former. At some point, even the best packaging and promotions can fall short if consumers only need to purchase the product once and they’re done for a long time. This can leave the business with periods of plateau wherein little to no new income is being generated and as an investor, this can be quite risky.

Thinking Twice Before Making the Leap

Investing in a small business can be a great way to help fund an exciting new idea, help entrepreneurs find their footing and get in on the cutting edge of an up-and-coming industry that has vast growth potential. However, before you sign on the dotted line and contribute a dime of your money, it’s important to do your homework first.

Analyzing these four elements can help interested investors organize their efforts, plot a journey toward decisionmaking and vet all options thoroughly. It might take longer than initially anticipated to get started, but being meticulous with this part of the process can equal a substantial reward down the road.

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