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.

As the economy ebbs and flows and production costs rise, a business with a razor-thin gross margin will likely have a challenging time keeping pace with the increase. Yet, one with a little wiggle room can comfortably transition and still stay in the black. As an example, one industry with comfortable gross margins is the specialty/green living sector, which includes products such as organic household goods, all-natural dog food and more. As customer demand for these products continues to increase, small businesses that can ramp up production and still keep gross margins high will be those worth watching and investing in.

2. Brand Position

Put simply, what unique factor does the small business offer consumers? What is it doing differently than everyone else that will earn it brand recognition and allow it to stand out amid the clamor of competition? This is the company’s brand position and while the concept might sound ambiguous, it is essential to understanding the long-term value and relevance of the company.

Keep in mind that even if a company isn’t revolutionary, or is offering a product or service similar to someone else, it can still be a valuable investment option.

Yet, there should still be some form of differentiator and in many cases, this falls upon marketing and packaging production. Does the company use dynamic design, sleek graphics and beautiful packaging to woo its target audience? If so, don’t cross it off the list just yet, even if it is offering a run-of-the-mill solution that you can buy at any big-box store. Humans are highly visual creatures and if the branding is strong enough through design, they can be swayed.

Before making your investment decision, research what people are saying about the company. That is its brand reputation, and you can find elements of discussion, from social media posts to customer feedback surveys, that are rich with data on this point.

3. Strong Leadership

It might sound cliche, but a small business is only as successful as its leader. To this end, learn who comprises the C-suite of the company in question and start your background search from there. At the very least, the CEO should be a person of integrity, drive, revenue, resources and connections. He or she should ideally have educational and professional experience in a related field and a unique skill set that makes this a natural fit.

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.