What to Know Before Investing in a Business

Investing in a business is exciting and scary. A lot could go wrong with investing endeavors, but things could go right if you do your homework. Below are some things you should know before you invest in a particular business, which should reduce risks.

Know the CEO

The CEO is the person who steers the company towards the future. If you’re getting ready to invest in a company, you need to know who this person is. This doesn’t mean you always have to hire a private investigator to uncover dirt about a CEO before going forward. You don’t have to know the person’s life story, but you want to know enough to feel confident this person can handle what lies ahead. Find out if he or she went to a good school. Learn about this person’s experience as a CEO or a leader of a company. More than 10 years of experience is ideal, but if the person has a good vision for the future, you could roll the dice when it comes to experience. If the business is small enough, you might get an interview with the CEO. If possible, talk with this person.

Projections are Vital

Smart businesses want to anticipate their sales. This means most of them have made some efforts to project sales. There are many ways to accomplish this, but one of the most trusted is through a Salesforce forecast. Chances are the business you’re thinking of investing in has this information, so go ahead and ask to see Salesforce forecast reports if available. It might seem strange to ask for something like this, but it’s quite common among investors. You’re thinking of investing a lot of money into this business, so you’re entitled to know everything there’s to know about this company. These reports should tell you how well the company might do in sales within the next few weeks, months, and even years.

Check the Business Model

Learn about the company’s business model before you invest. You’re not looking at the business model to judge it if it’s right or wrong. The truth is there’s probably no business model that’s wrong out there because each probably has strengths or weaknesses. The reason you’re looking at the model is to make sure you agree with it and want to support it. Try to consider the weaknesses of the model, and be sure you’re willing to accept those risks. For example, a business model that sales higher-end products won’t do as well if the economy isn’t doing well. This may not be something an investor wants to hear, but this country has been hitting economic roadblocks over the last few years. It’s more than fair to ask yourself these types of questions before you invest in a business.

Competitive Advantage

Look for competitive advantage before investing in a company. This is something you can’t overlook because it can make or break a company. The competitive advantage is that the company has something others don’t. It can be a number of things like having a recognizable brand, having valuable patents, efficient operating systems, or simply having superior products. Some companies have been able to break from their competitors because they were endorsed by trusted celebrities or other business leaders. When you know that a company’s competitors cannot easily replicate things, this makes the company special.

Look Closely at the Debt

Debt is sometimes ignored by investors, but you can’t afford that. You need to know the debt-to-equity ratio of the company you’re thinking of investing in. The more a company owes its creditors, the riskier it’ll be to invest in a business. If a company continues to do well, then they’ll be able to pay debt and investors. If the company suddenly faces financial difficulties, you can be in trouble since this company won’t be able to deal with the debt crushing the company during economic turmoil. You want a company’s total debt level to be lower than the company’s equity levels. This doesn’t mean you can’t invest in a company with some debt; just try to find one that has the least amount unless you don’t mind taking the risk.

This represents some of the information you should learn about a company before making this decision. Take your time to learn about the points just mentioned and anything else you can uncover, like the company’s net income or its profit margins. The more information you have, the better you’ll feel about your investment, no matter which way it ultimately goes.

 

Disclaimer: This content does not necessarily represent the views of IWB.