Investing in a small business can be risky. But in the event that a small business succeeds after your investment, you may reap great rewards.
Before you plunk down a chunk of your hard-earned money into a small business, it is important to do your due diligence. Understanding your risks, taking your time to research, and consulting with experts can help minimize some of your risk.
Our team at the Generations Law Group provides counsel to investors and business owners in and around Boise, Idaho. Read on to learn more about what you need to know before making an investment.
Talk with the Company’s Leadership
Whether a small business has a team of executives leading it or a married couple running it, you should speak directly with who’s in charge before deciding to invest.
When speaking with a small business’ leadership, it’s important to delve into their business practices and their goals. Ideally, business owners should be ambitious to expand their markets and mitigate risk. It’s important that a small business’ vision and values align with yours.
Red flags include:
- High staff turnover
- Customer dissatisfaction
- Previous legal history
- Disproportionate debt-to-income ratios
These conversations can give you a keen insight into the business you may invest in. They can also help you avoid serious investment mistakes.
Speak with Experts of the Industry You’re Investing In
Many times, investors put money into industries they may not have personal experience working in. If you’re unfamiliar with the industry with which you’re investing, it is important to consult with industry leaders.
Say you’re considering investing in a cleaning company but are unaware of the fact Uber-like apps are disrupting traditional labor models. Your investment could fall flat to rising market trends. Seeking the insight of leaders in the industry can help you reduce your risks.
Develop an Understanding of How the Small Business Could Grow
Profits are generated from growth. If you’re trying to reap a decent ROI, it is imperative that you understand how potential investments could grow.
Developing this understanding could involve determining whether the business’ leaders have plans to open more locations, expand their markets or deploy targeted advertising initiatives. Analyzing cash flow, balance sheets, and income statements can help you make informed decisions.
The future trajectory of a business’ growth is directly tied to your investment returns.
Evaluate Your Risks Should This Business Fail
Risk is something every investor must prepare for. Anticipating risk can help you maintain a healthy portfolio even after one investment fails.
Evaluating risks related to your investment should include understanding how slow growth, bankruptcy, and potential legal issues could affect your bottom line.
Once you’ve determined your potential risks, you should carefully weigh your comfort level with your investment.
Have An Exit Strategy
At some point, you will need to cash in on your investment and move on.
Determining when you exit is something every investor should consider with caution. Some may choose to exit after they’ve received a favorable ROI, while others may want to wait until they can sell their share of ownership to another party.
Having a clear exit strategy requires careful planning and open communication with the owners of a small business.
Consult with an Experienced Idaho Business Attorney
Investing in a small business without the guidance of an attorney is an ill-advised move that could come back to haunt you. An experienced business lawyer can help you anticipate legal risks, ensure that your contracts are fair and legally enforceable, and review a business’ financial history to protect your investment.
If you’re looking to invest in a small business, contact our Idaho practice, Generations Law Group. Our knowledgeable team helps existing businesses, budding entrepreneurs, and investors protect their bottom line. Give us a call today at (208) 401-9300 to schedule a consultation.