8 Essentials of Small Business Investing: Part 2
By Luke Loftin, Last updated: 2021-05-31 (originally published on 2019-09-25)
We began in Part 1 by setting out the initial four considerations for investors looking to put their money into a dldiiddddstart up. Here are the final four points that you should pay attention to before investing in a small business.
This is the first and foremost economic indicator of a company’s performance. This represents the net difference between the costs of manufacturing, shipping, and packaging and the price at which this product is sold. Ideally, gross margin should cover all necessary costs, provide an opportunity to cover all debts and necessary payments, have the potential to be invested in marketing channels, and the development of the company as a whole.
This, of course, was an ideal picture of the world, because often companies in which all these conditions are met do not need investments, or can afford a small business loan. Most often, a certain problem exists, and your task as an investor is to identify a weak spot, analyze all the indicators that we will talk about later, and make a general conclusion about the riskiness of investing in a particular company.
Yes, it is difficult to talk about brand strength when a business has not yet reached the level of world recognition. However, it is possible to notice the prerequisites and prospects for this.
For example, let’s recall Coca Cola. Thousands of manufacturers offer carbonated sweet water, but for some reason, only a few have received worldwide success (Pepsi, Fanta, Sprite come to mind).
So, how do you determine if a brand has potential? The single most reliable method is by collecting big data and analysing the information. If a brand has a prospect, even if it remains a small enterprise, it already has a powerful information distribution. And the question you need to ask before you start investing is “What makes this brand truly unique? Does its proposal coincide with the values and expectations of his target audience? ” If the answer is yes, you can consider this company investment-attractive.
When it comes to investing in startups, you can often read the phrase about investing first in the initiator himself, and only then in the business idea. And in fact, the CEO is the face of any business.
And even if it sounds a little cynical, then, first of all, it is this person who should be investment attractive. You, as an investor, must believe in this person. Very often you can answer this question on an intuitive level. This is not a business method, but do not neglect the tips from the subconscious telling you whether this person and his idea are promising or not.
In simple words, this is the profit that the company receives in its purest form. The simplest example is regular customers who no longer require funds to attract them, and ideally even to keep them.
Small business investment expert Ryan Caldbeck in this context talks about the example of investing in small businesses producing shampoos. The product had great packaging, good quality, and the amount of shampoo was calculated based on the needs of the average woman. However, everything turned out to be that buyers spent less shampoo than expected and returned for a re-purchase only after a year. The business strategy was designed in such a way that they relied on customers returning should in a shorter time.
Therefore, recurring revenue is one of the most important indicators of business payback, so it is necessary to assess the real prospects before entering an investment.
Few Final Words
And in the end, our main recommendation is to analyse a small business comprehensively. Sometimes one minor detail may be key to your final decision.
Luke Loftin is a writer and editor based out of Los Angeles. He specialises in finance, as well as health and wellness. In his free time, he enjoys watching Astros baseball. You can find him on LinkedIn.
This article does not constitute legal advice
The opinions expressed in the column above represent the author’s own.