For many people, the idea of investing in a small business is an exciting one. It’s their chance to give something back and hopefully make a return on their investment, too. They might want to be very involved in the business they are putting money into, or they might prefer to simply watch from a distance and get regular updates. Whichever sounds more appealing to you, there will be a business owner keen to talk to you about how your investment can help them grow their company.
That said, investing in a company, no matter how good its offering is, isn’t something to do on a whim, and you should not enter into any agreement lightly. There are many factors to consider, and you need to be sure that you have chosen wisely. Read on for factors to bear in mind if you’re thinking of investing.
What is the Gross Margin?
The gross margin of a business – the difference between the price something is bought for and the price it is sold for – is hugely important when it comes to investing. A fine balance must be struck because if the gross margin is too small, there won’t be enough profit and you might have to keep topping up your investment or risk losing it altogether. If the gross margin is too high, you might run the risk of not selling enough stock because it is just too expensive.
You need to look at whether the gross margin is right in any business you want to invest in. Of course, a gross margin can be changed if need be, but the fact that it was wrong in the first place will show you just how experienced or not the business owner is, and this could be a deciding factor for you.
Strength of the Brand
A company’s brand is what’s going to make it stand out from everyone else, so it’s vital, if you want to be successful, to have a brand that is trustworthy, recognizable, and that tells people what the business does and what they can get from it.
Generally speaking, the stronger the brand, the better the investment, as there is already a customer base to work with. A weak brand can be fixed, and it might not be something that puts you off entirely, but it will depend on how much effort you want to put into the business. If you are willing to be a mentor as well as an investor, a weak brand probably isn’t a problem. However, if you simply want to invest and grow that investment, a stronger brand will be better for you.
Don’t forget to look abroad when you are searching for strong brands. Although you will need E2 visas to invest in foreign businesses, you could see a high return on investment, and with Hirson Immigration to help you, it could be the best way to find the right investment for you.
The Exit Strategy
If the business owner is serious about growing their business, they should have an exit strategy. As an investor, it is vital for you to know what this is and understand what is required to get there.
Exit strategies include:
- Selling the business completely
- Splitting the business into parts, selling some and keeping others
- Dissolving the business
- Retiring but keeping an income
There you have it: three crucial factors to consider when contemplating investing in a business.