Step 1 – Invest Only If The Business Makes Sense!
In my previous blog, I shared my 3-step approach to how to invest in a business without losing your money. This month, I delve further into Step 1 of that approach, namely how to identify whether a business opportunity is worth investing in.
You may have decided to invest in a business as one of the ways of increasing your income or net worth. In my experience, at this stage, several opportunities will become apparent to you. Normally these opportunities are identified through discussions with your personal network (friends, family, colleagues, etc.). If the opportunity resonates, you will begin to probe the idea and run the risk of emotionally being attached to the idea before formally assessing the merit of the business investment.
Over the past few years, I have met many clients who have made decisions to invest, based on trust and the nature of their relationship with the existing shareholders of the business they invested in. During the early stages of a business investment, the future possibilities are exciting and as an investor you can easily be influenced by the promise of future success resulting in a decision to invest which is not based on sound analysis. Some business investments will work out for the better while others fail resulting in investors losing significant amount of capital.
Therefore, I am advocating a series of questions to assess any business opportunity no matter how big or small. By asking the right questions, you will be equipping yourself with the appropriate knowledge to make an informed decision.
Here are the key questions you need to be asking:
- Does the business solve a problem or a need? The business must deliver value to its customers within its target market.
- How does the business make money? The business model must be appropriate to deliver products and services in a financially sustainable way.
- Is the market big enough and can the market be reached? If you are unable to get to the customer, the growth potential will be limited.
- Can the market afford the services or products and is the market willing to pay for it? If customers don’t see value in paying for the products and services, the business will fail.
- Does the management have the skill and experience to manage the business and deliver the products and services?
These are some of the main questions to be answered to determine the attractiveness of the business investment. Also consider how future changes could affect the viability of the business.
The next blog in the Invest in a Business series will cover insights on assessing the financial performance of the business. Sun Advisory can assist an investor in assessing any potential business investment. Contact us to discuss your requirements.