Many people have savings they’d like to invest in a financially stable and profitable business venture. In fact, who doesn’t like a steady flow of income coming in, instead of working a monotonous 9-5 job or letting money sit in the bank? However, the possibility of losing their hard-earned money puts them off. What if you make the wrong investment decision and lose it all? In such a scenario, it would have been better if you didn’t invest your hard-earned money in the first place.
Investing in a business does come with its risks, but if you do your homework and proceed with caution, it can bring the following benefits:
· The potential to earn a higher income –With a business, there is a potential to earn a higher income than many other investment options. The possibilities are endless and the more energy, passion and hard work you put in, the greater the return is.
· Greater security than most jobs– in today’s uncertain market environment, the average person with a job has to work at multiple places throughout their lives, accompanied with periods of unemployment in between. With a business, you do not have this insecurity.
· Different retirement plan options – when you invest in a business, you have greater control over your retirement plan, being able to contribute generously and having the option to retire early if you wish.
· Opportunity to do what you love – you can invest in a business that you are passionate about, allowing you to do work that is in line with your skills and interests.
These benefits are surely there, but only if you make the right investment decision. If you are considering investing in a business, here are six things to consider:
1) Your experience and expertise in the industry
Many investors are quick to jump into successful business ideas they hear about from others or those that are doing well, without thinking whether they have the skills and expertise to make them work.
Lack of experience is one of the main reasons why businesses fail. For example, a person who has no knowledge of the retail industry will not know the most cost-effective sources to purchase inventory from, which products to stock, how much stock to hold, the mark-up to apply when setting prices and other industry-specific information. Without the specific expertise, needed to run a particular business, an investor is likely to make mistakes until they learn, increasing chances of losses and ultimately, business failure.
Therefore, before you invest in a business, it is essential to assess your own skills, talents and goals to gauge whether you have what it takes to manage it.
2) The investment required
According to research, only 50% of startups survive past their first five years while only 30% make it to the ten-year mark. Studies also show that 82% of new businesses face cash flow problems while 29% of those that fail to do so because they run out of cash. What do these figures tell us? Lack of investment is a major cause of business failure.
Before investing in a business, you need to assess the amount of funding required initially so that it can be arranged. If you are purchasing an established business, you need to have the sale price of the business plus some additional funds – you need to assess the company’s current working capital and cash reserves plus its receivables and payables to determine whether it needs some extra funding for operating activities.
For a new start-up, you will have to estimate the initial set-up costs (cost of acquiring office space, machinery, furniture, vehicles) and have cash-on-hand for operating expenses of the first six months at least, when revenues are likely to be low.
Once you know the required amount of investment, it is time to look into different financing options. A fast SBA loan, which is provided through a bank or other lender but guaranteed by the SBA, is a great option to consider. These are designed to support small businesses by offering them funding at a low cost. Other possible sources may include: personal savings, loans from family/friends, venture capitalists, angel investors and business credit cards.
3) The demand for your business idea
According to a research, the number one reason for new businesses to fail is a lack of market need for their product – a whopping 42% of start-ups fail due to this particular reason!
So, how do you find out if there is demand for your business idea? Consider market research in the following areas:
· The state of the industry – is it growing or declining? What are the biggest challenges faced by businesses?
· The different segments within the industry. For example, the car industry can be divided into segments such as family-friendly, luxury, environment-friendly etc. Look into how each segment is performing and which one you should target
· The customers within your target segment – their age, income, lifestyle, purchasing power, are some of the key factors in decision making related to your product
Thorough market research helps a new business understand its market so that it can produce a tailored product, thereby reducing the chances of failure.
4) The potential returns and their timing
If you are investing in a new business, it is important to remember that it could take a significant time before you are able to take home some of your profits. On average, only 40% of small businesses make a profit in their initial stages while 30% are able to break-even and 30% operate at a loss.
As you are a new business introducing your products for the first time in the market, it takes time to build brand awareness and gain the customer’s trust. And even when revenues are low, the business still has to pay its fixed costs such as rent, administrative salaries, utilities and interest on loans, resulting in little or no profit during the first year or two.
Profitability also varies from industry to industry. While some such as the financial services and software industry have higher profit margins, industries such as restaurant/dining and entertainment tend to be less profitable.
When evaluating investment opportunities, it is important to consider whether the return on investment and the payback period are in line with your requirements.
Before you invest in a business, it is critical to know the state of competition within your market. Find the companies with the biggest market share and analyze their marketing strategy, brand image and features, quality, pricing of their products to help you understand the factors contributing to their success.
Next, assess the other players in the market and their market positioning. For example, while some may focus on high price for high quality, there may be others focusing on offering an affordable product. This practice helps identify gaps in the market which you can fill with your business idea.
6) The risks involved
Before investing in a business idea, it is critical to evaluate the risks involved with the investment decision. Consider the following:
· The risks faced by the business – look into the impact of any negative factors that could affect the business such as the state of the economy, employee turnover, loss of major customers, fluctuations in customer demand. Through this practice, you can get an idea of the risks you could be facing in future and consider whether it matches your risk appetite.
· The impact of business failure on your personal finances –Business failure is likely to affect your retirement savings, credit rating and in some cases, can result in a loss of your personal assets or property if it has been used as security to obtain funding. Thus, it is essential to think about what you are willing to put on the line in return for your investment.
To sum up, investing in a business can bring many benefits but only if you make the right decisions. Keep the above factors in mind and you are sure to stay on track. Good luck!