Thinking about investing in a business? Ask these three important questions before jumping on board.
It’s understandable how many people become overzealous with the prospect of finally being able to invest their money in a business. And why not? It’s going to mean extra income, and hopefully, the business will be successful and lucrative. However, it is important that a new investor does not get carried away too much, and by too much it means not studying the business first before jumping on board.
There are many tales of new investors highly enthused about the opportunity at entrepreneurship, getting involved with business partners and rolling out financial capital to get the venture up and running. And then the honeymoon period ends and the new investor is instead faced with unmanageable overhead costs, measly profit and, for the most part, a pervading cluelessness as to how to sustain the business.
Needless to say, there are truly a lot of risks whenever anyone decides to invest in a business venture. It is not for the faint-hearted, some would say. Then again, it does not have to be pit trap of overdue, unpaid bills, exorbitant operational costs and unsatisfactory returns of investment. The risk will always be there, but it does not mean that it cannot be mitigated. This sordid tale of the new investor going broke even before he hit his stride and actually earns should not have to happen to you.
Of course, the presumption is that you would have done your research on the business proposal pitched to you before you give your thumbs up for the project and sign on that dotted line on your check. If not, then at least make time to ask these questions about your potential venture. The answers to these should help you discern better whether or not it is going to be worth your time, your effort and, of course, your money.
1) Is the business plan comprehensible and feasible enough for you?
This question is actually an internal one, more than anything else. It ranks first in this unofficial list, however, because this is going to be the basis of all your other questions regarding the investment. The point of asking questions is for you not to randomly throw out queries about things you know nothing about. Rather, it’s an opportunity for you to clarify or have the business proponent expound certain points in the business plan. If you don’t understand the business to begin with, how can you ask the right questions, and thereafter, derive the answers and solutions that could potentially prove beneficial for you and your venture?
Not because the opportunity could potentially click, and you think you have the money for it, doesn’t automatically mean you actually should invest in it. As financial experts say, it is never a good idea to place your bets on something you don’t understand. The argument that one can learn the ropes along the way doesn’t fly, too, in this case, considering how much there is at stake. For beginner investors, therefore, it wouldn’t hurt to stick with what you know in the meantime.
2) What’s the contingency plan?
After seeing – and understanding – the business and the corresponding operation and marketing plans for its actualization, the next thing you need to ask about is the exit strategy. While it is good to look forward to the best, it is also prudent and necessary to prepare for the worst.
What this allows is for the business or company to be able to face any possible threat or problems with as much intelligent decision-making as much as possible. The interest of the investors are just as important as that of the business operator, after all, and so if the would-be business operator could give you an avenue to step in, you should also be afforded the avenue to get out. It’s not that you are anticipating the failure of the business; rather, you simply would like to have a clear demarcation as to what property or business assets will be at stake should anyone pull out their investment from the business.
3) Do the costs add up?
Inevitably, money matters will have to be discussed. More than the expected cost at the start of the venture and the projected return of income once it gets running, many more expenses will have to be factored in. If your potential business partner would have done his assignment right, then the business plan should have a clear breakdown of these numbers. They need not be absolutely precise, but the estimation should be pretty close, and if possible, accounts for circumstances wherein budget will probably overshoot.
Needless to say, operational cost will be a constant factor in the equation. Rent or lease budgets, labor costs, logistics and others would ideally be taken care of by a revolving fund. Will the business be able to maintain this? How much of it can actually be turned into profit? What is the plan should the business merely make break-even returns? Remember, it’s your money that’s going to make up a significant percentage for all that, so it is in your best interests to clarify this matter as soon as possible.
Picking Your Investments Wisely
While risk-taking is inevitable in getting into a business, you can’t break the rules without knowing them first. There are plenty more questions to ask, but these three should be among, if not the first ones you throw at your potential business partner. There is no harm in asking, especially because it is your investment that is going to be on the line.
If you think your questions have been sufficiently answered, then by all means, go on and make that business happen. If not, you may want to consult further with a financial advisor. If that still does not make it clear enough for you, you may want to hold off on that partnership and instead find some other business that you will have a better working knowledge of. Although the potential may be unlimited, your resources aren’t, so pick your investments wisely.