With over 28 million small businesses in the United States, investing in small business promises growth and significant returns. Unfortunately, there is little market research done to determine the value of individual companies, so you could stumble upon a money-making company just as easily as one going bust. To avoid investing in companies headed south, you will need to bring a few requirements to the table. Included here are a few things to know about a small business before you invest.
Know the Gross Margin and Expansion Capacity
When looking into a company, you are first going to want to consider what product or service they are providing. The difference between the cost of producing that product and its sale price is what is considered the gross margin. Every industry will have its own standard gross margins and you will have to take into consideration the development of the company and how much room there is for expansion.
In some industries, gaining a larger gross margin, resulting in higher revenue, is an easy enough task to complete. You can simply purchase lower-cost ingredients, or automate productions, and gain revenue. However, in other industries, it can be impossible to cut back your overall production costs resulting in a stagnant gross margin percentage. Consider how much potential each company has to grow before you commit to investment.
Assess the Brand Strength and Potential
The first thing to think about in relation to brand strength is: “is this company offering something unique?” If you are investing in a company that is doing the same thing that ten other successful companies are doing, they will likely be a flop. The small business must be coming out with something that is significantly better and different from what is already out there.
Know the CEO
In small business, leadership is everything. Larger companies are able to benefit from a buffer of advisors and cumulative leadership, but small businesses are often made and broken by their CEOs. It is wise to run background checks and get references on a CEO before choosing his company. Spend time talking to the CEO and make sure they know their product inside and out, understand their mission and have passion for the company.
Understand Your Recurring Revenue
Recurring revenue is money that the company continues earning on into the future. This is often money that is generated by customers making repeat purchases of your product. Because it is as much as six times more expensive to gain a new customer than keep an existing one, it is critical that companies are retaining a strong consumer base. This revenue can be used as a basis for future growth and investments as well.