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Question
What are the possible questions to ask when planning to invest in another person’s business?
Answer
So, you are considering investing in a business. Well, there are several questions to get answers to before doing so. Let’s take a look at some of these relevant questions.
- How does the business make money?
Dive deep into the revenue sources. You need to understand the intricacies of the business model – whether revenue comes from direct sales, subscription models, licensing, or other avenues. This helps you to see how sustainable the income is and what to expect.
- Is the business making a profit or just breaking even?
After ensuring that adequate records of their financials are taken, scrutinise financial statements to assess the profitability. Is there any balance between the revenue and expenses? A business consistently in the black, that is, making profit, signals financial stability, while constant break-even or losses might raise concerns to you.
- What’s happening in the market? Any competition?
Next, you want to conduct a thorough market analysis. Research and evaluate the industry trends, potential for growth, and any looming challenges. Identify competitors and understand how the business positions itself in the market.
- Who’s running the show? Are they experienced and trustworthy?
You will agree with me that businesses are run by people. It is not enough to focus on the numbers, as the people and management have a huge effect on the business. Look into the management team’s track record. Assess their experience and expertise. Trustworthy leadership is crucial for long-term success.
- How will I get back my money?
You should be clear on the exit strategy. Understand the mechanisms for returns on your investment – whether it’s through profits, dividends, or a potential sale. Discuss when you can reasonably expect these returns, too!
- Is everything legal and in order?
Check out the legal landscape. Does this business adhere to all regulations as you do not want your money hanging as a result of legal challenges? This means taking extra time to examine contracts, licenses, and potential legal issues that could impact the business. A clean legal standing is essential for stability.
- Are there risks involved? How will the risks be handled?
The truth is, every business comes with a level of risk. As an investor, it is your responsibility to identify potential risks and mitigation strategies. Take a step further to discuss potential challenges this business might face and how the management plans to address them. A well-thought-out risk management plan showcases preparedness and secures your investment a great deal.
Do not shy away from asking these questions. Ensure you get answers to them and are satisfied with the answers before investing in any business. By delving into these details, you equip yourself to make well-informed investment decisions. When in doubt, seek professional advice for added clarity and guidance.
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