How to Invest in a Small Business
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While often, more traditional investments tend to be the popular go-to's, such as real estate, stocks, and mutual funds, investing in a small business could be quite lucrative, depending on the conditions and terms involved. With investing in a business, there is the potential for a quicker turnaround where ROI is concerned. Not to mention, there is also the ability to make more money should the business take off as predicted. Even when comparing investing in the business to investing in stocks, historically the amount of money to be made on a business versus a publicly traded stock can be quite a bit more. In this article, we look at some of the strategies on how to invest in a small business.
How to Invest in a Small Business: Starting the Process
The first part of investing in a business is to find that business. That is to say, which companies are looking for investors? Are there any small businesses that you know of that are trying to raise capital for their company? This can be a tricky thing, as for many entrepreneurs their business is their baby, and giving up some control of that "baby" may be difficult for them. You need to find a company to invest in that seems to represent the right deal for you and whose owners are open to the idea of an investor coming on board.
The next step is going to be to meet with the owners or company principals. By talking with the owners of the business, you will get a better feel for what they're hoping to accomplish as far as taking on investors and also what they are looking to use the capital for in the context of the business. You want to use the opportunity to assess not only the business but the people you will theoretically be in business with.
Beyond simply interviewing the principals, you want to do your due diligence as far as the company itself is concerned. Ask to see and review all financials. See what economic shape the business is in and if it is prudent to invest in it. Look at any outstanding debts they may have, do these look to be beyond the company's ability to manage and pay off shortly? Some who are considering investing in a business will also go so far as to do a background check on the owners along with any aspects of the company applicable.
If after reviewing the business, you believe it will be a sound investment, you next are going to need to come up with terms. Generating an actual financial agreement to this end, and doing so with the help of an attorney, is usually a wise move. You will then sit down with all relevant company stakeholders to review the terms and conditions and consequently sign off on them. Finally, you are ready to close the deal. All parties involved will sign the agreements and then you will proceed to invest your funds into the business.
Sound Businesses to Invest In
Some small businesses are more sound investments than others. Depending on the industry, economic climate, and risk tolerance, you will want to gauge whether or not a certain company represents a good fit for you as an investor. Below are a few business types that you may want to think about putting money into by way of an investment strategy.
More and more entrepreneurs are realizing that they simply don't have the experience or knowledge set to handle all aspects of their company's accounting. And therefore, more and more businesses are outsourcing this particular role. Accounting firms, especially those willing to work with clients via an online capacity, are taking off. Their overhead is fairly low, which means they are not dumping a ton of money on outside and/or miscellaneous expenses. Most experts do agree that accounting-based firms are poised for rapid growth in the coming years. This, therefore, makes them a fairly sound investment.
Everyone always needs legal advice—this is true regardless of business type or industry. And of course, legal services can also extend to individuals who need the advice and guidance of a qualified attorney. Thus, investing in a legal services business could equate to big returns. Again, this is a business type with relatively low overhead—their main expense coming in the cost of human capital. That said, the revenue that legal firms bring in is usually quite high compared to some other types of firms. Among the more profitable types of legal practices are those specializing in intellectual property, personal injury, employment law as well as estate law.
What the pandemic saw was a major shift to e-commerce and online businesses. The demand for copy and content writers especially as we emerge from the pandemic is at an all-time high. Their overhead is almost zero as they require merely a computer, Wi-Fi, and very little else to perform their tasks. When investing in this type of business, you want to make sure they can grow and respond to increased demand; meaning, they need to be able to scale the company as they gain more and more clients.
Mobile Party Planners
As employees are increasingly scattered and companies have a presence in multiple locations, the need for mobile party planners as well as mobile caterers has grown and will continue to do so in the coming years. While yes, startup costs here can be higher than with some other company types, generally the revenue they can bring in more than compensates for this.
First Union Lending wants to help. If your small business is struggling because of the pandemic, we have financing options for you. With short-term loans, lines of credit, and merchant cash advances, among other loan types, we can get you the cash you need quickly. Call today and let's get started together!