Whether you are considering in investing in an existing business or investing in building one yourself, it is important that you really take time to evaluate whether it is a good investment or not. You wouldn’t invest in a property if you weren’t sure it was a good investment, the same way you wouldn’t invest in certain stocks and bonds without reasonable assurances that you could make a good return.
Now, you must apply that wisdom, knowledge, and understanding to business. Below, I am going to give you questions you need to know in order to decide if a business venture is worth the investment you are making.
Investing in Business? Ask these 9 Questions First!
1. How will my money be returned to me?
This is perhaps the most important question you want to ask. There’s not much more I need to say here, but verify, verify, verify. Also, get it in writing. Make sure whatever contract you sign, it is clearly defined how your money will be returned.
If you’re starting your own business, you need to know how you will make money. This is a fundamental piece of the business model, and if you don’t have one, create one now!
2. In what time frame will my money be returned to me?
Once you know how your money will be returned to you, it’s important that you know when it will be returned. Now, there isn’t a “best” time frame for an ROI, rather, it’s whatever is best regarding the investment you made.
For example, our investors in Tricord get their initial investment paid back in a time frame based on how much they invest. They are notified of the time frame, and they sign a contract acknowledging they are aware of and agree to the time frame for their return. Could you say the same for the investments you’ve made?
3. Do I have the time to evaluate it?
Not every investment is a good investment. You need to take time to evaluate the risk and reward, which we will talk about later, as well as the potential cash flow. When I’m teaching real estate, I tell my students that they have to work the numbers out on every property they are considering purchasing. Any investment can look good on the outside, but take time to evaluate the inside.
4. Do I have the time to monitor it?
There are certain investments, like stocks, that take a lot of time to monitor. There are other investments, like real estate, that can require less time monitoring. You can hire people to monitor your investment for you, just make sure you trust them and they are good at what they do.
Whatever investment you make, you will need to monitor it at some level. If you have the time, whatever that looks like, then good!
5. What is the risk/reward ratio?
Any investment you make will involve risk. Businesses can be especially risky because there is a huge potential for failure. Make sure you are confident in those running the company (even if that’s you), and you are confident in the business model. Compare the risk to the reward, and make sure the investment makes sense.
6. Is the return tax advantaged?
I know we’re talking about business, but I’d like to use the example of real estate here. When you invest in real estate, there are certain tax advantages which are really what sold me. For example, you can have capital gains exclusions on vacation properties.
What is the tax advantage of investing in the business you’re considering? If you don’t know, you better find out!
7. Where does it fit on my financial plan/balance sheet?
Your net worth is your assets minus your liabilities (debts). When you are considering investing in any new venture, you have to consider how it would look compared to your balance sheet currently. Does it fit in? You never want to have too many liabilities, especially if they outweigh your assets.
8. Do I understand the investment?
The bottom line is that you need to understand what you are investing in. I used to own a franchise of hair cutting salons in Texas. Now, I couldn’t walk in there and cut someone’s hair, but what mattered was that I understood franchises. I knew what I was investing in, and I understood how franchises worked.
9. Am I making money “going in”?
If you’re starting your own business, there’s something called “bootstrapping” which basically means that you earn money upfront. For example, if you have a burrito stand, you make money as soon as someone purchases a burrito. You don’t have to wait for anything to get your payment.
To connect it to real estate again, I always say that “you make money when you buy, not when you sell.” Why is that? Because you need to buy properties with inherent value and potential so that you can make money later on, either in renting it or selling it. The same is true for investing in businesses. You have to know that it’s going to give you the opportunity to make money.
What other criteria do you think a good investment has? Let me know in the comments!