Many investors are looking for the next big thing. If you want to make a decent return, you shouldn’t be looking for investments that have already reached their full potential in their particular markets. Instead, you should be investigating investments that still have the possibility of large growth.

Something many people may be looking to invest in is a new small business. If you get in before such a business rapidly expands nationally or internationally, you can make a lot of money. 80% of businesses fail, you need to make an educated decision on what small business to invest into if you want to save your money. Here are some tips on what you should look for.

Don’t Invest in the Business of Someone You Know

One of the biggest mistake people make in regards to investing in small businesses and start ups is being hooked into an investment due to pressure from someone they know. This could be a family member, a friend, a former classmate, a business associate or any of number of different people. However, such an investment should be made based on facts and not bias. Investing because you know the business owner is always a biased decision, and that bias can often result in serious errors.

Look at the Business Plan

It’s one thing for a new business idea to sound good in conversation. However, you need to get into the fine details to really understand whether or not it’s feasible or if the small business owner really has the acumen for long term success.

The business plan should include minute detail regarding how the company will produce revenue from day to day as well as it’s more long term goals for expansion. All of it must sound realistic and feasible.  The existence of a business plan increases the chance of success for a business by two fold.

Calculate Downside Risk

No investment should be made without first knowing the risks inherent in the proposition. You too should also calculate the downside risk when what you are investing into is a small business.

Plot out a number of different possible outcomes including what will happen if the business is profitable, what will happen if it becomes insolvent and what will happen if it breaks even. Also include the strength of the financing beyond your stake in funding the business for the long term. If they company runs out of money, will it be able to borrow more to continue?

Consider the Legal Aspect

Investing into a small business should not be done without extreme care. You, for one, should not be lackadaisical about the legal aspect. If you are, the business owner could renege on the deal, and you could have no ability to prove so in court.

Hire a lawyer with years of experience in business law to work out a contract that includes all the details and expectations for the deal. That way, if something goes sour with the relationship, you will have an extra layer of protection to make sure you aren’t swindled out of your money.  9% of contracts result in legal disputes.

Do Your Own Market Research

Don’t trust the small business owner’s claims about the likelihood of a business idea taking off in the market. If your proposed investment is sizable enough, do some of your own market research to verify that claim. If you find, for example, that the market is already saturated with direct competitors, the investment may not be a good idea after all.

Overall, making the right investments requires a lot of work. Make sure to do the research to determine whether or not an offer to invest into a small business is really a good idea. If you are more educated on the company and the market, you will be much more likely to see a return on your investment.

 

Author Bio:  Jeremy is a tech and business writer from Simi Valley, CA. He’s worked for Adobe, Google, and himself. He lives for success stories, and hopes to be one someday.