How can you Invest in Small Businesses

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A small business investment opportunity can help many business owners make their dreams a reality.
At the same time, investing in small companies can help you diversify your portfolio and build wealth.
Here are 9 steps to invest in small business opportunities successfully:

1. Find the Right Deals​

If you want to invest money in a business, your first step should be to find the right small business investment opportunity.

Here’s how to find the right entrepreneurs and deals for you:

Find entrepreneurs in your own network
Find investment opportunities on Mainvest
Find entrepreneurs and deals on social media
Connect with your university alumni and/or professors
Go to your local Small Business Administration (SBA) office
Join your local Chamber of Commerce to connect with entrepreneurs
Keep in mind that investing in small companies is no easy feat because not all small businesses are seeking investors.

Here’s why:

Some small businesses may not be ready to give up ownership interest in exchange for equity
Some small businesses may already be fully leveraged and cannot make additional loan payments
Investing in a business means you need to take the time and effort to go through each deal with a fine tooth comb to find the best offer out there.

2. Do Your Research
Before you invest money in a business – whether it’s a small business or a large business – you need to do your research.

This is when you need to carefully review:

Potential risks
Business plans
Growth potential
Business strategy
Outstanding loans
Financial projections
Market opportunities

Here are some additional questions you may want to ask the company leadership first:

Is the business scalable?
How big is the potential market?
What returns are you expecting?
Will you have any additional investors?
How do you plan to use my investment?
How hard is it to acquire new customers?
How often can I expect to receive updates?
How healthy is the cash flow in the business?
How long have you been running your business?
How did you calculate your company’s valuation?
What are the company’s future financial projections?
Will your product/service generate recurring revenue?
Are you running your business alone or will you have partners?
How much of your own money did you invest into the business?
Understanding how to invest in local businesses successfully means you’ll have to be as thorough as possible when you’re researching the small business’ pros and cons.

3. Understand How the Business is Funded
Investing in a small business requires knowledge as to how the business is funded.

Some ways to fund a business include:

Debt investing
Equity investing
Angel investors
Second mortgages
Venture capitalists
Business credit cards
Home equity lines of credit
Small Business Administration Loans (SBA Loans)
If you’re thinking about investing in small business opportunities, you really need to understand your funding options.

Finally, investing in local businesses also means you’ll have to evaluate how the business is currently funded and the company’s status when it comes to:

Default status
Current debt level
Assets versus liabilities
Liquid versus illiquid assets
Successfully investing in small business opportunities means you’ve done your research and understand the business’s current financial position.

4. Ask for a Business Plan
Any small business investment opportunity will require you to thoroughly review a business plan.

Here are some of the items that go into a business plan:

• Balance sheets
• Market analysis
• Revenue streams
• Cash flow statements
• Operational procedures
• Legal business structure
• Marketing and sales plan
• Resumes of leadership team
• Capital expenditure budgets
• Financial plan and projections
• Licenses, permits and patents
• Customer acquisition channels
• Products and services description
• Organization and management team

Investing in a small business means you need to be 100% clear about how that business will make you money – and that information is always spelled out in the business plan.

5. Get to Know the Management Team​

When investing in a small business you should focus the majority of your time on the management team.
The management team is responsible for:

• Leading an organization
• Communicating a shared vision
• Ensuring proper organizational governance
• Executing the strategies within the business plan
• Monitoring and reacting to external factors appropriately
• Conducting risk assessments and risk mitigation activities.

Here are some questions you’ll want to ask the management team:

• What is your background?
• What relevant experience do you have?
• What is your key motivation to succeed?
• Are you involving experienced advisors to help guide you?
• What makes your team able to execute the business plan?
• How much of your own money did you invest in the company?
• Describe the dynamic between you and the leadership team?
• What is your plan to scale your leadership team in the next 12 months?
• Which key additions do you foresee in the management team to fill the gaps?

If you want to invest in a local business, talking to the management team is the best way to get a feeling for the character of the ownership.
In other words, are they:

• Kind
• Ethical
• Honest
• Relatable
• Experienced
• Willing to listen
• Enjoyable to be around
• Utilizing experienced advisors

Since you’re planning to be a future investor, you need to make sure you would want to be in business with the current management team.

6. Negotiate Terms​

Negotiating is part of the business game.
If you’re planning to become an equity investor, you’ll want to negotiate:

• How much you’ll finance
• An ownership percentage
• Your percentage of profits

On the other hand, a debt investment means you’ll want to negotiate:

• The loan amount
• The company’s repayment time frame
• The interest rate you’ll earn on your loan

Often, it’s a good idea to have a lawyer draw up these documents.

7. Understand How You’ll Get the Money Out​

An investment in business opportunities means you’ll need to be crystal clear about how you’ll be repaid.
If you invest in local businesses, here are some questions you should ask:

• Will I be an employee?
• Will I be paid consulting fees?
• Will I receive quarterly dividends?
• How will I get money out of the business?

For example:

• Will you receive a K1 partnership return?
• Do you need to elect an S Corporation status?

This is a conversation you should best have with your accountant or CPA.

8. Close Deal​

Investing in a business all comes down to real-life experience and reading the fine print.
After you’ve reached an agreement with the business owners, the next step is to actually close the deal.
This is when you:

• Sign the paperwork
• Pay the capital (or make a loan)