Sunday, 15 November 2015

Why You Should Invest In A Business? Read This Before You Make A Small Business Investment

“Don’t work for money, make money work for you”  - Robert Kiyosaki.

While the monthly paycheck at your job is a steady source of income, you must not stop at a single source. You should build financial assets which can grow over time and generate long term wealth. With the current inflation rates and growing consumer demand, your expenses will soon outgrow your salary hikes.

There are various ways to invest in financial assets. Common ways are investing in fixed deposits, mutual funds, gold, real estate, stock markets, etc. Investors who are a little adventurous invest in the stock markets. A dismal 2% of Indian investors invest in the stock market, compared to almost 50% in the US. While every form of investment has its own advantages and risks, the best long term investment has been stock investments. Investing in publicly listed companies provide, what we call a “passive form of investing” in a business. As a retail investor, neither can you play an active role in shaping the company's future nor can you participate in any decision making process for the company. On the other hand, investing in a small business provides a way for the investor to be actively involved with the business owner and shape its future. What’s better than investing in a business which operates in an industry you are passionate about?

Small business investment is probably the best form of equity investment where you can play an active role in growing your invested capital. It could be a simple main street business like a restaurant / beauty salon / supermarket to a complex manufacturing unit or a software business. The satisfaction of adding value to these businesses and helping them grow excites many investors.

But how and where do you find such businesses? It is important to pick the right kind of businesses to invest in and also speak to many business owners before you make a decision. One of the primary factors to consider is the passion you have towards the industry. This will dictate your involvement and the level of impact you can have on the business. After assessing your interest in the sector, you will have to assess the business on several other scales before taking the plunge.

Business Growth - Is the business on a growth track or is it ready for growth? You could get this information from the audited statements of the business.

Profitability - Does the business have large enough bottom line or does it operate on a very thin profit margin? Is there a way where you could improve the profit margins? This could help you determine how resilient the business can be during business cycles.

Promoter background - Investors should do a background check of the business owner either by hiring an external agency or reference checks for fraud, tax evasion and criminal record. There are several reports such as CIBIL, RBI defaulters list, etc which can be accessed to find financial defaults committed by them. It is important that you do basic due diligence on the promoters before investing in them.

Macro view of the sector - You should study the macro perspective of the sector and geography before making an investment. What seems like a good investment in one location may be a dying sector in another location. It is advised to connect with as many business owners as possible in the industry and related industries to get a perspective of how the industry is shaping up.

After these basic parameters have been scrutinized, most investors go by a gut feeling/belief that the business they have identified will go on to become a successful and stable business. Once you invest in a business, you have the option of working closely with the business owner with the shared vision of taking the business to the next level. Clear communication and objective ways of measuring outcome should be enforced so there are no misunderstandings. If the investor has complementary skills, which could be in the form of marketing, branding, technology, logistics etc, it should be used to the business’ advantage and this can accelerate growth.

In conclusion, small business investment is a safe option with high returns and give you the satisfaction of playing an active role in something you are passionate about. But identifying the right sector, business and building a good relationship with the business owner are key to making such investments successful. After all, which industry do you think produced the largest number of billionaires in the world? Investments"

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