The Business This is an obvious one. An investor needs to understand the business in which he/she is investing. Like Peter Lynch’s investment maxim says ‘Invest in what you know’. It will be difficult to be cheated in an investment, if you understand the rubrics of that business. Before investing in a business, study the business; the more you understand the business, the more confident you’ll feel about the investment. Additionally, talking to an expert – someone who knows the industry that interests you – can also help.
In addition to understanding the business, it’s important to understand the growth of a business. Consider how the venture is growing – is its growth organic or does it have more of a buying growth? Also, consider how the company will grow. To help with this, an investor will need to dig into the key financial statements of the venture like the balance sheets, income statements and cash-flow statements.
The Exit Strategy
Understand and know the exit scenarios for the industry that will be best for you. As a responsible investor, it’s best to always be prepared and have an exit plan laid out either for when the venture reaches the ideal scale intended or when the venture doesn’t seem to be yielding the returns you expected. Either way, always have an exit strategy of some kind for every business investment.
A good number of investors overlook this very important factor, and end up running from pillar to post seeking legal counsel when things go wrong. Be sure to seek legal counsel on all crucial steps of the investment and be sure that every legal document associated with the investment is shown to a trusted lawyer for feedback. Prevention will always be better than cure, and in legal matters, ignorance or oversights is not an excuse. So avoid the avoidable by seeking legal counsel; you don’t have to agree with all your lawyer’s points, but you should at least understand them and make your decision based on that understanding.
Your Comfort Zone on Risk Taking
All investments have some form of risk associated with it, so it’s therefore important to understand the risks of a business investment and first decide if the risks are what you can bear. If you can’t bear the worst case scenario and have no plan B to help deal with the worst case scenario, then it’s advisable to refrain from such investment. You must always consider your propensity for risk before putting your resources in a business investment.
Circumstances that Can Lead to Fraud
This is one of the most important factors on this list. There are a lot of scam artists out there looking to lure potential investors into their trap by making their ‘opportunity’ sound legitimate. But there is a limit to how well they can do this, and if you’re careful and vigilant enough you’ll be able to see through their facade. As a responsible investor, ensure you do your research well beforehand, ask questions and check out the answers with unbiased sources before you invest. Also, never rush into an investment. In fact, any investment that puts pressure on you or tries to rush you into it, is a fishy one. You should tread carefully. Always take your time and talk to trusted family and friends before investing. Never for any reason rush into an investment, regardless of the pressure.