Due Diligence For Businesses

Today’s guest post is from James at DINKS finance:

This posting will be on the topic of doing due diligence when evaluating investment opportunities. When I’m talking about investment opportunities, I’m speaking specifically about taking part in new business start ups. I’m not speaking about investing in stocks or loaning money to people at interest. To invest properly in new businesses, you’ll have to do what’s called “due diligence” or simply put you need to do your homework.

Here are some thoughts on doing this:

1) Research the market. All business operate within given markets. You should consider the demand for the product or service that your candidate business would produce. For example, if you might be considering investing in an internet start up. In this case you should consider the demand for the software or service the company is producing. Is it an American company which is feeling pressure from Indian or China? Is the product going to be used by a growing industry? So, to summarize you might consider using the internet to get a sense of the market.

2) Talk to People. An acquaintance of mine took a position in a chain of Buritto restaurants in Louisiana. After hearing about the opportunity from his father he went to the restaurant and talked with the employees and a couple of the customers. In addition to talking with the businesses staff, you might also consider speaking with people you know who are knowledgeable about the industry you’re considering. For example, when my wife and I were thinking about doing a real estate development in Portland, we talked with my uncle, who is a contractor and keeps an eye on trends on real estate on the west coast. With his help we were able to determine that the proposed development wouldn’t be profitable, so we decided to shelve the idea.

3) Go Over The Numbers. You might consider sitting down with a spreadsheet and figuring out what the projected profit and loss numbers look like for the first two years of your prospective businesses. Consider factors like projected profits, the probability of losses, tax implications, staffing costs, etc. If under a set of reasonably conservative expectations your company wouldn’t be make money then you should think twice about investing. The main point here is to put some numbers to the situation to critically about the company’s potential profitability.

Finally, direct investing can be both a challenging but very rewarding experience. However, to avoid losses you’ll need to exercise due diligence. Hopefully these tips will help you think critically about how to do this.

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