Investing in a small business can be a rewarding way to grow your wealth and support entrepreneurs. It offers the potential for high returns and a sense of personal involvement. However, small business investments also carry significant risk. Many businesses fail within the first few years, and without careful evaluation, your money could be lost. That’s why asking the right questions before making a decision is essential. In this guide, we’ll walk you through the 10 most important questions to ask before investing in a small business so you can make an informed and confident choice.
1. What is the business model and how does it make money?
Before you invest in any small business, you need a clear understanding of how it plans to generate revenue. The business model should explain who the customers are, what the product or service is, and why people will pay for it. This isn’t just about understanding what the business sells; it’s about understanding the entire process of how the company turns a profit. If the explanation is vague, confusing, or overly complicated, it may be a red flag. A solid business model is easy to understand and backed by real market demand.
2. Who are the founders and what is their track record?
The people behind the business are often the most important factor in whether the company succeeds or fails. Take time to get to know the founders. What is their professional background? Have they successfully run businesses before? Do they have experience in the industry? Passion and ambition are important, but proven experience adds another layer of security. Look for founders who are transparent, knowledgeable, and honest about both their strengths and weaknesses. You want to invest in people you can trust to make smart, ethical decisions.
3. What is the current financial situation?
It’s essential to review the financials before investing. Ask to see the latest profit and loss statement, balance sheet, and cash flow statement. You need to understand how much revenue the business is generating, what the expenses are, and whether it is currently profitable. If it’s not yet profitable, ask when they expect to be and how they plan to get there. Be cautious of overly optimistic projections that aren’t backed by data. Understanding the financial picture helps you judge how secure your investment will be.
4. How much capital is the business raising and how will it be used?
When a business is seeking investment, it should have a clear plan for how the money will be used. Will the funds go toward hiring, marketing, product development, or paying off debt? You also need to know how much they’re trying to raise in total and how much equity or return you’ll receive in exchange. Make sure your investment fits into the overall fundraising strategy and that the expected use of funds aligns with growth and sustainability. Vague or shifting answers to this question are a serious warning sign.
5. What makes the business different from competitors?
Every market has competition. A smart business owner should be able to clearly explain what makes their business stand out. Is it a unique product? A better customer experience? Lower prices? Proprietary technology? Understanding what sets this business apart helps you determine whether it has long-term potential. If there’s nothing that truly makes it special, it might struggle to attract and retain customers. A strong competitive edge gives a small business a better chance of survival and growth.
6. What are the biggest risks and challenges?
No business is without risk. Ask the founders what they believe are the biggest threats to their company. These could include market competition, supply chain problems, regulatory hurdles, or even economic downturns. A transparent and thoughtful answer shows that the team is aware of potential pitfalls and has a plan to handle them. Be wary if the founders dismiss risks or claim that nothing could go wrong. Being realistic about challenges is a sign of maturity and good leadership.
7. What does the exit strategy look like?
Before you invest, you should understand how and when you’ll be able to get a return. This is called the exit strategy. Will the business be acquired by a larger company? Are the founders planning to go public? Will they buy back your shares in a few years? Or will you receive dividends over time? Small business investments are usually not liquid, meaning you can’t sell your stake easily. Having a clear idea of how and when you’ll get your money back or make a profit is essential to your decision-making process.
8. What are the legal and regulatory considerations?
Every business operates within a legal framework. You’ll want to know whether the company is fully compliant with all licenses, permits, and industry regulations. If the business operates in a heavily regulated field like food, finance, or healthcare, compliance is even more critical. Ask if there are any pending legal issues or disputes. Make sure that any investment agreement you sign has been reviewed by a qualified attorney. Legal problems can quickly destroy even a promising business, so this isn’t an area to overlook.
9. Who else is investing, and what are the terms?
Knowing who else is investing in the business can provide valuable insight. Are there any well-known investors or experienced entrepreneurs backing it? If so, that’s often a sign of credibility. You should also ask about the terms others are receiving. Are you getting the same deal as other investors? Is there a lead investor setting terms? Understanding your place in the investment structure is crucial. You don’t want to invest under unfair or unclear conditions. Transparency builds trust and helps you feel confident moving forward.
10. How involved will you be as an investor?
Some small business investments are completely hands-off, while others might give you a more active role. Depending on your preferences, you might want to contribute beyond just funding. Will you be able to offer advice, join board meetings, or help with strategy? Or is this a passive investment with no involvement? Clarifying this upfront will help avoid misunderstandings later. Make sure your expectations align with what the business needs and wants from its investors. A good fit benefits both sides.
Bottom line
Investing in a small business is not just about putting money into a good idea. It’s about understanding the people behind it, the market it serves, and the challenges it may face. By asking the right questions before you commit, you protect yourself from unnecessary risk and increase your chances of success. Every investment carries some uncertainty, but due diligence can help you avoid surprises and build confidence in your choice. Whether you’re investing a small amount or making a larger commitment, these ten questions will guide you toward smarter, safer decisions.
