According to the latest available data from Spain's National Statistics Institute (INE), there are 122,838 small businesses in Spain, defined as having between 10 and 49 employees and revenue of no more than €10 million.
Many of them are hidden gems. If you want to invest in one, it's essential to do thorough research and consider several key factors that will help you make an informed decision. Here are 10 aspects you should analyze:
Risk vs. return
To begin with, investing in smaller companies usually carries more risk than investing in larger companies, which are more resilient because of their size. They're more volatile and sensitive to any market change, they tend to depend more on a few customers, and they have more limited access to financial and human resources.
That said, in terms of return, they have their appeal:
- Their growth potential is greater than that of a larger company.
- Investing in a small business at an early stage can give you the opportunity to take a significant stake and benefit from its future growth.
- They're more agile and flexible in adapting to changes in the market or industry. This can allow them to seize new opportunities and respond quickly to customer needs.
- They have greater potential to be acquired by larger companies, which can generate a positive return for investors.
Business analysis
Research the company you're interested in investing in thoroughly. Get to know its business model, products or services, current financial position and future projections, and competitive advantages. Review its performance track record and analyze how it has dealt with past challenges. Due diligence will help you understand all of the company's financial ratios in detail.
Industry and market
Examine the industry the company operates in and analyze the growth potential of its target market. Consider macroeconomic factors and trends that could affect the industry in the future. Get to know its competitors and how they differentiate themselves in the market. An in-depth analysis of the environment will help you understand the context in which the company operates and assess its competitiveness.
Management team and experience
Find out who the company's executives are. Assess their experience, skills, and ability to meet challenges and make strategic decisions. A solid, experienced management team can be a positive indicator of the company's future success.
Sustainability
Sustainability is an increasingly important value for any type of company, regardless of its size. For a small business, the value of sustainability becomes even more relevant, as it can have a significant impact on its long-term success and its ability to thrive in a changing business environment that is increasingly conscious of the environment and social responsibility.
Legality and compliance
Make sure the company complies with all regulations and legal requirements. Consult legal and accounting advisors to verify the company's regulatory compliance status. A business that complies with the law is more stable and carries fewer legal risks.
Protecting your investment
Make sure you have a solid investment agreement that protects your interests as an investor. Consider the terms of the investment, such as the percentage stake, rights and responsibilities, and the conditions for a potential exit.
Liquidity and investment horizon
Keep in mind that investing in a small business may require a long-term commitment, since liquidity can be limited. Consider whether you can afford to commit to the investment for an extended period.
Positioning
When investing in a small business, taking on a certain level of control or active involvement can be a strategy for protecting your interests as an investor and contributing to the company's success. However, how much control you can take on will depend on several factors, such as the size of your investment, the agreement in place, and the willingness of the founders or current shareholders.
Professional advice
Consult financial advisors and professionals with experience investing in small businesses. Their knowledge and experience will help you make better-informed decisions.
Now that you know what to consider before investing in a small business, sign up on our website and look for a company that fits your investment goals. More than 1,950 registered companies are looking for a partner to strengthen their financial muscle.
