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Red flags are factors that are specific to an industry or business and raise concern with investors.
Following is a list of the most common Red Flags, and how you can use them to your advantage to close your deal.
Your industry has a high failure rate. Certain businesses, such as retail stores and restaurants, have a particularly high failure rate. Before you pitch a business idea to investors, research the failure rate in your industry. If it’s above average, don’t hide from it. Illuminate the most common reasons these businesses fail, and how you will overcome these challenges.
Your industry depends on heavy legal or government regulation. Sometimes investors are reluctant to invest in industries that are subject to high levels of legal regulation. Additionally, if the success of your product depends on a government bidding process, or government approvals, then investors may raise concerns. Seek out investors that are comfortable and have history with this type of deal.
You have key operations in different locations. In a fast moving business, having your head office in one place and your key operations in another will make investors nervous because it will be hard for everyone to keep up on the same page. Key managers and operations should be close and investors should have a clear understanding of how you manage external resources.
Your business only offers a small return to investors. Even if investors can see that your idea is sound, that you’ve got the right team together, and that it’s the right time for your product, you’ll struggle to attract investment if anticipated returns are too low. This is a common problem with lifestyle businesses. Find investors that would like to be a part of the lifestyle business for the long term.
Always remember to identify red flags in your business, then use them to your advantage. Have a plan in place that wins the confidence of investors and closes the deal you want.