You'll need to do your homework
Landers says you'll want to know the background of everyone involved in the management of the business and have an understanding of the industry and competition. You should request a full written business plan complete with a business description, marketing plan, financial plan, market analysis and a SWOT (strengths, weaknesses, opportunities and threats) analysis. Landers says entrepreneurs often have visions of grandeur for their business but lack the plans to truly implement them in practice.
"Every entrepreneur believes their business is going to be the best thing since sliced bread and they're going to be filthy rich. That rarely happens. Many go bankrupt," he says.
Coffman says when a startup does have a business plan, there is usually "very little to go on." The attention to detail, professionalism of the founders and presentation of their plan should serve as a representation for how they might operate when in business. Coffman says you should carefully analyze projections or representations made in the business plan and use outside sources to vet it.
"They may have fantastic projections on (projected cash flows), but they usually aren't that credible," Coffman says.
Pratt recommends that potential investors consult with their CPA or a business valuation expert before making the final decision to invest.