NAICS codes, short for North American Industry Classification System codes, are an important tool for analyzing investment opportunities across different industries. Getting the right 6-digit NAICS code is crucial when starting a business, filing taxes, applying for licenses and permits, and qualifying for government contracts or SBA loans. This article will examine what NAICS codes are, why they matter for investments, and how investors can leverage NAICS data in decision-making.
NAICS codes help categorize business activities and structure investment analysis
The NAICS classification system provides a consistent framework to collect, analyze, and publish statistical data related to the US economy. The codes allow investors to quickly segment businesses into various industries and sub-industries. When researching a potential investment, understanding the target company’s NAICS code provides insights into its competitive landscape, growth trends, cost structures, and risk factors. NAICS codes power various investment research tools and government economic reports that investors utilize to inform capital allocation decisions.
NAICS code accuracy is required for many regulatory and lending purposes
For entrepreneurs starting a business, properly assigning a NAICS code is crucial to satisfy various legal and compliance requirements. The NAICS code must be accurately reported when applying for federal or state tax IDs, business licenses, SBA loans, and other financing programs. Government agencies use NAICS codes to monitor economic policy, implement regulations, and enforce standards tailored to specific industries. Certifying bodies require NAICS codes to confirm eligibility for minority-owned, woman-owned, or disadvantaged business certifications.
NAICS classification influences eligibility for government contracts
A company’s assigned NAICS code also determines if it qualifies to bid on certain lucrative government contracts. Many federal, state, and municipal contract opportunities are reserved for Small Business Administration-designated small businesses within a particular NAICS industry. Veterans can qualify for veteran business certifications under certain NAICS codes to access set-aside contracting programs. So properly classifying your business via NAICS codes expands access to public sector business opportunities.
NAICS codes help investors identify industry-specific risks and growth trends
As an investor assessing a potential opportunity, analyzing the NAICS code provides useful context on business conditions. The codes allow parsing growth trends, regulatory shifts, cost inflation, and disruptive forces affecting sub-sectors differently. A company classified as Accommodations under NAICS code 721110 faces very different tailwinds and headwinds than one classified under Computer Systems Design Services under NAICS code 541512. This differential insight supplements traditional financial modeling and valuation methodologies during investment analysis.
In summary, NAICS codes serve as an important categorization tool for businesses and provide invaluable signals for investors evaluating opportunities within specific industries. Accurately assigning and reporting NAICS codes unlocks access to lucrative government contracts, targeted small business loans, and industry-specific investor data.