What you should consider when investing in a business

Investing in a business is a daunting decision. Whether you are investing in a new or established enterprise, there will always be risk involved. The best way to mitigate these risks is to gather as much information as possible on the enterprise you wish to invest in.

But how do you go about gathering this valuable information?

  1. Basic knowledge of the entity will be gathered at the beginning, through a general description of the entity and industry it operates in.

During the basic evaluation, you should determine if the entity is trading in an industry that you wish to align yourself with, whether you have experience with the product or service provided and the current economic environment.

  1. An informal sit-down should be organised, a meet-and-greet if you will. It is generally expected to enter into a non-disclosure agreement with the entity before any sensitive information is shared.

At this point, it is good practice to appoint an independent advisor that can assist with the negotiations and even act as a mediator to ensure that all parties are heard. This way the parties become familiar with one another and you gain insight into the basic operations and management of the entity.

  1. Should you proceed, a due diligence of the entity should be considered.

During the due diligence, a detailed evaluation of the company’s records will have to be performed.

Since there is a vast amount of documentation to consider, some of the core information that should be requested and considered is:

  • Financial statements for the previous 3 to 5 years;
  • Management accounts to date;
  • Dividend history;
  • Forecast of profits, investments and planned asset purchases; and
  • A tax clearance certificate.

Through the above information, you will be able to determine the profitability and growth opportunity of the entity.

  1. Should you like what you see after a due diligence has been performed, a formal sit-down should be arranged between parties to negotiate the terms of the investment.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted. (E&OE)

What should you consider when investing in a business

You have worked hard for many years, and have finally saved enough funds and mustered the courage to take the big leap that you have been dreaming about for such a long time… you are going to invest in your own business.
 
You have found the perfect business and is excited about your new journey, when you suddenly realise, however, that you have never been in this situation, and suddenly have no idea what to do next.
 
The first step
 
It is important to understand what you wish to gain out of your investment. Some people may solely invest in a business for financial gain, while for others it may be fulfilling a life-long dream, or to chase a very specific passion, such as having the opportunity to jump out of an airplane every single day through your newly acquired skydiving school, for instance.
 
Although motivation will differ for each person and will likely include a number of factors, it is important to understand what drives your decisions, in order to invest smartly.
 
Start with the end in mind
 
Once you understand the why behind your investment decision, it is a good principle to start with the end in mind. Ask yourself where do I want to be in the next three to five years (skydiving every day, the richest person in my street, having loads of free time, etc.) and how you will be able to leverage your business to get you there.
 
Good questions to ask might include –

  1. Is the business scalable (the ability to multiply a business model);
  2. Is the business labour / time intensive;
  3. Do you have adequate and necessary skills to manage the business;
  4. Are you aware of all the risks that you are assuming through investment;
  5. Is the price that you are willing to pay for the business substantiated and reasonable;
  6. Etc;
Practical considerations
 
In practical terms, there are a number of ways in which to invest in a business, primarily including acquisition of a going concern, as opposed to equity / members interest in an existing entity. It is also important to understand the advantages / disadvantages of the structure in which you choose to invest. You might decide to invest as a sole proprietor, through a company, a corporate structure or a trust (etc.) for instance.
 
The above considerations can have a major influence on a variety of factors, including statutory risk, tax consequences, contracting procedures, etc. and if the process is not approached correctly, it can cause many unnecessary headaches in the long-run.
 
Summary
 
Investing in a business, is no doubt always a very exciting prospect which, if approached correctly, can have a profoundly positive impact on a person’s life. It can be a precarious process, however, if not negotiated carefully.
 
It is therefore recommended to find a credible and experienced partner, to help guide you through the process, and even to further strategically aid and assist you post the investment.
 
This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted. (E&OE)