Yaneek Page Things to do before investing in someone’s business
QUESTION: I’m always an admirer of your work, your achievements, and your gift of imparting sound business wisdom and, virtually, common sense to people. I’m in need of your guidance and help. In brief, a friend made a business proposal to me to invest in her new business. She has other shareholders. She has a bold medium-term expansion plan, which is driven mainly by large contracts. She says the business is profitable and now wants me to join as a co-owner to drive expansion. So my question is: Can you guide me as to what I need to do before approaching her to ask certain questions? I know I need to do research on the industry, variable factors that affect its revenues, and gross profit margins, etc. What details other than strategic plans and goals she wants to implement to sustain the business should I know? One love.
— Social media user
BUSINESSWISE: Thank you so much for your kind words and generous endorsement.
You have raised an important issue, and I’m sure that my response will be help many readers.
When deciding to invest in anyone’s business, or to partner in any entrepreneurial venture, the most important questions are the ones you will first ask of yourself. These would include:
– What is my risk appetite when it comes to this investment? How much money am I prepared to lose?
– What is the minimum return on my investment that I would require in order for me to take this risk? Is it 10 per cent, 20 per cent, 30 per cent-plus per annum?
– How soon would I want or need these returns on the investment?
– What is the frequency that I would like to receive my returns? Weekly? Monthly?
– How much of the money invested in the company will be treated as equity, and how much of it will be treated as a loan that is repaid to me with interest?
– How well do I know the principals of the company? What evidence do I have that would suggest that the principles operate at a high level of integrity and accountability and can be trusted with my investment? Should I ask for their credit reports and do my own background checks as due diligence?
– How much do I value the friendship relationship with the principles of the company, particularly if these are family members or friends?
– Exactly how much time and effort will be required of me to support the growth of this company and or help safeguard my investment therein?
– How much do I know about this industry? What is the personal risk/exposure to me in joining the business as a partner?
– If the business fails or if the relationship with the principles becomes contentious, do I have the wherewithal to manage any conflicts or walk away from the business and my investment? And how will my reputation be affected, if at all?
Answering these questions will give you clarity to make an informed decision while exercising some best practices in being a disciplined investor, which will serve your interests well.
Unfortunately, this is the soul-searching many don’t do, especially when dealing with family and friends, which is why they are sometimes blindsided when there is a breakdown. I should note that breakdowns are usually common because of inexperience with investor relations, leadership, management, communications, partnerships, among others. This can also be exacerbated by the fact that start-ups have a very high rate of failure. Therefore, to invest, your risk appetite must be high.
The next step is to proceed with the fantastic questions you put forward regarding the strategic plans, competitor analysis, landscape analysis, and growth goals. I would ask for the financials, to see the past performance and do a deep dive into the numbers. You should also review the estimated financials aligned with the expansion plans. Ask how much is needed to finance the growth objectives, and if there is a gap between your capital injection and what is needed, and how it will be addressed.
You raised a red flag for me in noting that the expansion plans would be driven largely by one or two contracts. It would be helpful to understand the risk assessment around those contracts, particularly since it is imprudent, as an accounting principle, for most of your income to come from a single customer. There should be a sound mitigation strategy in the event of the loss of those customers.
You should also ask about the governance of the business, for example, will there be a board of directors or an advisory board, and what part would you play in that governance structure.
Finally, the entire agreement, including exit clauses that protect your interest, and that the matter should be referred to mediation or arbitration in the event of a breakdown, should be concretised in a signed contract, which is appropriately witnessed and stamped, should you decide to proceed with an investment or partnership.
Good luck and one love!
Yaneek Page is the programme lead for Market Entry USA, a certified trainer in entrepreneurship, and creator and executive producer of The Innovators and Let’s Make Peace TV series. Email : yaneek.page@gmail.com