How to invest in someone else’s business
Whether you have decided on your own to start investing or have been asked for investing in someone else’s business, it is a big financial step and deserves careful consideration.
Investing your money into someone else’s business is always a risk, and it can yield a great reward or become a loss. Investing is not something you should jump headfirst into.
8 rules to consider when investing in someone else’s business
1. Business Plan is Required
Any business you are considering investing in should show you a well-written business plan. This plots out their plans for the future, indicate how they think their business will grow and what they plan to do when things don’t go as planned. The company’s target market should be identified, and the financials must be clearly laid out. If you have trouble understanding any part of the business plan, take it to a professional for advice.
2. You Select your Investments
Don’t blindly acknowledge a companion’s or relative’s pitch. If you haven’t set up your own investment objectives, don’t put resources into anything until you do so. Without your own goals or principles, you lack a basis for assessing the opportunity. You leave yourself helpless against the attempt to seal the deal that sounds great.
3. Calculate Your Downside Risk
There is always a risk in investing in someone else’s business. The pitch is meant to make it seem like a sure thing. Do research on similar businesses and the competition. Compare what the company is asking for the amount of risk you’re taking and make an educated offer. This will help prepare you and protect you from investing too much or making a bad investment.
Once you define your goals and decide how much you’re willing to invest, get everything in writing, even if you are investing in a friend or family member’s business. This will ensure there are no misunderstandings and protect both parties. Having the proper paperwork will also help you stay organized and keep track of your investments.
5. The Founder also has Something to Lose
Try not to get into a business where the originators have nothing to lose. Make sure the originators will lose cash or end up in debt if the business comes up short.
The business needs to have impetuses and disincentives for the board and the founder. Otherwise, they might work a useless business as long as your cash turns out revenue to them.
6. Investment Goals
This is 2nd most important rule for how to invest money. Before investing in someone else’s business, you need to define your investment goals. How much do you want to get back for your investment? How long do you want to wait for your investment to return? What kind of stake do you want in this business?
7. Don’t Invest Money that you Can’t Afford to Lose
Be sure to invest responsibly. Don’t invest more money than you can afford. Check all laws and tax laws surrounding your investment. Always air on the side of caution; if it sounds iffy or wrong, steer clear.
8. Keep Duplicates of all Documents
Remember to save duplicates of all paperwork for the substance. For a corporation, keep duplicates of minutes, standing rules, articles of incorporation, and shareholder agreements. For partnerships and LLC, keep copies of the agreements which establish the entity. Keep the original notes on your advance in a protected place.