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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?

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.