Most small businesses will need an investment at some point in their lives. Some companies may require investment to get their initial operations underway, while others may need funding for growth or to weather any unforeseen circumstances. If you’re looking to invest in a business, here are some general investment tips and how to navigate your first small business investment.
type of investment
There are two general types of investments in existing businesses:
- stock investment: Equity investments involve an investor buying a portion of a business. By owning shares in a business, an investor is entitled to receive a portion of the entity’s earnings and dividends. Investors are rewarded based on how well the business does over time.
- Debt investment: Debt financing involves investors lending capital to a business. Business owners typically repay the loan amount with interest over the agreed loan term. This type of investment requires repayment obligations that are not tied to the income of the business. Debt financing can be dangerous for small businesses and new businesses.
[Read more: Private Equity vs. Venture Capital: What’s the Difference?]
Tips for investing in your business
Investing in a business can be a rewarding undertaking, but it requires some knowledge and forethought. Here are some general investment tips.
The best sources of investment opportunities come from your established network of friends, family and business contacts. Consider searching for startups, local businesses, and entrepreneurs on social media to expand your network.
However, not all companies are looking for investors. Some companies don’t want to give up part of their business or expand too much in exchange for capital. Don’t burn your network connection while looking for the perfect investment opportunity.
While it may be tempting to sit back and watch your investment return appear in your bank account, you need to remain involved in the whole process.
Conducting due diligence
After conducting in-depth research and finding the perfect investment opportunity, conduct due diligence to get a better feel for the company and its operations. You can find out how that leader plans to use the investment. This will help you feel more involved before committing to an investment.
Next, gather information about the company, such as financial viability and business model. Perform background checks and credit checks on company leadership to determine risks associated with potential investments.
Consider hard data and numbers
Examine the data you’ve gathered about investment opportunities and boil it down to cold, hard facts. Every company is trying to establish itself as a unique idea, but do the numbers reflect that? Does the company have a proven track record of meeting its goals? Do you use forecasting? Your money deserves to go to a company that has solid data and numbers to back up its lofty claims.
Negotiate the best terms for both parties and strike out an investment contract. Term sheet outlines vary depending on the type of investment. For equity investments, the term sheet outlines the company’s ownership percentage, profit margins, and investment amount. For debt investments, the term sheet includes the loan amount, loan term, and repayment process. Once the term sheet is complete, present the terms to the company principals at the investment meeting.
Your first term sheet may not be accepted word for word. Please be patient while negotiating the term sheet with the company. These are your future business partners.
[Read more: Looking for an Investor? 3 Types of Investment Deals for Small Businesses]
Close the deal (and stay involved)
Once the term sheet has been accepted, the final step is closing the deal. Both parties sign a contract and the company receives capital.
While it may be tempting to sit back and watch your investment return appear in your bank account, you need to remain involved in the whole process. The economy and business operations change faster than you think. So, stay on top of the investment trends in the market. You may find your next investment opportunity!
CO— aims to draw inspiration from leading and respected professionals. However, before making any business decision, you should consult a professional who can advise you based on your individual circumstances.
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Published August 10, 2022