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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)

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