Investing in private companies, especially small ones, is not easy. These types of investments can be risky and difficult to analyze effectively. You need to do a lot of research on all aspects of the business before you decide to invest, and even then, there is no guarantee of success. However, this risk is something that some investors like, so how do you do your homework on the company before you decide?
Talk With the CEO
It is surprising to think that many investors are persuaded to invest money in a company without first talking to the CEO. The conversation you have with them is fundamental because you get to hear what their vision is for the company now and in the future. You can also get to hear about the way they run the company, treat their staff, and deal with customers. If any of these answers are of concern to you, then that is an indication of how the company will progress. If you are denied access to the CEO of the company you are thinking of investing in, then this should be a warning to you.
Does the Company Fit in With Your Diversification Strategy?
To be a successful business investor, some think that you need to have investments in at least seven different companies. If you are growing your investment list, then you will have a strategy in place to help you keep them all in check. Depending on how many companies you want and the type of investment you like, you need to see if this company will fit in with your strategy. Do they offer a certain amount of success and is that success proportionate to the risk? If this is a high-risk company, you might not want to invest a lot of money straight away.
Talk to Experts
If the company you are interested in deals with a market you are unfamiliar with, then you should seek some expert advice. No matter how good the company looks, you need to know that the market is also in good condition. You should also try to speak to other investors that have companies in this market. See how their investments have gone and whether they see them as a good idea. If you don’t know anyone in this industry or any investors, then try sites like LinkedIn. You can often find people on there that have a connection to the industry or know someone that can help you.
Check Out the Company Clients
To get a good background about the company, you need to look at the dealings they have with other clients, suppliers, and distributors. These types of interactions can often give you a greater insight into the workings of the company more than anything else. That is because they will have a certain persona with their customers and with you as an investor, but they will be more honest with their clients. Find out if their suppliers are happy with their dealings with the company. Do they always pay invoices on time? Are they making regular orders? If they are still seeking suppliers, then this could be a good opportunity to recommend some depending on trade. For projects involving steel fittings, a manufacturer such as Custom Fittings Ltd is a good place to start.
Talk to Customers
The customers are the reason this company is in business, so it makes sense that you should speak to as many of them as possible. Try to seek them out yourself, rather than those suggested by the company as they might have picked the best ones for you. It is important that you get an honest opinion and one that represents a cross-section of their customers. You need to speak to at least seven customers ideally, but the more you see, the better it is for you. Ask them what they like about the products and how they solve a problem for the customer. Are there any alternative products from other companies that they would consider? If another company dropped their prices, would they remain loyal to this company? You won’t find a positive response from every customer, but you should be getting a majority saying positive things. You should also ask about any improvements they would recommend as this could be a good way to retain current customers.
Growth is part of why this company has asked for investors, so you need to know how sound this growth will be. How is the company growing and is there scope to continue that growth in the future? How has their growth developed, have they bought into other companies or is it an organic growth? Organic growth is more valuable than bought growth because it shows that customers are liking the products. Bought growth just shows that they are trying to eliminate the competition to give their customers less choice. Although that isn’t a bad thing in itself, you want to see some organic growth as well.
What is the Exit Strategy?
You need to know what the exit strategy is for this company and this sector. Ask yourself, how big will this company need to be before it is considered a potential target? Who will the potential buyers be when or if that happens? It is this question that will give you the proposed exit strategy you need. It might be that this sector of the market attracts few buyers, so the opportunity for an exit strategy is small. It also depends on the other companies in your portfolio. If all of the others have a good exit strategy, this company might be worth the risk. However, it might also be the reason other investors are not coming on board, which could strangle the company’s growth.
Investing in a company takes a lot of work and some investigation. You may consider taking these steps to make sure you are doing the right thing. You shouldn’t feel pressured by the company to skip steps or to invest before you are ready, or you could be making a bad investment.