The benefits and pitfalls of investing in someone else’s business

The benefits and pitfalls of investing in someone else’s business

Arguably, it could be easier to invest in or outright purchase a small business that is already up and running than establishing a new one from scratch. Although you need to know what type of business you want to invest in, you also need to present yourself as a serious investor otherwise the deal may pass you buy. This will require you undertake extensive research to illustrate you are prepared to begin the process.

Investing in a business without taking over ownership offers you the benefit of some profit without having to put in the initial work, but you won’t ever have the potential to make as much money as you would be capable of if you fully owned the business. You also have less control over the company, so if things take a bad turn you have a limited ability to change things. On the other hand, merely investing represents less of a risk for you overall.

It can be difficult deciding how deeply you want to get involved with a business someone else started up, so consider the following steps to ensure you go through the process properly in order to be fully prepared to decide.

Step 1: Choose a small business to invest in

Investigate businesses that combine the potential for profit and interest for you as the first step to finding a company to invest in. Once you’ve found a number of likely candidates, create a short list of those that are most likely to be a good fit based on your financing capabilities and goals.

Step 2: Approach the seller

Make a good first impression when you meet the business’ current owner. Not only do you want to come across as professional, but you also need to indicate you have the experience and knowledge to take part in the business, especially if you plan to purchase the company in its entirety. Once you have established yourself as someone to be taken seriously, you can move on to discussing the nature of your investment.

Step 3: Gather information

Don’t just look at the company’s financial information when considering its success, especially if you think you only need to focus on the income. You also need to consider the company’s assets — what is their value and will they need to be replaced soon? — and any outstanding debt you will inherit once you invest. Although you shouldn’t expect everyone to be deceitful, it is possible the buyer may keep important facts from you in order to put the best possible face on matters.

Step 4: Decide to invest, buy, or pass on by

Once you’ve obtained all the relevant information and looked it over (preferably with a professional, such as a buyer’s advocate), you need to decide if you are more comfortable with investing in the company in exchange for a profit share, buying the company and taking over ownership, or turning the deal down as something that is not currently in your best interests. You need to consider the risks involved versus the possible returns — how much are you willing to lay on the line?

It is also during this stage of the process that you should consider looking into government funding information if your current finances are insufficient to complete the deal.

Interested in investing? contact team@capital.com.my

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