Investing in a private business

Have you ever wondered about becoming an investor in a private company? If yes, you might want to read on till the end.

We are always looking for ways to earn more. But we often do not know how to do it. There are plenty of ways of earning more money. Like you could sell your services as a freelancer or could sell products on eBay.

Where there are tons of ways to do this, investing in a private company could be one of the best things.

Recently, I happened to learn a little about Warren Edward Buffett. I was impressed to know that he made his first investment at the age of 15 in 1945. He, with a friend, invested $25 in a pinball machine and placed it in a local barbershop. And within months, he made several more machines.

Buffett’s life is very inspirational, especially for investors. So, if you too wish to become an investor, let’s jump into the idea of investing in a private business like a pro.

Find the Companies

There are tons of private and small businesses always looking for investors. There could be a local department store near you that might accept your investment on a fixed-term basis.

CrunchBase is an effective place to find investment companies. They help you meet companies looking for investment and share relevant data to help you invest in a business.

If you find a company worthy of investment but not listed on CrunchBase, you could perform detailed research to find more about that company. Get the below information in hand before investing:

  • Which industry does the company operate in?
  • For how long it has been in the business?
  • Who are the founders/partners/owners of the company?
  • Do you understand the business this company does?
  • What benefits you’d be getting?
  • Get their financials (if possible) and compare them over the past few years.
  • Compare the data of this industry with companies in a similar business.
  • And more.

When I first invested in a friend’s clothing business, I didn’t do any analysis. I just knew what he was going to sell. Though I have not yet received any benefit from that investment (as I invested just before covid-19), I foresee a small profit in the coming few weeks.

My mother, on the other hand, has always been a smart investor. She always takes into considerations all the above elements before investing. And so is making profits.

One key piece of advice here is to invest small amounts in the beginning. You could either increase capital later or invest in other companies to avoid losing all if the company doesn’t perform well.

Meet with the Owners

If you choose a company via Crunshbase, you might not get a chance to meet the owner(s). But if there’s no middle agent, it would be easier to meet and know the owners.

You would get to know more about their business, could get the financial statements, and further analyze if investing here is worth it or not.

As I already knew my friend, it wasn’t hard for me to invest in his business. I visit him regularly and keep asking about his business.

Fortunately, his business is reviving, and I am expecting a return soon.

Whereas my mother has invested through this broker, and she only gets to know what that broker tells her.

Research the Operating Models

While it sounds exciting for new investors to invest in a business, it’s imperative to understand the business model of the company.

It is best served if you could meet the owner in person. They would tell you clearly how they intend to use your investment, how would they promote the product/service, what level of expertise they have, etc.?

Knowing the operation model further gives you the strength to make up your decision.

Again talking about my investment, when my friend told me about his business plan, I asked what particular piece of clothing would he buy. I further asked him where he would buy and where he intends to market the clothes.

Although things changed with his initial plan of action, I still know where he buys his products, on what terms, and how he sells them.

After facing some issues in the beginning, he is now much more confident, and so am I. And with time, he keeps on revamping his operation model as and when required.

Negotiate the Investment Terms

That is another advantage of investing in a private company. You could negotiate the investment terms, unlike with a public limited company.

You could ask for a higher return, could ask for equity, could negotiate capital return policy, and so on.

Finalizing the Deal

Now that you have everything you need to invest in a private business, it is time to finalize the deal with the chosen company.

Do document everything according to the legal requirements. It will not only protect your investment but the rights of the company as well.

Legally and professionally speaking, the documentation could be including:

  • Term Sheet
  • Stock Purchase Agreement
  • Disclosure Schedule
  • Registration Rights Agreement
  • Voting Agreement
  • Right of First Refusal and Co-Sale Agreement
  • Certificate of Incorporation
  • Legal Opinion
  • Accredited Investor Certification
  • Signature Pages

The steps to invest in a company might haunt you at the beginning. But once you have made your first investment, you would feel proud of yourself. And would be wanting to invest in more private companies.