Do you know, how to invest in established business?

Important tips to keep in mind before investing in any business.

  • Has to analyze the hierarchy behind the operations.
  • Go through the documentation clearly regarding lock-in periods, other terms and conditions
  • Obtain financials, memorandum, and articles of association to analyze position and vision respectively.
  • Past performance
  • Business size, growth, and mission of the business.
  • The rate of returns, terms, and conditions.
  • Have an exit strategy
  • Seek the help of a financial advisor.

Remember the rules while considering an investment:

Pick your type of investment after analyzation, as you decided with an advice from an expert and consider other advice as a suggestion, plan yourself based no your capability, capacity and future needs.

Business Plan and strategy:
Do not invest unless there is a strategical business plan for collecting the information, statistics and other related past, present and future needs to analyze. Compare the payables like interest to banks and other payment with competitors.

Calculate the depth of risk:
The estimated amount of investment, returns and ratio analysis based on risk, break-even, abnormal situations, losses, etc., needs to be analyzed. Future is vague and uncertain, planning is necessary to face abnormal situations.

Tax consequences:
Tax benefits and rebates, exemptions, utilization of capital gains and losses, setoffs and carry forward announced by the government and the consequences if they fail?

Self-Role or Influence:
If your investment in any, you have to own some holding power depends on your investment and decision-making involvement is necessary to know the facts as a financial backer. Do not overestimate or underestimate either your contribution or hierarchy of the management Have the investment structured the way you want it or don’t invest. Without your contribution, management may have nothing.

Make sure the founders also have something to lose:
In any business, founders must hold some stake, if don’t get in and make sure founders will lose some if the business failed.

Security Interests:
You have to right to receive financial reports on a regular basis, inspection also to be done for appropriateness. Need observation on collateral securities, financial status and audit to be carried out.

Keep all the documents:
Cover all aspects which are important and take a copy of written but not oral such as minutes, bylaws, articles, memorandum, partnership deed and all related original documents. Necessary copy registration is also required.

Plan to get money out:

  • How will you get money out of the business?
  • Will you be an employee?
  • Will you spend enough time on the business to justify the income you want?
  • Will you be paid consulting fees?
  • Will you want dividends paid?
  • Do you need to elect corporation status as a basis for distribution of profits to you?

Don’t invest money that you can’t afford to lose:
Investment is to be done as much you bear even additional investment required. Even the situation demands more, do not acquire from borrowings.

Invest Responsibly:
Responsible is a way to generate competitive returns and find sustainable solutions to many of the challenges and it delivers a sound investment strategy, greater accountability, important ethical governance.

Generally, Investments are of 2 types:

1.Equity Investments:

Generally, equity investment in any business either in the form of cash or any mode to hold some ownership stake and also to get profits and losses at an agreed ratio. The business may use this cash for a variety of things, including funding capital expenditures to expand or working capital requirements like running daily operations or reducing debt.

Investment in equity can result in good returns and parallel with risk too. If expenses run higher than income, the losses get assigned to you and sometimes may lead to bankrupt. Virtually all of the research on millionaires across the world shows that the single biggest classification of millionaires is self-made business owners.

2.Debt Investments:

Generally, investment in debt means to obtain interest income benefit or a return of certain asset in a nearby future with regular amortization or income in stipulated payments interval and advantage of debt is that it has a privileged place in the capitalization structure which means even company going into liquidation, the debtor has priority over shareholders.

Which Is Better: An Equity Investment or a Debt Investment?

  • Example: If you had been an early investor in Reliance or Infosys and bought equity, you’d be rich.  If you had bought bonds, making a debt investment you would have earned a decent, but by no means spectacular, return on your money.
  • On the other hand, if you buy into a business that fails, your best chance to escape unscathed is to own the debt, not the equity.
  • All of this is further complicated by an observation that famed value investor and come up with Security Analysis.
  • Equity in a business that is debt-free cannot pose any greater risk than a debt investment in the same firm because, in both cases, the person would be first in line in the capitalization structure.

1. How to invest in Established Business?
The established business itself says that it is good for reputation, goodwill and market share among many competitors. It is much better to invest in existing business than a start-up and one may invest either in equity or debt or balanced depends on their capability, capacity, risk acceptance, tax consequences, stake in the business and their influence on business.

  • Have a look at the rate of return before investing.
  • If you have expertise in management or in the industry, you may think you should help run the company.
  • Take a note everything in writing whatever you agree.
  • Even among friends, a handshake business agreement can turn sour (disappointment).

2. How to Establish a Percentage of Business Ownership?
It won’t just start with a handshake, must outline and agree on important details and issues in the form of agreement which includes capital requirements, partners and their details, goodwill to be brought in, percentages in profits and losses, designation, roles and responsibilities, ownership, operations, etc., need to settle. After agreement registration is required with the registrar in the presence of a notary. In some situations, you have to file a copy of the agreement with state corporation bureau or secretary of respective state. For instance, if any purchased more than 5% share in a company, must inform the SEBI along with complete details.

3. How to Buy a Business’s Shares & Assets?
One may invest in 2 ways, either lending money to the company or be purchasing an equity. It is necessary to hold a D-mat account and check the information regarding ratio analysis, financials, balance sheets, financial position in the industry, projections and all related documents, fundamentals, technical analysis by downloading or acquiring from the company. Make an analysis historical data to anticipate future graph.

4. Do Small Business Investors Get a Percentage Forever?
Generally, an angel investor seeks the position in decision making because they are funding for the company. Investing in small business to hold stake may or may not limited for certain amount of time that will depend on terms and conditions while investing or entering into the contract and large shareholder get the percentage of voting rights by their stake over the company in general meetings

5. How to Draft a Contract for the Purchase & Sale of a Business?
Point to consider while drafting an agreement:

  • Date of an agreement enters into.
  • A number of partners, name, age, and full address.
  • Details of a firm or company which enters into and purpose of business.
  • Registered office details of the company. The place of business and register office may be different.
  • Works to be carried out by the business. In case of a company, all the details will be included in the memorandum, articles of association and prospectus.
  • Consent of all business partners regarding debt, owing, authority, check signing powers.
  • Surety, execution of business, mortgages, draw and accept of promissory notes and bills of exchange and related.
  • Interest in giving and taking to the member as per the rules and regulations.
  • Remunerations and salaries to partners or board of directors.
  • Taxation in related matters of book profits and balance of reserves and surplus.
  • Profit and losses sharing ratio and related.
  • To collect outstanding dues from the firm,
  • To file suits in Courts of law,
  • To receive firm’s tappal like letters, registered letters, money orders and insured parcels,
  • To do such other duties as are incidental to the conduct of the business of the firm.
  • In the event of retirement, admissions and death and consequences.
  • An agreement is terminable at will or period based or if any.

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