5 Questions Entrepreneurs Need to Ask Before Investing in a Business

By Sean Stein Smith

 

Entrepreneurs and small business owners form, in a literal and virtual sense, the backbone of the economy, and as your business grows you will inevitably field questions from other aspiring entrepreneurs. Just last week I was having a conversation with an individual considering investing in a business that they had interacted with previously as a freelance content provider. As we sat and discussed the pros and cons of starting a small business, becoming an entrepreneur, and navigating the changing business landscape, there was an underlying theme that become apparent.

No matter how skilled you may be, or how successful you have been in your previous endeavors, there is always a bit of nervousness and anxiety when you are asked to invest capital in someone else's dream and business. You have worked hard for your money, so it is perfectly natural that there are some nerves and anxiety that accompany making this decision. Let's face it -- this is a big decision and a tough situation to evaluate effectively, so let's take a look at some to items to check out and review before making this decision.

As I always recommend, be sure to consult with your CPA, financial professional, or attorney before investing any money into any business.

1. Don't invest what you can't lose.

An old adage of investing in the stock market is that you should never invest money or funds that you cannot afford to lose, and this is equally as applicable to investing in a business. When making an investment decision, double and triple check that you are absolutely certain you can live without these funds -- business always carries risk.

2. Check the legal structure.

Without diving too much into the legalese of corporate law, or overstepping my knowledge of the subject, it's important to know that you and your money are protected. Setting up an official business, and protecting both the owners and investors, is something that should always be done, and is something you should certainly ask about.

3. Make sure they have coverage.

Every individual, and every business, needs to have adequate insurance coverage to protect both the people running the business and the individuals have invested in the business. Making sure that the coverage is for the business, and not just the policy holders, will protect you if/when things go wrong.

4. Look at the numbers.

You might be surprised that this point is only listed at number four on the list, but it is important to recognize the reality that any business is driven and guided by the financial results. Reviewing these figures, and making sure that the different financial results make sense when viewed at a business level, is a task you should always do with your CPA or financial advisor.

5. Get everything in writing.

Handshake agreements and deals are great in the movies, and nice when you are planning a happy hour, but for business investments it is always a good thing to have everything in writing. Outlining the terms, conditions, limitations, and opportunities that you will have an investor will help reduce questions, tensions, and potential acrimony in the future.

Making an investment in a business is a significant decision that should never be made lightly, but it is not outside of the realm of possibility that you will face this decision at some point. Leveraging your expert network, reviewing any and all documentation that is available for your review, and ensuring you have laid out your position at the beginning can help reduce the inevitable stress and anxiety associated with this decision.