Originally published by Raymond James.
Whether it’s to diversify your existing offerings, position your firm for future growth or amplify returns, investing in a new business can be both thrilling and complex.
Whether you want to start another business, or to expand your own entrepreneurial enterprise, there’s a lot of ground to cover – and some practical and emotional considerations once you make the commitment. It’s like adding a new member to the family – exciting and nerve-racking all at the same time. But you’ve done it before, and you can do it again – with a little guidance should you need it.
All the whys
First, identify your motivation for investing in a new business. Are you looking for a straightforward investment to provide returns with a hands-off approach? Maybe you want to get in on the ground floor of a business that aligns with your existing one – or identifies an area you think is positioned for extreme growth like technology or biotech? Are you looking to expand, grow or diversify your existing offerings? Do you have the bandwidth to help multiple enterprises, even if they’re related, or will you deputize someone to step into your shoes while you get the new business where you want it? Identifying where you’re at and what level of involvement you want to have are two good foundation points to begin.
Thinking it through
Start doing the groundwork for your investment – but don’t go it alone. Talk to your financial advisor, accountant and an attorney and go for a team approach. Codify everything in a written business plan. If you’re considering an investment to grow your existing business, an additional layer of analysis is required. Where your business is growing – and not growing – might direct the kind of investment you will make.
Evaluating the potential of a new business is just as important. How big is the potential market? What’s the current market penetration? What trends or forecasts for this particular industry will influence growth? And if the business is large enough, your financial advisor may be able to bring in an investment banking professional to help analyze the deal and make an accurate valuation.
Alternatively, investing in a business that is directly adjacent to yours to strengthen your market position and bottom-line profits can also yield great benefits. An example might be if you produce cardboard packaging – it might make sense to acquire the packaging design firm or even the company that creates the ink you use to print on the packaging.
Finally – how much risk do you want to take on? Are you willing to put your money into a venture that’s doing cutting-edge and experimental work or do you want to know there’s a steady pipeline and year-over-year revenues? Risk is often both a personal and financial question, so take some time with this part of the equation. Your advisor can help you run hypothetical situations to ease your mind as you pursue potential opportunities.
Once you’ve narrowed down how and where you’d like to invest, finding the right match means putting on your detective hat. Reaching out to colleagues and peers in the same boat can be a good start. Casually talking about what type of business you’re looking for may yield a gem or two.
Meet and greet
Once you’ve narrowed your list of acquisition targets, meeting with leadership is a must to understand their philosophy, vision and to answer any questions you may have on financials are crucial. This can reveal information that’s not readily available in the business plan. Background and credit checks, as well as Google searches, can be other useful tools.
Doing the diligence
Go through all the financials with your team and look at the fine print as well as any outstanding debt, conduct competitive analysis of the market and comb social media for clues on past performance. Like any investment, you want to know what you’re buying and why.
Ready for the ride
Once you’ve made your investment, get ready for the ride. Big change always has the potential to create feelings of excitement, anticipation, anxiety, worry and maybe a little fear. The process may even be frustrating and require resilience and perseverance to get a good deal done.
But think back to when you first started or took over your business – the highs and lows that came with building it to where it is today. Was it worth it? Does your family agree? When you’re ready, you’ll be well-equipped to jump into something new.
Sources: yahoo.com; worth.com; thebalance.com; fastcapital360.com; seedinvest.com;
angelinvestmentnetwork.us; gettingpeopleright.com; nerdwallet.com