Invest Without Losing Your Money – A 3-Step Approach!



Feedback from some of my clients over the years, has spurred me onto developing a series of blogs that provide insights on assessing a potential investment in a business and making an informed investment decision.

Recently, I had a coffee with John, an old friend of mine, and as we began to catch up on the lost years in our relationship, I began to hear a familiar story of a great business investment opportunity turning into a complete nightmare resulting in the loss of John’s hard-earned capital.

The motivating factors for making the investment was John’s desire to achieve greater balance from his all-consuming stressful professional career,  freedom to spend more time with his family and diversify his income so he was not totally dependent on his day job.

Since qualifying as a professional, John has built a very successful career and is regarded as one of the smartest people I know. In preparation for making the investment, John updated his business knowledge and did significant research through discussing issues with his accountant, personal and professional network. In John’s case, his failure to understand the implications of providing personal surety has resulted in him being requested to make further capital contributions to cover the debts of the business.

As an advisor with over 20 years’ experience, it always surprises me that significant investments are made without consulting advisors or experts who know how to assess the business opportunity and protect against the risk of loss. General accountants, personal tax advisors and personal lawyers are often consulted but the value of their advice depends on their area of professional focus and may not cover the gambit of variables that must be considered.

As we discussed John’s approach to making the decision to invest, it became clear that some of the issues would have been identified had a structured approach been applied.

In deciding on a potential business investment, I suggest a three-step approach:

Step 1 – Assess the nature of the business, the management and underlying business model

Step 2 – Assess the numbers, both historical and future projections and exit options

Step 3 – Assess the risks and mitigate the risk of loss through a shareholder’s agreement

Making a business investment requires an unbiased assessment of all the variables that could contribute to the success of the venture and taking steps to limit the potential for loss. Equally important is an assessment of the management of the business and the relationship with other existing shareholders.

The next blog in the ‘Invest in a business series’ will cover insights on assessing the business opportunity and the supporting business model.