Long term investments in private companies carry a lot of risk, and it is a form of investment that is unable to convert profits into cash very easily. This means that it is important to to plenty of ground work beforehand to increase our chances of success. Here are 10 steps that are vital to take to ensure your investment success:
1. Talk to the CEO
Never invest in a private company without talking directly to the Chief Executive Officer. Taking to the CEO brings valuable insight into the leadership and management ability of the business, and you can gauge how effectively their strategies will be implemented in the future based on this.
It is unlikely any investment strategy will be successful if it is built upon just two or three companies. Research shows that an ideal number of companies to form a sound investment strategy is between seven and ten. These companies should also be diversified in market sector, ensuring you have investments spread across a range of asset classes as appropriate.
3. Seek advice from experts
Whatever industry you are looking to invest in, speak to someone with in depth knowledge. A successful investor, a consultant in the industry or a banker who specializes that particular field, it doesn’t matter who, but find that expert and learn from them. Networking sites can be great for this, as you can quickly find people with the expertise and knowledge you need.
4. Talk to the customers
Don’t take the word of those marketing the product, speak to people who buy it. Find out what made them buy it, why they love it, what they would like improved, what does the competitor offer that is better, would you recommend it to others, anything you can. This allows you a much better insight into the market itself, the vulnerability to competition and so on, which in turn gives a much clearer idea of the potential of the business and its future growth.
Customers can be separated into three groups. Promoters, who are loyal, actively recommend the product and contribute to business growth. Neutrals, those who use the product but could easily replace it with a rival if they provide a better offer. Finally, there are those who are detractors. They are customers who are primarily upset at a product and constantly criticize, and these can have a negative effect on the company reputation. Too many of these and a business has problems.
5. Examine Growth
You need to understand the company’s plans for growth, how it will achieve growth, how it will maintain that growth in the market. This includes plans for new distribution points, are store sales rising as well, or is it opening more markets? Most of this information can be found in the basic financial statements, budget, income and cash flow details of the company of course. The consumer division of retail sales will have further information.
6. Exit Strategy
You need a viable exit strategy for the industry. How much time and effort will be needed to achieve the move to public sales? If the IPO is not in the foreseeable future, are there potential buyers lined up for this exit strategy?
IPOs in the consumer goods and retail markets remain rarer than in the technology sector, mergers and acquisition being the most common purchase model compared to other industries. In fact, mergers and acquisitions in the consumer goods sector account for almost twice the cash value of internet and software deals in 2012.
7. Discuss the deal with your lawyer
Do not just talk in general, show each document to your lawyer to be sure of what is being proposed. Legal documentation for investment into private companies can be incredibly complex, and your lawyer will help you understand them better.
8. Understand the business
Do not just look at the fundamentals and balance sheets, use the product, study the overall project and really understand it, both as it is now and what the goal eventually is. The more you understand it, the more comfortable you will feel about investing into it, as knowledge provides confidence.
9. Calculate the return on every commodity
Some companies in recent years have attracted a lot of investment despite losing money on everything they sell, and worse still, have no plan to turn those losses into profits. Before investing, see what profit per item is involved, you can get this from the revenues from the full costs, including marketing and distribution costs along with overall sales revenue. The sales should show a profit per item, or if not, the business should have a viable plan to transition into profit per item in the short term.
10. Understand the competition
Check investment ratings of similar companies on the Ice 9 technology software, compare the income, net income and the rate of growth, risk and capital structure compared to the investment business.
Ultimately successful investing is about knowledge and understanding. You can never have too much knowledge about the business or industry you are planning to invest in, and while there is never a guarantee, having the understanding of the business and its potential is the best way to be successful long term.