Whether you are investing in a friend’s company or in a stock of a company, it is incredibly important that you do your due diligence before making any type of commitment. Investing in private companies is not easy. When you buy stock or invest your own money into a company, you are not simply getting a piece of paper. Rather you are becoming part owner of that company.
Now before you invest in a company, it is vital that you do your homework. When I talk about homework, I am talking about the history and financial status of the company you are thinking about investing in. But what if you didn’t do your due diligence? What if you decided to go on a whim? Imagine investing in stock from an unknown company. All you know is that your best friend’s cousin highly recommended it. Like anyone in finance, this is incredibly risky move. At one end, you could be lucking out and have invested in a company whose profits grew throughout the year. At the other end, you could have invested in a company that does poorly over the next few months and lose a majority of your investment. Regardless of the wins or loses, increasing your odds is always the smarter move. That is why I highly encourage you to analyze the overall situation before making that big leap.
One thing you want to keep in mind is that there is no such thing as a sure thing. Investing in a private company has many risks, especially when you are talking about your life savings or long term investments. My best advice is to do a lot of the work upfront to increase your odds of success. Below, I have outlined a variety of topics to research so that you can make the best well-informed decision.
Research the Chief Executive Officer
The Chief Executive Officer (CEO) is the most senior corporate administrator or executive in charge of managing the overall organization. Making sure there is a strong leader behind the company is incredibly important. Now I am not asking you to call up the CEO of a big business firm and ask why you should invest in their company. Rather ask yourself various questions on whether or not the CEO is a strong representative of the company. If they are not, then do not invest. If they are, then continue your research. Certain questions you want to ask are:
- Do you share the same vision and goals of the CEO of the Company?
- Do you believe in the values and direction the CEO is pushing for the company?
- Can the CEO execute in their vision? What have they done to prove this?
- Does the CEO have the right experience to run the company for the next 5, 10, 20 years?
Analyze the company’s business model
A business model is an abstract representation of an organization. The overall model should essentially break down the strategy that a company will use to maximize its profits in its industry or field. Similar to the CEO you want to ask specific questions to make sure that the company is going in the right direction. In addition, research the overall company and try and find specific trends. While this may not be as accurately as you would expect, this does give you the holistic view and history that your company was in specific situation. If there was at any point in which the company was in danger, try and see how they were able to strategies in optimizing for the most correct path.
Net Income, Revenue, Cost, Profit Margins
This is by far one of the most important steps you can take in holistically viewing your company on a financial basis. Begin by analyzing this in parts. Start off by analyzing the revenue. Revenue is simply the raw amount of money the company made from sales of its products or services. One you see the revenue, take a look at the cost. Cost is the value of money that has been used up to produce the company’s product and services. This can range from main expenses such as salary or material or miscellaneous expenses such as snacks and office supplies. When viewing this, you want to see that the company is utilizing its funding properly. After you have gained this information, view the net income, or the profit, will give you the bottom line of how much the company pulls. Looking at its annual history of its net income and profit margins will be a sufficient amount of information to make your decision to invest.
Talk to a Lawyer or Financial Advisor
If you were still weary of making an investment even after doing all of this thorough research, I would best advise you to seek professional expertise on this situation. Financial advisors or business lawyers can help you though the overall financial jargon.