I promised to provide some pointers to would-be investors on what to look out for before making an investment.

The first in the series will start today.

Enjoy reading...

Always do due diligence before investing

The importance of doing a due diligence before making an investment cannot be over-emphasized. Be sure to verify whatever the business promoter tells you. Do not make any assumptions. You have a right to obtain all relevant information since you are planning to stake your money in the business which in effect means you will be exposing yourself to the loss of capital.

Part of the things you need to check is to be sure that the business owner actually has the competency and experience to run that business.
One of the biggest mistakes you can make is to put your money in a business where the principal owner does not understand the business or where he does not fully understand the trends in the business yearly cycle.

The learning curve will be much longer and the risk of loss is higher.
Always ask for evidence of past performance of the business. The best place to get this is from the bank account of the business.
Do not rely solely on internal records of the business owner because this can be manipulated to give the impression that there is an on-going business.

When reviewing the bank statement look out for payments from customers and clients and also payments to suppliers and other creditors. The bank statement does not necessarily need to have a large closing balance but it should have regular transaction flow which indicates presence of business activity.
The bank statement will also show you exposure of the business to external debt which you need to be aware of before you put in your money.
If the business has a large debt profile which it cannot justify by either presence of physically assets and the profit margins are very thing it’s best to walk away from the deal.
Other things you need to check for are:

- Licences and authorization to carry on a business

- Contracts between existing business partners

- Competitors to the business

- Review cycle of flow of cash in the business and internal controls to be sure there are no leakages


Please feel free to send in any questions you may have.

Remember to ask all necessary questions
Do not make any assumptions when considering making an investment in a business. It is usually very difficult to retrieve your money once you have made a transfer to an investee especially if it turns out to be a bad investment therefore you need to be absolutely sure that you are not dealing with a scammer or someone who is genuine but is incompetent or making bogus claims.
Before you make an investment or financial commitment make sure you ask all necessary questions and obtain safisfactory answers before you proceed.

Personally for me if I notice that the person is reluctant to provide answers or does not know the answers to questions about the business I just back off and walk away from the deal.

Some of the questions you need to ask are:
- How long has the business been in existence?

- Is it an incorporated business or registered business name? (This question is very important)

- Does the business have a dedicated business bank account?

- What service or product does the business sell to the public?

- How do clients make payment?

- Does the business sell on credit?

- What are the controls in place to make sure there are no leakages?

- What are the immediate future growth plans for the business?

- Why does the business need additional capital?

- How much has the promoter committed to the business?

- Will the new cash to be invested be classified as a loan or equity?

- What is the agreed interest rate or dividend?

- What will be the exit strategy for the investor? (if any)

The questions I have listed are not exhaustive so you can come up with other questions that will give you and insight on the type of business under consideration.
The general idea is for you to have a view of the business that will enable you assess the risks involved and thereby make an informed decision.
Do not take all the answers you receive as the gospel truth. It is your responsibility to do an independent check or verification of your own based on the answers you receive.


...to be continued next week

Do not be in a hurry to invests and do not allow yourself to be rushed

When making an investment do not allow yourself to be rushed into making payment. Always take your time to make your enquiries and review them where necessary.

You need to bear in mind that if you make payment to the wrong or fraudulent person you may not be able to recover your money.
I will give you an instance, in some instances where the business promoter feels that the investor may not want to invest if he were to get hold of some unfavourable information about the business he will try to put an undue sense of urgency into the transaction by trying to rush you into committing funds to the business.

It could also be a situation where all the expenses of the business have not been properly disclosed to the investor. In such a situation the final profit will be much less than what has been disclosed.
The reason for rushing you into the making the investment is because the business promoter is aware that the investor is probably considering other investments and will likely base his final decision on profitability.

Ultimately if the investor become aware that the actual profit is much less he will likely shift his attention elsewhere therefore in order to avoid this the business promoter will try to rush you into releasing money by coming up with some spurious excuse about deadline or some other excuse concerning scarcity of raw materials etc and a need to speed up the investment process.

He could also come up with several other reasons but the objective is usually to stampede you into making the investment – Don’t fall for it!
Take as much time as you need to do a proper review of the investment opportunity and the dynamics involved before you make a commitment.

...to be continued next week