Investing in Another Business

Have you ever been invited to invest in a friend’s business? Perhaps it’s a “startup,” or even an established and successful business poised for more growth, if only some additional working capital can be made available.

Such investments can be very rewarding, but it’s important to be very careful about the terms and conditions associated with such an investment.

• Are your interests better served by an equity investment (greater risk, but opportunity for greater return) or a loan (less risk and opportunity for security, but limitations on return)?
• Are you in a position to require a personal guarantee from the business owner?
• Do you want to have input into, or some control over, operating practices and decisions? Warning: if you’re not careful, this may expose you to personal liability in some circumstances.
• What kind of reporting and feedback do you want on business operations?
• If the business doesn’t perform as expected, what remedies should be available to salvage what you can?
• Are you being presented with a “take it or leave it” deal, or is there reasonable opportunity for you to investigate and negotiate equitable terms?
• What do you know about the person offering you such an opportunity? What can you learn about their background and experience, which will help you evaluate their credibility, integrity and capability, all of which bear on the risk you will be exposed to?
• Can you afford to lose your entire investment?

Such investments should generally be made only if you have competent and experienced advisors with whom you can consult, and who can assist you in evaluations of the opportunity, the risks, and the detailed terms of the investment. At a minimum, your legal counsel and accountant should be involved, as well as an advisor familiar with the market in which the target business investment operates, especially if it involves a new or developing market.

Remember that old adage: an ounce of prevention is worth a pound of cure!

The information presented is not intended to be, and does not constitute, “legal advice.” Because each situation varies, and only brief summary information is provided here, you should not use this information as a basis for action unless you have independently verified with your own counsel that it applies to your particular situation.