Investing in real business: how to make money work for real
Against the backdrop of high-profile news about grandiose investments in IT startups, many have already forgotten that it is possible to invest not only in applications, websites and online services, but also in quite real offline businesses.
Meanwhile, this area is flourishing. Successful investments still pay for themselves many times over, and the most far-sighted and prudent investors now and then break into Forbes lists with high-profile success stories. And many eminent investors are in no hurry to part with the shares of ultra-successful offline companies.
Basic principles of successful investments
- Numbers are everything. Only the analysis of financial statements will give you an idea of the real business prospects. A comprehensive assessment includes not only an accounting audit, but also an analysis of all major transactions and major business counterparties. The words of the owner do not solve anything - only the numbers tell the truth.
- Adequate risk assessment. Business is always a risk. And your task is to adequately assess the likelihood that the investment will justify itself and bring profit. Financial modeling and analysis of all-time business data will provide enough information to make a truly informed and informed decision.
- Adequate cost. This principle can also be described by the classic advice "don't put your eggs in one basket". The amount of investment should correspond, firstly, to an adequate assessment of the business (and not to the ideas and dreams of the current owner), and secondly, to your own financial capabilities. Think ahead: what will happen if this particular investment becomes a direct loss for you? Will you be able to recover from this and continue to work as normal? Or will you have to get a job at a factory to earn money?
- Adequate assessment of prospects. The most subtle moment of the entire investment process. Most often, owners believe that their businesses can repeat the history of Apple, Walmart and Mobile combined, but in practice this is simply impossible. Prospects can only be assessed on the basis of one's own experience, and the assessment should be adjusted taking into account the most skeptical negative forecast.
If you skim through the list that we have prepared for you again, you will notice that the word “adequacy” is repeated more often than others. And this is not without reason.
Owners most often tend to significantly exaggerate the value and value of their business. Almost every owner of 3 stalls imagines himself the creator of a trading network and does not hesitate to back up his opinion with a request for an inadequately high price.
Your task is to find an adequate offer, assess the risks and draw a conclusion about the appropriateness and amount of investments. And now we will talk about how to do this, in a little more detail.
How to find a company to invest
Searching for suitable offers for the sale of a business or a share is quite an interesting activity. Get ready for the fact that you will be surprised more than once by many things: conditions for owners, cosmic estimates, unwillingness to provide at least some information.
As a result, the search takes a lot of time. Although, as you gain experience, you will immediately cut off inadequate offers, which will help you save a lot of time. And now we'll talk about where to find these same proposals.
- Thematic sections on free classifieds sites. Slando, Avito and other boards are literally full of proposals for finding investors in existing businesses. But to select among them something really worthwhile, as we have already said, is not easy.
- Local and regional media. Companies often publish offers in newspapers and magazines. However, searching for offers in a large amount of side information and among advertisements takes an unacceptably long time.
- Thematic Internet forums. If you are interested in a particular line of business, then you should look for offers on thematic Internet sites. And although there are not so many of them, as a rule, these are projects that in most cases really deserve attention.
- Regional online media and forums. Relevant if you are looking for a business for investment in a particular region.
Each of these sources can be used both to search for offers and to publish your own offer. In this case, the owners will contact you.
Which way is better? It's hard to say. Much depends on the industry in which you want to invest, on the region, on the planned volume of investments and many other factors, each of which can play a decisive role in your case.
Assessment of the financial condition and prospects of the company
And so you selected interesting projects, held preliminary negotiations with the owners and agreed to start the process. You have the company's statements and other documents on its activities in your hands, and now the task is to determine the attractiveness of the company for investment and determine the optimal value of a share or the entire company.
- If you are not a professional accountant (read - you have worked in a large company for at least 5 years and were related to controlling), then it is better to contact specialized firms. Today, accounting and auditing services are provided by a large number of outsourcing companies: you only need to make a choice. If possible, trust the work of a company not from your region, but it is best to order an audit from 2-3 companies at once. This will help you get a truly objective assessment.
- Carefully study the ownership structure and constituent documents. It is advisable to contact lawyers. Often, during the audit, not very pleasant facts about the company, the management system and the features of making important decisions (including those on profit distribution) are found out.
- Study the marketing of the company you are considering buying. This is the share of marketing expenses in the structure of finances, and the presence of a strategy, and the development of a corporate identity, and the features of working with clients, and the availability of a website. Engage marketing consultants, use the services of mystery shoppers. Perhaps already at this stage you will see opportunities that will allow you to increase profits several times literally immediately after the purchase.
- Study the reviews on the Internet (if there are any, of course). You are acquiring a business, and it is better to make sure that its reputation is clean right away. This applies not only to the acquired company, but also to the personality of the current owner.
Based on the results of the research, you can draw balanced conclusions about the feasibility of investments, about the risks, threats and prospects of the purchased business. Now it's just a matter of determining the optimal price of the share and, if it does not match the assessment of the current owner, agree on the final sale price.
How to determine the optimal share price
The payback period of investments is the main criterion in determining the optimal amount of investments.
The current market situation both in Russia and throughout the post-Soviet space is such that relatively small investments (up to $1 million) should bring at least 20-30% per annum. This means that within 3-5 years the purchased business must fully return the investment and begin to make a profit.
Based on this, the optimal share price is determined, which rarely exceeds a 3-5 year payback. Exceptions do happen, but not too many. Companies with operating losses are rarely sold, and the purchase amount in this case can fluctuate greatly depending on the interest of buyers.
It is rather difficult to give any general specific recommendations, since not only the payback, but also some other factors affect the final cost. Often, the assessment takes into account the strength and popularity of the brand, the benefits of the location of the business, and some other features that can also greatly affect the final price.
However, first of all, only 1 factor matters - how much you are ready to pay right now for this particular business.
Rules for negotiating with owners
Situations where the buyer's estimate matches the seller's asking price are rare. But even in this, no doubt, happy case, you will have to repeatedly meet with the seller and discuss the terms of the transaction. And in a situation where assessments differ, meetings and negotiations will simply take the lion's share of your time. And now we will talk about what rules should be followed when communicating with contractors.
- Argument your position. Confirm the assessment not with words and opinions, but with numbers. We have already said that what cannot be calculated has no value for you as an investor.
- Stand your ground. If your arguments are strong enough, and the opponent has nothing to offer in return, you can safely defend your position. After all, if, after voicing your assessment, the seller made an appointment, this indicates interest on his part.
- Discuss the weaknesses of the business. Talk about threats, not prospects. Praise and show potential - the task of the seller. Your task is to pay the optimal price and return the investment as soon as possible.
- Discuss terms. This is relevant if the seller needs a strictly defined amount. Perhaps, by overpaying a little, you will have at your disposal additional assets that the counterparty was not going to sell initially.
- Look for the weaknesses of the seller. Is there any information that the deal needs to be closed urgently? This is a chance to pay less than planned. And there are many such situations.
If the counterparty is interested in selling the business, then the advantage in negotiating is completely on your side. Remember that you have much more options for investing free money than a counterparty for selling your business.
When the price is agreed, you can proceed directly to the sale process. There is no need to do this on your own: there are dozens of outsourcing companies that offer services for the legal registration of such transactions.
Your participation in this case comes down to signing papers and transferring money to the seller's account. The employees will do the rest for you. The terms for completing the transaction can vary from several days to several months, depending on the conditions and the desire of the seller to receive money.
Company development, profit growth
When the company has completely passed under your control (or you got the opportunity to take part in management by purchasing a share), profit and business development are the two issues that should worry you in the first place.
And here there are two ways.
- Development within the existing model. In fact, this means leaving everything the same as the previous owner left before you.
- Development within the new model. It provides for the development of a new marketing strategy and work to improve the company, its development in order to increase profits both in the short and long term.
Which way to choose? Only you can decide.
As the investment returns, you can invest in new businesses or direct them to the development and scaling of existing ones. We have already talked about many ways to build a business and ways to invest - you really have a lot to choose from.
In the event that the investment has not justified itself (the company is operating at 0 or at a loss), you can either try to sell it and return part of the funds, or close and sell the property. The ability to fix losses and move on will come in handy when investing in businesses, you can believe it.
Investing is a highly intellectual and for this reason very profitable occupation. Knowing how to analyze information and make adequate forecasts, you can achieve amazing success in an extremely short time.
On the way, you will not be able to avoid losing trades, but with the right approach, their number will tend to zero.