Investing in Another Person’s Business
At one point in your life, you will be given what you think will be a golden opportunity – investing in someone else’s business. Before you turn giddy and give your yesses and your checks, think.
My husband and I, we are very enthusiastic persons. The idea of getting into a new business – except when it involves multi-level marketing, which does not float our boat – is enough to send us to euphoria. But of late, we have been a little selective and a little wary of the businesses we get into. We have been burned some of the time and if added up, those investments would run into the hundreds of thousands. Okay, okay, some are not yet “dead” but we worry about them constantly and we do not think that worrying is very good use of our time and our money.
So here are some things that we think about before get into the boat with someone (yes, before we even start rowing):
1. Is it your core business?
It is not a very good idea to invest in a business that you know nothing about, or does not even make use of your strengths. My husband is an artist, he has his own graphic design studio and ad agency (logo and web designs are outsourced to him from abroad), he loves to cook and is a self-confessed food connoisseur. I practice law and personal finance and I write. If there is no correlation about what we do and who we are with the business, we stay away.
2. Even if it is connected to your core business, do you know enough?
My husband got a pitch from a printer for a partnership. Even though logically it would be perfect to have a graphic design studio and a printing business, we do not know anything about it – how to run a printing office, how to run the machines, the market, who are the clientele, among other variables. Yes, my husband has had several dealings with printers and would more or less be familiar with the basics and even beyond the basics, but if we still need to get ourselves more acquainted with the business to the point that we need to spend more time to learn it, and we think we do not possess enough passion to learn it and learn it well, then it’s no go.
3. What is your degree of involvement?
Even if we are only investors, we like to get involved. If the other partner is not so keen in at least getting our input (if he cannot even pretend that he is listening or even following our suggestions), then the partnership is not for us. If we push it, we know that we will just end up frustrated and blaming the other person eternally. (we learned this the hard way)
4. How well do you know your partner?
Maybe this is not a fair question. Even friends end up enemies when money is involved. But I guess if you know your partner well-enough, he does not have any problem with money, has run successful businesses, has been more or less open with you in your past dealings (there should be 1 or 2 past dealings, at least), confirm that he would show you the books and give you regular financial reports and pay you the dividends when he says he would, then getting involved with his business may be okay. More often than not, though, the truth surfaces only at the end when money has already been spent and the business is in the middle of success and failure (and there is no other way to go but to go). I guess try to get to know the other person and see if you want to get in bed with them (figuratively, of course). And carve out an escape route (at least a return of your investment in 1 year or so if the business does not work out – making your investment like a loan without any interest – which is better than not seeing a cent back).
However, we found out that the best arrangement would be for you to invest in your own business. This way, all accountability is yours and no friendship (or other relationship) would be burned to the ground, there would be no unmet expectations (except maybe yours), and no surprises. Just hire really good people (well, this is a different topic and a different challenge altogether).
But then again, if a goose that promises to lay the golden egg talks to you, and you think that what he has may be the next best thing, then you may want to heed the advise above. It may save you a lot of money and a lot of heartache.