It seems almost every week new businesses looking for investors are announced.
Economic development in food processing, livestock feeding and other ventures are vital to the survival of rural communities. With good management and some luck, they provide jobs and a return on investment for supporters.
But the potential investor must ask, “Is this the right investment for me?”
There are risks involved and if the project goes sour, the full amount of a venture investment is susceptible to loss.
Security over assets such as land and buildings is often granted to a financial institution to cover loans.
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If assets are liquidated, in theory, investors are entitled to receive a return of their capital, but only after priority ranking creditors are paid. In reality there is seldom enough cash to go around; equity investors are often left out.
Investment points to consider
- What are my objectives and are they consistent with other shareholders?
- What do I expect to gain? How much can I stand to lose?
- Is there a balance between risk and return?
Have a clear set of objectives in considering an investment. Write them down, if only to force you to seriously address them.
Remember, an experienced venture capitalist will review about 10 deals before considering one, and only one in 10 of those is likely to be pursued. That works out to roughly one in 100 investments made from opportunities reviewed.
Who is making the sales pitch?
Know who you are talking to, and if a commission is being paid to an intermediary.
Securities law in most jurisdictions restricts the ability of intermediaries and promoters to charge commissions on certain types of private investment offerings. The prospectus, if available, will disclose the method used to calculate commissions but it doesn’t comment on whether the commission is fair.
Are fees being paid to the people making the sales pitch?
Are the fees contingent on success of the money-raising efforts?
Why are they talking to you?
How long has the opportunity been offered to others?
Who else is contemplating an investment?
Can you team up with other investors to review the opportunity together?
Never respond quickly to an investment proposal; avoid pitches with high pressure tactics.
Find out who else is considering the investment and talk to them. This might depend on the promoters identifying other potential investors. If they won’t, find out why.
Is there a complete business plan?
The business plan is the blueprint for the venture. Avoid plans that are “in my head.” By the same token, don’t be fooled by a glossy, polished presentation that lacks substance.
What are the key aspects of the business plan?
What are the competitive advantages of the business or project?
How developed is the project: concept only, start-up, growth, turn-around, buy-out?
How much money is being raised and what will it be used for?
How much will be spent on tangible versus intangible assets?
How much income will the company make if the business plan is successfully implemented?
Generally, a business plan should contain a one or two-page executive summary of the entire plan, history of the project, people profiles and an indication of their status (i.e. board members, management, full-time and part-time employees) and company culture.
It should also contain:
- A clear description of the product or service, how competitive advantage will be established in the marketplace and an analysis of the competition.
- The target market and the size of that market, a plan to penetrate the market and the cost of start-up and promotion.
- Whether all regulatory requirements pertaining to environment and zoning have been met.
- An independent study of the technology or product.
- ÊDetails of legal structure and ownership before and after investment is completed.
- The sources of project financing and an analysis of risk.
- Projected financial information for at least three years and the assumptions used in making the projections.
Before being provided with a detailed business plan you might be asked to sign a confidentiality and non-disclosure agreement. This is a standard practice, but if you are not sure exactly what you are signing, ask your lawyer to review it with you.
This is a condensed version of a Manitoba Agriculture publication. For more information visit Manitoba Agriculture’s website at www.gov.mb.ca/agriculture and click on business management.
