When it comes to investing, we all want to make great yields. The thought of investing in new innovative ideas, or just placing money into existing platforms that look lucrative may excite us. Who doesn’t want to make real money right? Especially when we look at the current global landscape, we realize how everything has become so convenient regarding ease and accessibility. This applies directly to investors as well.
Yet, even though technology, research, and having access to all different types of tools give us the flexibility we desire, there may be some things that we automatically be discounting. Due diligence for instance, which is apparently healthy to do at the beginning stage, but somehow miss the important stuff, like a well planned ‘exit strategy.’
Let’s discuss the 5 useful due diligence tips that will greatly help in risk assessment before you move your money from your pocket to theirs:
1. The Management, their backgrounds, and where to verify
It looks silly, doesn’t it? Trying to illustrate a basic understand of the management you’ll be investing in? Especially when it’s that obvious?
Truth is, I’m not talking about the basic form of ‘reviewing’ their CV and understanding their biographies. Sure, some investors just love to have a discussion and accept things at face value, especially if there are good first impressions. However, the type of background check that I’m entailing requires a bit of time and research.
Don’t overestimate information that is bluntly presented to you, take your time and do your research. When it comes to management and studying who will be running the business, you need to be thorough. Believe it or not, a simple Google Search can land you on some pretty interest topics and discussions.
Whether it be previous businesses, bankruptcies, records, public events, or some apocalyptic event that you’ve survived, background checks really help you nail down the nitty gritty. Again, commit time and study well!
Here are some kind of cool recommended tools that you can use:
(a) Pacer, for the search of court records. (https://www.pacer.gov/)
(b) Justia, a place for brief legal statements on some cases. (https://www.justia.com/)
(c) Coordinated Legal Tech, for your research on their business information (http://www.coordinatedlegal.com/SecretaryOfState.html)
There are, of course, other tools that are readily available on the internet. Feel free to make any suggestions or recommendations at the comment section!
2. The Financial Statements, Disclosures, and Projections
I’ll keep this one brief, as most of you already do this when assessing a viable investment opportunity. The financial information is truly imperative prior to any commitments, yet the aspect in which it is done simply isn’t adequate.
It’s wise to have your accountant review the numbers. I’m not talking about a 10-minute skimming through the numbers thing. Details are what we’re looking for. Your accountant should be able to spot a few discrepancies, inaccuracies, or even make suggestions by having a thorough look. Don’t ignore this paramount step!
3. Matching, Analyzing Competition, and Understanding The Market
I know, most of you probably think that these are the roles of a business. Why should investors do their research? Why should we take our time and do the work for the business, when it’s their responsibility in the first place? Right?
It’s true, typically, the business seeking the funding should be the one that readily provide these details to investors. In fact, investors shouldn’t even ask for them.
Despite that, most companies provide little to no information about their competition. Some actually prefer not to and tend to excuse the lack of research with a statement like “oh but we’re different.” Have you seen some of these businesses? All too familiar right?
No business is different! They all start somewhere and must be built on a legitimate foundation. Thus, it’s important they show some commitment towards market research in order to match and identify the best possible outcomes for their businesses, especially when asking investors to fund their firm.
4. The Business Plan
Beyond the scope of the three first elements we’ve discussed, reviewing the business plan can be time-consuming, which is why you need to do it efficiently. Look out for red flags.
Sometimes, businesses have a tendency of being over-optimistic, although it’s not a bad thing. However, when it comes to presenting it as an investment grade platform, companies need to take an approach that is both realistic and conservative.
What do you think about that? Should business owners stay conservative and present fact checked realistic data, even though it may scare some investors? Share your thoughts in the comment section below.
5. The Exit Strategy and its Timeline
We now finally come to the conclusion that you may be ready to invest and the only thing that is holding your decision in confidence is the idea of not having something to fall back on.
Has this ever happened to you? Right before investing, your gut feeling tells you that something doesn’t add up!
You’re not wrong to think that way or feel a bit of anxiety. Here’re some things that you may want to consider:
(a) Does the business have a structure in place to safeguard the possible downfall, should things go south?
(b) What measures has the company taken in order to establish groundbreaking rules that prevent a possible collapse?
(c) Is the business evergreen? Will it last in the next 3, 5, or even 10 years?
Don’t kid yourself, always be sure to answer the above-referenced questions before making your decision.
All in all, it’s important that you take your time and commit a serious schedule (even if a whole day) towards setting your standards when it comes to investing. Remember, every scenario is different. Your financial situation may allow you to be more flexible, whereas others will have no choice but to be conservative.
There are companies out there that can potentially help you go through all that hassle free. When it comes to due diligence, I recommend using private wealth club. They are thorough and come back pretty quickly with some insightful data that will certainly help you prior to decision making.
Do have any suggestions in terms of what other steps can be taken? What are some of the things you’ve personally experienced that can help investors make a more informed decision?
Share your views, thoughts, comments, and concerns by commenting. Let’s discuss!