Tech enabled investment banking platform for Startups and SMEs
|
Does the idea of buying or investing in a business excite you?
Welcome to the Club!
Thousands of first-time buyers and investors embark on this fascinating journey every year by putting their money in an existing business. For some, it is the idea of testing their entrepreneurship acumen in an existing business, while for some it is about making their money work hard. However, for many people, the decision is not easy to make – should you buy a business or invest in one?
We have worked with thousands of business owners, buyers and investors over the last few years and have closed multiple deals – both in business buying and investing. In this chapter, we will share a few practical insights from our team to help you understand the varied implications of buying and investing in a business. We recommend that you begin by asking yourself the following questions – the answers to these will help you lead the way towards the most suitable opportunity for you.
Are you looking for complete ownership, control, and a deep-dive into entrepreneurship? Are you excited about building your dream venture? Do you want to be your own boss? If the answer to one or more of the above is ‘yes’, then buying a business is more suitable for you. Investors are limited in terms of the amount of control and decision-making power they exercise in a business. Of course, there are various rights of an investor that you can exercise to significantly step-up the amount of control you have – but the owners are still going to have the final say and a much higher involvement in running the business.
Do you have some experience in the industry to which the business belongs? Do you have prior experience in running a business – either first-hand or through a family member? Do you have adequate network in the relevant domain? If yes, then buying and running a business on your own will be a lot easier and more appropriate. However, if you are not sure about your background and experience being a good fit for the business, then investing in it might be a less risky proposition.
Resources are critical when it comes to running a business. Does the business have an existing, well-established team, or do you have to build one yourself? Is there a loyal client base that you can rely on? Are the distribution networks on auto-pilot or will they require your constant supervision? Is the raw material coming steadily from an assured supply base, or is vendor management going to be a constant headache? If most of these pieces are sorted out, both buying and investing are lucrative possibilities. However, if the business is of high potential but still needs a lot of fixing, it might be better to invest your money and help the existing owners figure it out on their own.
In reality, the decision to buy or invest in a business is not isolated from other decisions in one’s life. Contrary to popular belief, there is no ‘right time’ to buy or invest in a business. There are no rules – anyone can put money in a business at any point in time, provided their existing commitments are in sync with the decision. Having a wonderful day job that you absolutely love? Invest in a business. Looking for a career transition? Consider buying your dream venture. Do you have significant financial commitments towards your family? Start by investing in a business – consider buying one later. Looking to build an enterprise that will sustain your family for generations? Go for buying a business. These are just a few examples – the best way to go about it is to map all your personal and professional commitments against the two options (buying and investing) and then arriving at the best opportunity for yourself.
We hope that these pointers have helped you decide whether you want to buy or invest in a business. In the next chapter, we explore the various preliminary considerations to be reflected upon before you actually begin the journey.
“You Can’t Fight for Your Rights If You Don’t Know What They Are”
Investment in a startup is an opportunity to enter a new industry, a new market and develop a long partnership with your investees. Though, sometimes it can be a little scary to fully comprehend the terms and conditions entailed in the deal documents. A typical deal agreement covers five key areas – deal economics, investor rights, governance, management and control, and exit. We have worked closely with thousands of businesses, business buyers and investors over the last 5 years, and in this article, we will share with you the key rights that are available to an investor in a startup.
Rights Against a Down-round: This right is called Anti-Dilution Right, and it protects the investor from devaluation of his stocks against any future investment into the startup at a lower price or valuation. If there is a down-round, i.e., the business raises the next investment at a lower valuation, then the prices of shares of the earlier investors are also reduced to the current price with retrospective effect. The adjustment is reflected by a proportionate increase in their shareholding percentage. Need a refresher on business valuation? The following article tells you in a nutshell everything you need to know about business valuation.
Rights Against Investor Overriding: This provision is collectively referred to as ‘Control Rights,’ and it makes the business owner liable to communicate and take approval of the investors for any material changes in ownership, business model, strategy, any material transaction, contracts, and so on. Control Rights are usually negotiated between the investor and the business before finalizing the agreement, however, at the end of the day, the stronger your partnership with the investee, the more you can stay involved in the startup. Here are some additional tips you should remember when investing in a small business.
The right of First Refusal (ROFR): What if a business owner or promoter decides to sell a part or all of his shareholding? ROFR gives the investors precedence over any third party when it comes to purchasing the owner’s / promoter’s shareholding. It is only when there is a written refusal from investors to buy the promoter’s stocks that a third-party sale can be initiated. How does this protect the investor? Note that as an investor you not only bet your money on the startup but also on the people running it – i.e., the owners or the promoters. You can avoid onboarding an unknown third-party by exercising ROFR.
While we have tried to explore the key investor rights briefly in this article, a professional deal consultant can help you understand the full plethora of rights available to an investor, and help you negotiate the same. Indiabizforsale.com is India’s most preferred business opportunity platform that is trusted by over 25,000 business owners, investors, buyers, consultants and investment bankers. To know more about what we do and how we can help you, explore us.
You may have explored a number of investment options, such as bank deposits, shares, stocks and bonds, mutual funds, and so on. But, have you ever considered putting your money in a small business? Yes! In India, we are slowly warming up to the idea of investing in small and medium sized businesses, as more and more people get allured by the return potential and the exciting journey that it involves.
In this article, we discuss the benefits of investing in a small business, and why you should consider it as a major investment goal in the years to come!
You must be wondering if there are risks associated with investing in a small business. Investments are never risk-free, and investing in a small business is not an exception either. However, there are several ways to safeguard your money, and mitigate the risks involved. These include: opting for low-risk instruments such as debt investment, vetting the business, its owners and the industry rigorously, and securing investor rights for protection against future unforeseeable circumstances.
At IndiaBizForSale.com, we provide first-time investors with thorough support and handholding, and also help you connect with professionals to help you with the transaction and risk-management. We have thousands of businesses on our platform which can be filtered by industry, location, asking price, credibility and so on.
Be it for business expansion or otherwise, investing in a business can be exciting. However, it is often expensive and comes bundled with risks. In this article, our team at IndiaBizforSale shares with you the common tips to remember as you set out to explore an investment opportunity in India!
Before You Begin
Industry: Every investment opportunity is a risk-return proposition. Start by shortlisting the right industries for you to invest in. These could be either the ones where you already have a portfolio, or the ones you have an understanding of, or simply something that is new and has good return potential.
Size: Identify a range of business sizes that you would be comfortable investing in. The size could be in terms of revenues, customers, employees, infrastructure, or any other indicator as you may deem fit.
Location: Location becomes important in terms of the local environment and your accessibility to the locations. You don’t want to put your money in a location that is fraught with political / communal unrest, or one that is not easily accessible within a few hours!
Transaction costs: Take stock of professional costs such as legal fees, accountant’s fees, banker’s fees before you initiate the investment process!
Sourcing Investee Businesses
To invest in a business in India, source out businesses to invest in from local magazines, classified, directories and web portals. Information on other businesses which are not listed there can be obtained from third party agents, brokers. Alternatively, you can also check with consultants or CAs and Lawyers describing what kind of business you are looking to invest in.
Due Diligence Checklist
Reason for investment: Why is the business owner raising investment for his business? Check for obvious red flags like ailing business, financing concerns or court litigations. As an investor, you should look out for businesses that are raising money for expansion and/or diversification.
Credit history of business: Check for outstanding debt, unpaid creditors, and other liabilities – you definitely don’t want to take on liabilities of the owner!
Reputation: Delve thoroughly into the reputation of the business as well as personal reputation of the owner. Visit the area, speak to the local people, and do not restrict yourself to the customers and creditors.
Financials: Dig deep into the sales pattern, seasonality and periodicity, major cost drivers, a review of audited financial reports for the past 3 to 5 years for fair valuation of business assets.
Compliance Considerations
Tax: Your business investment decision will have a few tax implications and you should consult your accountant to take stock of these. For starters, Capital Gain Tax and Stamp Duty are common considerations.
Legal Issues: The commonly applicable provisions are from the Company Law, Income Tax Act, Labour Laws, and approvals by Banks or Financial Institutions, copyrights, patents, trademarks, etc. along with licenses, zoning requirements, insurance coverage and lease rights. There are also special provisions for startup investments, which are worth looking into.
Valuation
There are various approaches to value a business.
Return on Investment: The most common way to value a business is to estimate the percentage return on investment that a commercial investor would expect from the business over a certain period of time.
Cash Flow: The Discounted Cash Flow (DCF) technique values a business by projecting its future net cash inflows over a period of time using the time value of money approach.
Assets: This process entails valuing tangible assets such as land, building, plant, machinery, etc. and intangible assets such as intellectual property and management expertise.
Investment Terms and Conditions
Payment: Decide on payment mode, tranches, conditions for tranches, and arrangements such as escrow.
Documentation: Obtain a receipt against your payment and an original copy of all investment documents.
Non-Compete: It is important that the purchase agreement ensures that the owner is not allowed to set up a similar, competing business of his own post-investment.
Post Investment
Secure rights for attending board meetings, being updated on crucial business changes, and make sure you have a say on important company decisions. Most importantly, build a relationship of trust and transparency with your investee – it can go a long way in making investments smooth and hassle-free!
If you have any queries on the above or about investing in businesses in general, please write to us at [email protected]. Happy investing!
Indiabizforsale.com is India’s largest online platform for M&A, Investment, JV, Partnership, Fund Raise and allied needs. With approximately 20,000 registered clients and a dedicated team of professionals we provide end-to-end services for all needs related to buying/investing in, selling/investment for a business, franchise or distributorship network.
Raising investment for business can be a nightmare, especially if you are just starting out or have a small to medium sized business that is still establishing its hold in the market. In this article, we bring together the most important tips to get investment easily for your business or startup.
Visibility: Here’s a question, would you buy something that you never knew existed? No, right? Exactly. Investors would never put their money in something they have never heard of – a problem that plagues investments in SME. Create a buzz around your business – make some noise! And it does not always have to be costly. Post free-of-cost online press releases for your product launch and other achievements. Get people in your network to spread the word around your business. Write interesting blogs, and make sure your company gets the visibility, and not just you. Attend events, present at small gatherings, tie up with entrepreneurship clubs and bond with fellow entrepreneurs. Do everything you can to become more discoverable. It is the key to grabbing an investor’s eyeballs.
Portfolio-fit: Do your research – investors are usually looking for the next fit in their portfolio. Instead of pitching randomly to every investor, pitch to the ones that have a portfolio where your business will be a great fit, or the ones who are adventurous and try new investments once in a while. This way, finding investors is more focused and targeted. These can be individuals or institutions or groups of individuals / institutions. Study your competitors and see where they got their money from – that’s your cue! Franchise investments are a great way to secure investment intelligence and determine portfolio fit for your investment.
Relationships: Until you form relationships, all your research and intelligence are just scratching the surface. Investors and their representatives are people who invest in people. Form genuine relationships – and not just for raising money. Communicate your ideas and learn from theirs, leverage any cross learning you can get from seasoned investors. Wait for the right opportunity to pitch for investment – understand what the investor wants by meeting him informally first. Events are great platforms to network, but the onus is on you to follow-up, connect and create a relationship of value and trust.
Solid Financials: Yes, we are taking you back to the basics, and yes, it’s hard. While you may get an investor interested by networking, visibility and relationships, to sustain his interest, your business must have solid fundamentals. Otherwise they will just feel that you are wasting their time! For small business investment, it is important that you have in place your revenue model, cost drivers, 5-year plan and sales projections, and you should be able to articulate your business strategy that makes you stand apart. You should be ready to pitch your business anytime anywhere, with the numbers at the tip of your hand.
Meticulous Documentation: Investors are demanding when it comes to documentation, and small business and startup investment are no exceptions. Standard due diligence checklist includes company incorporation documents, audited financial statements for at least 3 years, budgets, plans, records, and projections, among others. Even documents such as minutes of meetings, client deals, employee contracts, supplier invoices, maintenance records, lease records, personal credit history, intellectual property documents and licenses should be kept organized in a single folder for anytime access.
Valuation: Suppose you want to buy a toothbrush, and ask the price. But the shopkeeper can’t tell you how much the price is – would you be interested in buying from him? Exactly. If investors get interested in your business, sooner or later they will enquire about the valuation. You must have a fair a reasonable number ready with you, supported by calculations done by your Chartered Accountant. Remember, that this is just an opening price, and not a deal breaker! You can state it as a range and then mention that it is negotiable. You can also ask the investor what he thinks, if you deem it appropriate to do so at this point.
Now that you have a bird’s eye view of raising investment for your business, get started! Stay tuned with Indiabizforsale.com for more articles like this.
