Make Your Money Work Hard – Invest in a Small Business!

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!

  1. Capital Gain – Unlike investing in a business for dividend income, which gives steady but relatively smaller, periodic pay-outs to the investor, you can invest in the equity of a small business for capital gain. What does this mean? Essentially, an investment made for capital gain does not pay out a steady stream of income, and waits for the value of the business to multiply instead, so that the value of the investment made by the investor also multiplies proportionally. This implies a longer gestation period, but a much larger return potential.                 For example, let’s say you have Rs 1 Cr. to be invested. You can invest in a company which pays say 10% dividend monthly, or you can invest in a small business whose value will potentially double in 5-7 years by using your money as growth capital. When this happens, your investment also doubles! Now, how would you identify a business with a good growth potential and what value multiplier can you expect? Usually, a good consultant or deal professional should be able to help you with these aspects.
  1. Interest Income – If you are interested in immediate, periodic payments instead, go for debt investment in a small business as opposed to the equity route. A debt investment is like a loan, but an investment all the same. A predefined interest rate is agreed upon between the business owner and the investor, and annualized pay-out streams of repayment are disbursed periodically. The upside? You do not have to wait for the business to start minting good money, and a debt investor usually has preference above all other investors!
  1. Diversification – As Warren Buffet once said, when it comes to investment, “one should never put all one’s eggs in one basket”. Instead of only sticking to the conventional investment options, bring a fresh flavour to your portfolio by investing in a high-growth small business. Let your money work hard for you as you reap the benefits of a diversified investment basket.
  1. Grow Your Network, Grow Your Money – Not all investment returns are tangible. Apart from the direct monetary rewards of investing in a small business, there are also indirect benefits that can help you grow your money in the future. These include securing your foothold in the industry to which your investee business belongs, growing your professional network through business promoters, consultants, deal professionals and co-investors in the business. Unlike other investments which tend to be passive, investment in a small business is a high-involvement one that also makes your journey exciting and the returns manifold.

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.

Tips to Remember While Investing in a Business

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.

Quickly Connect with Investors

Newsletter Issue 40
August 2016
 
Introducing you our New Feature that allows you to Quickly Communicate with Buyers in 2 Simple Steps.
   1. Register / Login 
   2. Send Message to Buy-side listing
 
More than 2800 Business Buyers looking to Buy a Business. Search for your matching buy-side prospect for your business requirement and Send Message to your ideal prospect.
 
2 more Businesses Sold in last 40 days, next could be yours! 

Mergers and Acquisitions in India

Newsletter Issue 33

January 2016

BizNews: Your Monthly Refresher for Buying and Selling of Business in India

Mergers and Acquisitions in India
Experts see transactions bouncing back in 2016 and the deal making in India to grow further this year.

Pharmaceuticals, Healthcare, Infrastructure, Technology and E-commerce are the key sectors that are already gaining interest from the investors. Also, the government’s launch of the ambitious ‘Make in India’, ‘Digital India’ and  ‘Startup India’ initiatives have increased interest to buy and invest in businesses in different segments.

Continue reading “Mergers and Acquisitions in India”

Onwards and Upwards: More Business Opportunities

NEWSLETTER ISSUE 32

BizNews: Your Monthly Refresher for Buying and Selling of Business in India

Turning 3 – IndiaBizForSale.com !!!

We are super excited to announce that we are only few days away to turning 3 as a company. For many, it is a milestone to prove that the company is here to stay.

In this year, we have grown to a team of 9; moved to working space at CIIE incubation by IIM Ahmedabad; passed through accelerator program Gujarat Accelerator in flying colours; established tie-up with ClickIndia.com for more visibility to our listing owners; exhibited and participated in Vibrant Gujarat and many more exciting activities.

Continue reading “Onwards and Upwards: More Business Opportunities”

Positive Sentiments in M&A Activity in India Sets New Trend

Largest global corporate that includes Indian tycoons are expected to exhibit huge appetite for M&A transactions in the year 2014 compare to last year, as per the KPMG International latest Global M&A Predictor. Isn’t it encouraging?In addition to boosting confidence, global analysts are also predicting corporates to manifest improved potential to undertake transactions in this year than last year.

The Indian M&A activity has begun to witness more traction and improved interest in the later quarter and expect it to continue at the end of 2014 also, making it a much better year.

Continue reading “Positive Sentiments in M&A Activity in India Sets New Trend”