5 Things You Need to Know Before Saying Yes to That Start Up
Hundreds of thousands of new businesses are started each year. Yet, over half of those businesses fail in year one, and another 50 percent fail by year number five. Because of that, traditional business start up financing has become very hard to come by, resulting in wide-eyed, hopeful entrepreneurs turning to friends, family and anyone who will listen when it comes to raising capital to fund their vision. What are you going to say when they turn to you? Before you say, “Yes,” make sure you investigate these five items first, and be prepared to ask your entrepreneur a few tough questions in the process.
1. Is it viable?
When someone is near and dear to you, it can be all too easy “sell” you on whatever million dollar idea they have. Take some time to investigate the viability of the idea before whipping out your checkbook. Who needs it? Who will it help? What are the demographics? Are there other businesses like it? Viable business ideas have numbers behind them for similar businesses or related franchises that will help guide your decision.
2. Who pays the bills if you fail?
Did you know that if the legal structure of the business isn’t done right, you, as the investor, could be left footing the bills in the event the company fails? You can. Before investing in any venture, make sure everything is in writing, and encourage your entrepreneur to establish the business as an LLC (Limited Liability Corporation) to offset costs to you in the event that the idea tanks.
3. When will I see a return on my money?
Don’t expect to see a dime until the business has been profitable for three to five years. Even if your entrepreneur’s “baby” takes off and shows profit in the first year, most entrepreneurs need those profits as added capital to grow the business. However, even knowing that, it’s wise to have a written contract that outlines when, how and with what money your investment will be paid back, or affording you a choice to maintain equity in the company in lieu of repayment.
4. Plan your exit
Succeed or fail, you probably don’t want to be tied to this business for the rest of your life. When you write out your contract and outline the repayment responsibilities you are holding your entrepreneur to, you should also have an exit strategy as part of the entire agreement. Plan your exit during, or a little after, year number five if you want to get out ahead.
5. Read and understand the business plan
Every great business has a plan that includes a basic outline for the business itself, a marketing plan and potential pitfalls the company anticipates along the way. If your entrepreneur doesn’t have a plan, they also shouldn’t have an investment – from you anyway. Basic business plans can be obtained online for free, so no entrepreneur has a good excuse to not have one put together. Then, once you receive the business plan, do your own independent research and verification of the numbers and competition before you pen a check or hand over a single dollar.
Of course, if the business go belly up, you may never see your money back at all, so you should be prepared for that contingency. Wise investors know better when to invest more money and what they are comfortable losing, and you should be too.
Regardless, it is never a smart move to believe in everything you hear, or invest in every new start up opportunity that comes your way, unless you do a little bit of research on your own first.