For investors looking to buy into a business, there are a lot of different factors to take into account, and when it comes to actually signing a deal, how do you know what sort of issues to negotiate? The checklist of things to take into consideration can seem overwhelming, but once you know what you are looking for, it can be considerably easier to navigate the ins and outs of the business world and make a sound investment.

I have found that the two most important steps are intelligence gathering and negotiations (leading to acquisition or investment). By using the below points as a sort of mental checklist, you can get a good grip on the key things that you need to scope out before getting involved in any investment, from getting a solid understanding of the business at hand and its position in the market, to negotiating your position and profits once you are on board.

Stage One: Intelligence

I cannot stress enough how important it is to do your groundwork. Learning all you can about a potential investment, from the people behind it to its accounts and business plan, allows for an informed decision and a clear outline of where the business is heading. It also establishes how your investment will be utilised within the company, and how profitable it will be.

The three golden rules are:

• Business is all about people. Meet as many of the people in your potential investment as you can. By putting a face to a name you get to know what sort of staff and key figures are operating the business. Speak to them about it and get their viewpoints – try to speak to them separately and not all together, if possible, as often the most dominant senior staff member will set the tone. If everybody has a different opinion, that can be a bad sign. By getting to know the different people behind a brand, you will also get a 360 degree understanding of the company’s make up.
• Check out their business plan. It is a good idea to speak with somebody in the industry to ascertain whether the business plan of your potential investment/acquisition is viable. Does it provide a realistic long term outline for growth? Does it cover all the angles? Where will the company be five, ten years down the road?
• Look at the books. Check the accounts thoroughly to get an understanding of how well the business is doing and what sort of financial inputs and outputs are involved. What about other businesses/investors they have been involved with? What sort of relationships do they have with previous business partners? What have the experiences and feedback been like from them? Are there any debts? Remember: reported profit is not necessarily the same as cash profit, so dig deep! You want the most accurate report on their finances to make sure everything is up to scratch.

Stage Two: Negotiation

You’ve done your groundwork and want to acquire the business. When it comes to putting pen to paper and signing off, there are a number of factors to take into account. The below points, while by no means exhaustive, are a good place to begin and should provide you with a solid starting point:

• How is the business valued? Look at previous equity deals in the same market and check to see if your investment is structured or valued differently, or in similar ways, and why. Check their growth and sales profits (if they are an existing company and not a start-up) and see what the potential market is – are there opportunities for growth? A SWOT analysis (strengths, weaknesses, opportunities and threats) is extremely useful to figure out the competitive landscape and your investment’s position within it.
• What sort of position will you have? Will you have voting rights on the company’s board/committee? Make sure you examine how the shares are structured and how active your role will be – will you be a silent investor or sit on the board? Is it limited liability? What kind of share of profits will you be looking at?
• Negotiate on management information. If you are investing a certain amount of money, how often will you be informed of updates and briefings? While these are just a few points to bear in mind, they are an outline of the sort of factors and issues to consider when looking to invest in a business. Be as thorough as possible in doing your groundwork, as the better understanding you have of the business, then, in turn, you can make an informed decision on how profitable it will be to get on board, as well as just how involved you will want to be.

My biggest learning curve as an investor was a company I looked at which had a very interesting concept but its founders could not produce an acceptable standard of accounts and books. When you are looking for investment, creativity needs to be balanced with sound business acumen. In this case I passed, but only after wasting valuable time and money.