Though pushing their business forward is typically job number one for entrepreneurs, holding on to the money they have already made can sometime be an equally difficult challenge.
Much like lottery winners, successful entrepreneurs, particularly those who have cashed out on one enterprise and are looking for a new challenge, find they have many more friends and relatives with their hands out than they ever thought possible. Many of these individuals have “investment” ideas and just need a small amount of funding to bring them to fruition.
Sometimes, an opportunity comes from a relative who dreams of opening, say, a restaurant, in which case we advise people to decide on a reasonable amount to offer via a loan – an amount they can live without, in case the loan isn’t repaid.
But when the offering is something more formal, we may hear about the same deal from several clients. That happened with a golf course a few years ago in Northern Virginia, but when we evaluated the package, there were more questions than answers and we urged all of our clients to stay away.
Three years later, one of those clients sent me a thank-you note along with a newspaper article about how the course had gone into bankruptcy.
Regardless of whether the investment concept is presented by a friend, a relative or someone in your business network, you should apply the same evaluation criteria. Here are four pointers to keep in mind:
1.The first thing business owners should do when approached with an investment offer is let the person know that they have a process in place for making such evaluations. Sometimes, bringing in a financial professional can take the emotion relationships out of the process, which can help you evaluate the offer strictly on its own merits.
2.If the person looking for money doesn’t have a formal offering kit or even a written business plan for the venture, it’s probably more of a pipedream than a serious business proposition.
3.The other question to ask at the outset is what kind of stake the individual making the offer has in the deal. If the people looking for investors don’t have enough faith in the venture to commit their own resources, then it’s probably not right for my clients either.
4.If there is both a business plan and a significant personal investment from the principals, then it is time to start learning everything you can about the industry in which the entrepreneur is looking to compete. Who are the leaders? Is there room for new players? What can this venture do better than current players? What problem does this firm aim to solve?
After a dry spell of several years when there was very little of this activity, our clients have started raising questions about potential new investments, which could be a harbinger of better times ahead.
If such an opportunity comes you way, be sure to keep those four pointers in mind as you evaluate the investment proposition.
Jeff Leventhal is a financial advisor with Hightower in Bethesda, Md.