On specialized platforms, it is common to encounter advertisements seeking investors for new or existing businesses. Is it worth investing in such ventures, and what potential pitfalls might one encounter?
To gain insight into this topic, we spoke with entrepreneur and founder of OILResurs, Sergey Tereshkin, who has firsthand experience building a business from the ground up and is well-versed in the nuances, strengths, and weaknesses of such investments.
Investment Features in Business
In most cases, companies seeking investors already possess a clear business plan detailing all expected revenues and expenditures. Potential investors have the opportunity to review documentation before making a decision on whether to invest in the enterprise.
Investors can contribute funds by purchasing shares of the company or by becoming co-owners. These arrangements are discussed in advance. Entry into the ranks of founders can be for a specified period until the company fully reimburses the investor for their contributions along with agreed-upon returns.
Investment into a business can also take the form of equipment that is placed on the company’s balance sheet. Additionally, an individual may offer various ideas or leverage their own expertise and connections to promote the firm in the market. Such forms of participation should be discussed beforehand.
Advantages of Investing in Business
Investing in a business offers numerous advantages for entrepreneurs:
- In certain cases, individuals can influence the company’s operations, propose their own business strategies, or gain full access to management. This can significantly enhance the company's profitability and, consequently, the returns on the investment portfolio.
- Investors have the opportunity to invest in enterprises across various sectors, including manufacturing, arts, construction, technology, etc. This allows individuals to choose areas that not only generate income but also enable them to engage in truly interesting work.
- Becoming an investor does not necessarily require millions. One can start with a small share of the enterprise. Over time, it is possible to buy out the shares of other investors and become the full owner of the firm.
- Investing in business is one of the simplest and most accessible ways to generate passive income. There is no need for specialized education or extensive literature study, as the organizers handle the primary activities.
- The potential profits of a company are unlimited. It all depends on the willingness of individuals to work and promote their products in the market. The more effort invested, the higher the company’s profits and the investor's returns.
Despite the numerous advantages, any business inherently involves risk. The enterprise may fall under sanctions, face bankruptcy, etc. The risk of losing funds is particularly high if the investor does not participate in the company's activities or show interest in its performance. Conflicts may also arise among investors and business organizers, especially when the company begins to thrive and generate substantial returns for its owners. In such cases, mere greed and reluctance to share may lead to issues.
The investor's profit is directly tied to the company's success and can fluctuate considerably. Sometimes an enterprise requires additional funding, and the absence of such resources can result in diminished profitability or stagnation in growth. Investments in business tend to be long-term. The days of recouping investments with substantial profits in just one month are gone. Currently, returns rarely exceed 50% per year.
Tips for Investors
To avoid issues when investing money in a business, it is advisable to heed the expert’s recommendations:
- It is crucial to carefully analyze the documentation provided by those seeking investment. Often, seekers intentionally underreport expenses and overestimate potential profits to secure funding for development. Inaccuracies can lurk in the most unexpected places, such as in energy costs, overhead expenses, etc. Every detail contributes to the overall cost.
- Do not invest money in areas where you lack any understanding. Business organizers, sensing a lack of knowledge and comprehension of the operation processes, will likely attempt to turn the situation in their favor. This can leave the investor at a disadvantage, as deception can hide in the details.
- It is essential to document the investment. This can be done in various ways; some prefer notarizing the agreement. Other options are also possible. It is important to specify the degree of participation and amount of investment in the document. Otherwise, proving your affiliation with the company may become problematic.
- Many experienced entrepreneurs prefer to enter the company as a legal entity rather than as individuals. A foreign investor can acquire a share in the enterprise, allowing disputes and problems to be resolved in international courts, effectively minimizing the risk of hostile takeovers. One strategy is to register a firm in an offshore jurisdiction, granting it the same rights as any other foreign company.
- Do not invest all funds in a single enterprise. It is better to spread investments over several businesses in smaller portions. This strategy significantly minimizes the risk of total financial loss.
Investing in business can yield substantial profits. The key is to approach the matter responsibly and not leave it to chance. It is important to maintain comprehensive oversight. No one will take care of the investor's money as diligently as they will. Issues of control and access to information and financial documentation should be discussed in advance.
