The continuous scramble for investment opportunities constitutes an essential characteristic of wealth oriented people. What business to invest in, when to invest and what portion of one’s capital should be earmarked for investment purposes are some of the general factors investors consider before investing their money. However, given the growing incidence of investment scam, a rational and experienced investor moves beyond these generic considerations to rummage the possible devils in the books, the process and the people of the company they decide to invest in.
As a prospective investor, you are required to carry out a number of background checks on the businesses you have in mind. It is often advised that you have more than one business for the background checks as this will give you an opportunity to weigh various options and select the most appropriate before investing your hard-earned money. In doing a background check, you have to look out for certain things which include the following:
History of the Company
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The history of the company plays an important role while considering or planning on investing with the company. However, understanding the company’s history in the aspect of the company’s prioritized product and how they have been able to accomplish their projected returns in the past and also giving attention to their track record since their existence. This will give you an in-depth insight on the history of the company to avoid falling into the hands of fraudsters.
Location of the Business/Project
While identifying the physical existence of a business is almost the priority of most investors, the location or positioning of the business is often taken for granted. A successful and profitable business or project must be located in an optimal location with all necessary resources for its specific needs. You need to look out for the location of their projects and how suitable it is to accomplish their said goals and objectives.
Management Structure
You should also be conscious of how the business is managing its projects, peoples and products. A company without modern methodologies and techniques which could help in managing uncertainties effectively would likely default in paying the promised return on investment.
Capital Structure
The financial strength and records of a company invariably have a strong connection with the company’s ability to meet their financial obligation or commitment with their investor(s). Therefore, while reviewing the company’s financial records, you should pay attention to their past three years’ budgets and tax returns, a balance sheet, current accounts receivables, cash flow projections and profit and loss statements. Examine these to determine the business’s current net worth, its sales and expense trends and where the company’s strengths and weaknesses are.
Consult with Experts
In addition to working with your lawyer, you are advised to communicate with investment and financial analysts in the domain or industry you expect to invest. Being with one of the analysts is an opportunity to understand the type(s) of risk you are exposed to, and how it can be mitigated or completely avoided. To get secured with investment you have to communicate with people, ask questions, get acquainted with the company and also ask brilliant questions you might end up knowing what you didn’t know before.
Risk-Reward Analysis
As an investor, you should understand the possible risks the businesses are experiencing and how they are managing them towards sustainable growth or otherwise. In other words, assessing the relationship between risk and returns plays an important role in your investment decision. Most investors focus on the risk side of an investment but don’t assess the potential for and magnitude of returns. You need to know which of the projects or products being pushed to you by the businesses has a low or a high risk.
Conversely, the investment opportunities you may see most frequently are those with high risk and low returns. These are not the ones in which you are interested in investing. The investments in which you may be interested in investing are the ones where the rewards match the risk (low risk/low returns, high risk/high returns). Meanwhile, your ability to make an assessment of the risk/return profile is important in making successful investment decisions.
Resources
The Rules of Investing In Nigerian Agritech Business. 2021. FIDAS Africa. Available here