Someone wants to invest in your business: The A-Z guide

Dustin Johnson
By Dustin Johnson

You’re here because someone wants to invest in your business. Conventional wisdom may say never to look a gift horse in the mouth. However, blindly accepting investment in your business could have negative impacts. After investing your money into your business, you need to be sure you’re getting into a good deal when taking outside investments.

The first thing you’ll get from this article is the pros and cons of investing in your business. That’s not all, though, because the pros and cons depend on your situation. This begs the question, “How do you know you’re getting a good deal?” By the end of this article, you’ll feel empowered to make the right decision for your business.

Let’s get into it.

Pros of investors for your business

According to the SBA, the average entrepreneur needs $10,000 to start a small business. When you factor in inventory, tools, and staff, the cost can exceed that. Additional funding can help you make more growth-oriented decisions for your business.

Cash flow

The added cash flow is the most obvious advantage of working with an investor. Their immediate and possible future investment in your business promises the ability to plan your business's future. The number one thing keeping business owners from investing in growth, hiring employees, and expanding their business is cash flow.

Faster growth

A high growth rate is essential for young companies because it allows them to scale quickly and build momentum. Your business will need more market share, respect, and sustainability in the early days. The faster you can reach “critical mass,” the better.

Growth requires dedication, hard work, and good decision-making. The reality is that even if you max out those three characteristics, sometimes they’re not enough to see rapid growth. An inflection of cash can help your business improve the quality of its product/service and hire top talent.

You get more than just money

When you partner with an investor, you can access more than just their money. Many business investors have extensive experience running businesses and may even know your industry. They can provide you with insights you’d otherwise never have access to.

Smart investors also know that making profit-driven decisions isn’t always in the best long-term interests of your company. They can use their expertise to guide your decision-making, knowing that a win for you is a win for them.

Tip: Considering the best choice between multiple investors? Consider their market and industry knowledge. One critical insight could be the growth lever your business needs to unlock quick growth.

It’s not your money

Too many entrepreneurs put all or most of their own money on the line. You can never accuse an entrepreneur of having too little skin in the game. Money from outside investors can help you minimize your own financial risk. You can save your personal funds as living expenses or holding on to them as an emergency fund.

It’s not a loan

Business loans can be great funding options. You can quickly get qualified for a loan through private lenders, the SBA, or your local bank. The difference between a loan and a private investment is that you must repay loans. Investors understand and accept the risk of losing their money if your business doesn’t work out. You must repay business loans regardless of whether your business succeeds or fails.

Cons of investors for your business

You get another boss

Having an experienced mind on the sideline can be an asset to your business. However, as the saying goes, too many cooks can spoil the broth. If you’re an entrepreneur who prides yourself in autonomy, working with an investor with a controlling interest in your business can present challenges. If you’re giving someone a stake in your business, they may insist on being part of the decision-making process.

It dilutes your share of earnings

In exchange for their investment, most investors expect equity in your business. Depending on the growth potential of your business, diluting your share of your business can diminish the worthiness of your return.

How to know you’re getting a good deal

If you want to step into a good deal, you should have advanced knowledge of what you’re looking for in an investor. Sketch out what funding your business needs, why, AND the type of person you want investing in your business. Know the types of private investors, what they’ll bring to your business, and ask for in return.

From the investor's perspective, they’ll want the highest percentage possible in relation to their capital investment. Too low of a percentage, and it will take too long for them to recoup their original investment and eventually profit.

You should consult with a professional or a business attorney before accepting an investment in your business. 

What do investors look for when investing?

A big part of finding the right investor includes exploring your options. Don’t worry about offending a potential investor by exploring your options. Having multiple offers on the table puts you in a better position to negotiate a better deal and find the best possible investor.

Past financial and market performance

More than anything, investors want to see a return on their investment. So the biggest hurdle is demonstrating that your business will make them a profit sooner rather than later. The longer your business has existed, the easier it is to show favorable profits. If you’re a startup, then you may need to rely on other metrics like revenue, MRR, or growth rate. You can appeal to your skills, the market opportunity, or a specific competitive advantage if you don't have the history to show these metrics yet.

Your business plan

If you lack the financial track record to convince investors, you can win them back with a solid business plan

Your business plan should include:

  • An executive summary acting as an introduction to the main ideas that you’ll discuss in the business plan. If a potential investor reads the executive summary and nothing else, they should walk away with a clear understanding of your business.
  • An investment opportunity section where you tell investors your goals and how their investment can help you achieve them.
  • A market opportunities section, which discusses factors outside your business, like the problem that your market faces and industry trends.

Your background 

Your business idea is only a tiny piece of the puzzle. You may think you have the greatest idea since sliced bread, but that idea still needs a skilled operator to execute it. Who leads a company is crucial to its success, and investors know that. In fact, it could be said that investors will spend more time evaluating YOU and less time evaluating your idea and the market you’re entering.

So what do investors want to know?

Investors will look to draw insights from your previous business experience. They’ll like to know about your experience in the industry of your new business. 

Your business with ComplYant

Growing a business can be one of the most rewarding experiences. When it stretches you to your limits, you realize that you have a little bit more to offer yourself and the world. If, along the way, you need help from an investor, you should consider every angle of a potential deal. One of those angles is your tax obligations. If you need assistance with keeping your taxes in order, you can use a tool like ComplYant.

Dustin Johnson
By Dustin Johnson
Dustin Johnson is a Senior Tax Research Specialist at ComplYant. Prior to joining ComplYant, he spent over eleven years performing tax research at the world’s largest tax preparation company. Dustin holds a Bachelor of Business Administration and a Juris Doctor. Outside of work, Dustin enjoys biking and spending time with his family.

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