Clients of ours who are current or former business owners are often offered to participate and invest in private deals. These range from angel investments to private businesses and real estate. As stewards of our clients’ wealth, we act as river guides for private opportunities to help clients make sound investment decisions with their capital. In this environment, it's especially important to be discerning.
If you’ve just sold your business, have no work responsibilities, and received a large exit, it can be tempting to start investing in private deals now that you have meaningful capital to invest. You may also want to continue doing work in some capacity at least to stay busy rather than retire altogether. We have nothing against private investment deals whatsoever, as long as they pass a few tests.
In the first pass looking at a deal, most can be dismissed quickly for a few reasons. You may not know the person offering the deal very well and may not have built up the necessary trust that comes with investment. Or the deal could have been offered via more public distribution channels, so it's important to know who is co-investing. Most deals that are legitimate and investable don’t make it into the public realm before being funded by investors who know the particular space. Where a deal comes from is important.
The deal may also not be a good fit for your skill set and background. An owner who recently sold a software company might not be a good fit for investments in aerospace manufacturing companies. Keeping your investments within your knowledge set helps you identify good deals from bad ones. You will spot frauds, bull$*!#, scams, and bad actors much quicker than deals outside your domain. You may also be able to add value to those investments through your expertise and help grow the next generation of companies in your industry.
If an investment is in an area that you are new to:
You must size the investment correctly with smaller dollar amounts.
Diversify in multiple investments over time to maximize the learning and feedback loops.
Expect that it will take 5-7 years minimum to learn the space.
What is your investment going to be used for? Is your capital going towards buying out a prior investor/operator or growing the company? With rare exceptions, long-time investors looking to get out of a company using your capital is not a good sign. If a previous investor wasn’t able to do well, it’s unlikely that you will. We want your capital being used to grow a business and make your investment more valuable in an arena that you understand, not liquidating investors wanting out.
If a deal passes these initial steps, then we can move on to more specific due diligence including financials, business model, risks, funding, management, and exit. More than anything else though, don’t discount your gut feelings. As a business owner you have great experience running a company, managing and working with people, and developing your own intuition. Use it in an arena/industry where you have an edge over others. Trust your intuition: it’s likely what helped you be successful in the first place.
Pilot Notes
Permanent Equity published the “Small Business Pandemic Response Toolbox” that is filled with helpful information, spreadsheets, calculators, and more.
Advisor Perspectives published an article about how they review private investments with their clients.
Ari Ozick wrote a very in-depth article about how to sell your online business.
On Twitter, Cash Flow Cowboy did a Q&A all about family offices.
Andrew Wilkinson, founder of MetaLab and Tiny Capital, appeared on two podcasts this week, Venture Stories and My First Million. In both he talks about how he acquires companies, what he looks for as an investor, and how he built his companies to over 400 employees.
Tim Ludwig, an investor in search funds from San Diego, shared a few notes and observations he’s seen recently.
If you know anyone who might enjoy reading our thoughts around business owners and interesting resources we come across, feel free to forward this along to them so we can keep them in the loop as well.
Additionally, if you come across an interesting article, interview, podcast, or Tweet, please send it over to us. We are always buyers of quality information.