Be it for business expansion or otherwise, investing in a business can be exciting. However, it is often expensive and comes bundled with risks. In this article, our team at IndiaBizForSale shares with you the common tips to remember as you set out to explore an investment opportunity in India!
What To Do Before Investing In Business OR Startup?
1. Industry:
Every investment opportunity is a risk-return proposition. Start by shortlisting the right industries for you to invest in. These could be either the ones where you already have a portfolio, or the ones you have an understanding of, or simply something that is new and has good return potential.
2. Size:
Identify a range of business sizes that you would be comfortable investing in. The size could be in terms of revenues, customers, employees, infrastructure, or any other indicator as you may deem fit.
3. Location:
Location becomes important in terms of the local environment and your accessibility to the locations. You don’t want to put your money in a location that is fraught with political / communal unrest, or one that is not easily accessible within a few hours!
4. Transaction costs:
Take stock of professional costs such as legal fees, accountant’s fees, banker’s fees before you initiate the investment process!
How Sourcing Investee Businesses?
To invest in a business in India, source out businesses to invest in from local magazines, classified, directories and web portals. Information on other businesses which are not listed there can be obtained from third party agents, brokers. Alternatively, you can also check with consultants or CAs and Lawyers describing what kind of business you are looking to invest in.
Due Diligence Checklist
1. Reason for investment:
Why is the business owner raising investment for his business? Check for obvious red flags like ailing business, financing concerns or court litigations. As an investor, you should look out for businesses that are raising money for expansion and/or diversification.
2. Credit history of business:
Check for outstanding debt, unpaid creditors, and other liabilities – you definitely don’t want to take on liabilities of the owner!
3. Reputation:
Delve thoroughly into the reputation of the business as well as personal reputation of the owner. Visit the area, speak to the local people, and do not restrict yourself to the customers and creditors.
4. Financials:
Dig deep into the sales pattern, seasonality and periodicity, major cost drivers, a review of audited financial reports for the past 3 to 5 years for fair valuation of business assets.
Compliance Considerations
1. Tax:
Your business investment decision will have a few tax implications and you should consult your accountant to take stock of these. For starters, Capital Gain Tax and Stamp Duty are common considerations.
2. Legal Issues:
The commonly applicable provisions are from the Company Law, Income Tax Act, Labour Laws, and approvals by Banks or Financial Institutions, copyrights, patents, trademarks, etc. along with licenses, zoning requirements, insurance coverage and lease rights. There are also special provisions for startup investments, which are worth looking into.
Business Valuation
1. Return on Investment:
The most common way to value a business is to estimate the percentage return on investment that a commercial investor would expect from the business over a certain period of time.
2. Cash Flow:
The Discounted Cash Flow (DCF) technique values a business by projecting its future net cash inflows over a period of time using the time value of money approach.
3. Assets:
This process entails valuing tangible assets such as land, building, plant, machinery, etc. and intangible assets such as intellectual property and management expertise.
Investment Terms and Conditions
1. Payment:
Decide on payment mode, tranches, conditions for tranches, and arrangements such as escrow.
2. Documentation:
Obtain a receipt against your payment and an original copy of all investment documents.
3. Non-Compete:
It is important that the purchase agreement ensures that the owner is not allowed to set up a similar, competing business of his own post-investment.
What To Do After Investing in SME or Startup Business?
Secure rights for attending board meetings, being updated on crucial business changes, and make sure you have a say on important company decisions. Most importantly, build a relationship of trust and transparency with your investee – it can go a long way in making investments smooth and hassle-free!
If you have any queries on the above or about investing in businesses in general, please write to us at [email protected]. Happy investing!
Final Thoughts
Indiabizforsale.com is India’s largest online platform for M&A, Investment, JV, Partnership, Fund Raise and allied needs. With approximately 20,000 registered clients and a dedicated team of professionals we provide end-to-end services for all needs related to buying/investing in, selling/investment for a business, franchise or distributorship network.
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