Lifestyle

How to Invest in a Local Business from Your Home

Karen Donovan

Working at a job allows you to trade time for money, and you know, based on the hours you put in, how much income you will make. This is a safe way to earn a living, but you are the investment and scaling it is limited by your skill set and time commitment. You can invest in going beyond your earning potential and creating more cash flow.

Investing is buying assets that increase in value over time, allowing you to gain a financial return. This grows the amount of money you have and also can benefit the investment itself. While there are many investment opportunities, looking to your backyard for possible investments is wise. They allow you to build the local economy and show a commitment to your community.

Are you wondering how to invest in a local business? You can invest by using lend capital. This is typically in the form of a loan, and you set the terms for interest payments and the repayment of the initial loan amount within an agreed-upon period. No ownership is granted, so you are just repaid your investment plus interest, regardless of the business’s success.

Another way is to purchase equity in the company. With an equity investment, you buy a set amount of the company’s stock. Instead of interest payments, you receive an equivalent share of the revenue and dividends that the business makes, and you may also have some control over the business itself. The capital is invested into the business for growth and revenue generation.

Let’s learn more about how to invest in a local business:

1. Find Local Opportunities

When investing locally, you must find businesses aligning with your values. These are operations you believe in and want to help grow in your area, and you not only are looking to increase your net worth, but you also want to feel good doing it.

These are deals worth pursuing, and a good place to start is with any entrepreneurs within your family or friend network. There are publications where you can find information about start-ups or those seeking expansion. You can contact local business development organizations and even social media platforms. Business investment opportunities are available everywhere if you know where to look.

2. Meet to Solicit Interest

When you find a few promising local businesses, set up a meeting to gauge their interest in getting funding. They may be open to individual investors if they have struggled with banks and other lenders. Here is where you learn about their business goals and what they intend to do with any funds they collect.

3. Due Diligence

For any companies that meet your criteria, it’s time to dig in and do some investigation. Due diligence means you are auditing financial records to confirm details and facts about the company under consideration. Different types of due diligence include:

Financial

This audit goes over statements to ensure the company is financially solid and has no irregularities.

Commercial

You want to check the company’s competitiveness and market share, including prospects and growth. Commercial due diligence considers the company’s management, HR, IT, staff and supply chain.

Legal

The company you are considering investing in must comply with all legal and regulatory requirements and not have any pending litigation. Make sure to go over leases, intellectual property, contracts, warranties and property liabilities.

Tax

This is essential to check for any negative tax exposure, including back taxes and potential reduction in their tax burden.

You can do soft due diligence where you look at the people working with the company, including the quality of management and their loyal customer base. Human elements such as company culture, ethos, and employee relationships should be considered. Hard due diligence is all about data and financial statements where you dive into the accounting, financial position and future projections.

4. Negotiate

This is where you hash out the terms of the investment and is a formal negotiation with a binding contract. You will go over the following:

Equity Investment

  • Financing amount
  • Profit percentages
  • Ownership percentage

Debt Investment

  • Loa amount
  • Interest rate
  • Repayment terms

You need to be flexible and understand the needs of the business in question while keeping to your investment goals. This is a balancing act and one that comes from both the analytical brain and compassionate heart.

5. Close the Deal

You can finalize the deal when everything is negotiated to both satisfaction. This involves signing contracts and providing funding. In return, depending on the contract details, you will receive a percentage of ownership, stocks, dividends, profits, capital gains and or interest.

This is how to invest in a local business. Once you have done so, keep involved and lend your support as needed to ensure your investment is sound. Adding a local investment into your portfolio helps your local community and those that work and shop in it, so embrace your area and get involved in its development.