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Critical Questions to Ask Before Investing in a Private Company

investing-companyEngaged investors are always seeking new opportunities and potential ventures to invest in. Some of the most lucrative investments to be made are in smaller, private companies. After all, many of today’s major corporations began as private companies – but how do you know which private companies to invest in?

By aggressively asking questions of potential companies, you can ensure that you’re taking a risk that’s best for your investment portfolio. Private venture investing provides many financial benefits. Consider the statistics:

  • Money market returns are trending lower than ever before. Seeking out a private venture provides higher rates of returns.
  • While the overall United States economy struggles to rebound, there are local and regional markets that are thriving, creating perfect atmospheres for startups and small businesses.
  • Labor sponsored venture capital funds such as pension funds are booming. This means that entrepreneurs are more likely to start a business now and seek venture capital.

With so many benefits to investing a private company, it’s no wonder that investors are aggressively seeking out these opportunities. However, it’s important to ask the right questions to ensure that you’re making an investment that’s advantageous for you. Questions to ask include:

What’s the business’s management style?

Of course you’ll want to investigate the private equity firm’s track record and financial standing. Once you’ve looked through that information, though, one of the most important considerations is the management style of the business. This is important because it will define the relationship that you have with the business and how you can effectively work with those who will be using your investment. In other words, while financial considerations are important, the business’s personality, business culture, and management style must all be taken into consideration.

What’s the complete business plan?

For any investment, you’ll want to consider both short and long term growth. This means that you should consider key aspects of the business plan and what sets this organization apart from its competitors. You’ll want to ask what your money will specifically be used for and how much will be spent on tangible versus intangible assets. Furthermore, aside from the business itself, be sure to consider its market. What’s the size of the market? Key demographics? Customer profiles?

By understanding the key aspects of the market, you’ll be able to determine the potential rate of return on your investment. Basically, you don’t only want to consider the business profile, but the market as well.

Who’s making the pitch?

It’s crucial to remember that the business will always make a sales pitch that benefits their image. This means that you must always carefully consider the investment proposal before responding. You’ll want to avoid high pressure tactics such as a deadline and work with businesses that allow you to not only ask as many questions as possible, but also talk with current or potential advisors.

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