Deciding to invest locally can be an exciting and daunting decision. There are so many factors you need to consider beyond just which business you want to support. When you do pick a business to invest in, what happens next? Do you just cut them a check, shake hands, and hope for the best? Not if you want to be a savvy local investor. Cutting a check is more like a donation. If you want to invest, you need to make sure you follow through with due diligence. Due diligence is evaluating risks in order to make better investment decisions and, in turn, improve positive outcomes for you and the local business.
Step one in the due diligence process is deciding your own needs, goals, and the risk on investing in the particular company. You may need to consult with a financial adviser for this step. Look at your current investments, income, and expenses. Do you have enough to pay your bills? Can you cover an emergency if needed? If your current situation is meeting all your needs, then investing locally is a great idea. If you’re unsure if you’re ready to take the big step into investing in small businesses, invest in yourself. You are your own business. Pay off your credit cards, pay down your mortgage, buy a house if you currently rent, go solar. There are a lot of ways to invest in yourself before moving on to a higher community impact project like investing in a small business.
After you’ve done your due diligence, you can move on to step two which includes researching and evaluating the local business you hope to invest in. You may want to look over the business plan, read through financial statements, ask for profit projections, and talk to their current investors (if they have any). The important thing to remember is you need to do as much research and gather as much information as you personally need to make a decision regarding the potential investment. Are you comfortable supporting the business? If so, great. If not, figure out why or move on to doing due diligence on your next investment opportunity.
Step three is deciding on contract terms. Make sure you get all terms from investment amount to time frame on return in writing. The contract should be drafted by a lawyer and signed by both parties. After that, it’s cutting a check time! Once that’s out of the way, don’t just walk away from the investment. Stay engaged. It’s better to be hands on (unless you’ve agreed to be a silent partner).
If there is any part of the due diligence process that you are unfamiliar with, you may want to consider teaming up with several like minded local investors. This is usually referred to as a “club” or “network.” Local investment clubs are a great way to play off the strengths of the other members. Maybe you’re great with understanding contracts but not so great with reading profit projection reports. Team up! Everyone wins when you’re well informed on all aspects of the risk process.
The number one piece of advice to remember when evaluating local investment opportunities, is to trust your instincts. If there is anything at all that makes you uncomfortable about the deal, don’t sign. Expressing interest means just that – you’re interested. You only commit when you are ready.
Investing locally is a wonderful way to support your community. Have fun with it, though never lose sight of the fact that it is an investment, not a donation. Do your due diligence so everyone involved – you, the business, and the community – can be winners.