business is especially in Nigeria and the kind of businesses that could be regarded as small based on some criteria.
Having said that, below are some of the things that should be considered while deciding on how to invest in these businesses.
1) Your risk appetite and the risks that the small business is exposed to as well as the mitigations.
2) The management team and/or the owner(s) and their expertise with regards to the running of the business.
3) The availability of a viable target market, the ease of accessing the market and the product acceptance level.
4) The availability of a sustainable sources of input for the business.
5) The business's growth plan.
6) The vision of the business and the problem it's created to solve.
7) The stage the business is at in its growth cycle.
Having thoroughly considered the above, we can now delve straight into the topic.
Investing in small businesses could be done under this two broad categories.
A) Direct investment in equity or debt.
B) Indirect investment through intermediaries.
Starting with category A, most small businesses in Nigeria are owned by one person or a very few people with little or no capital to up scale the business and as such are looking for you to invest in exchange for an ownership stake or financial return over a period of time(in the case of debt finance).
Now that I have these options, how do I invest?
The following steps should be followed.
1) If you are not going to have a majority stake in the business that will give you control over the business, then take the "test the water depth" investment approach by agreeing with the owner(s) of a particular stake (eg 20%) but the payment of which will be broken down into smaller instalments of say 5% payable after a given milestone is achieved.
By this, you have the prospect of having a stake in a successful business but will only lose 5% of the agreed sum if the business is unsuccessful and you decide to exit without the stress of recovering your investment through the sale of their assets if any.
2) Your exit routes should be discussed and agreed on, as well as circumstances that may trigger the exit clause.
3) The expectations of the business and the owner(s) from you (your responsibilities as a stakeholder in the business) should be discussed and clearly spelt out before you invest even a logo. Please do not assume everyone knows your relationship and responsibilities in the businesses instead confirm your assumptions by discussing them with the appropriate person(s).
4) Your relationship with and responsibilities in the business including items 1 and 2 above should be documented in detail and signed by the parties with you having a copy. This should be witnessed by a lawyer or at least by a knowledgeable person. Please do not skip this on the basis of family relationships or friendship as this will give the idea owner or borrower a sense of responsibility and accountability and as well serve as binding document for your stake in the business. Very important.
The document should also clearly state the reports that will be sent to you and at what intervals if you won't be part of those managing the business.
The above applies to whether the investment is by equity or loan.
Let's now look at category B.
This is the investment you make through an intermediary. The intermediary could be a family member, friends, business associates or a mutual fund. The common denominator here is that the investment is extent secured by the personal guarantee of the intermediary though the return on investment is usually small.
In this instance, the relationship is usually informal and undocumented but only premised on TRUST. However, it is the best investment practice to have this new relationship documented and signed by the intermediary, the business owner and yourself.
This will protect you from any unforeseen circumstances such death of the intermediary friend.
Having done the above based on the option chosen, your comfort level on the investment in a small business should be high.
Ultimately, it will be a lot easier if the GOD factor is brought in at the very beginning of your decision to invest. By this I mean bringing the decision to God through Jesus Christ for leadership and direction.
You will know if He supports your decision when you have an inner peace of mind.
Culled from:
The Mind Set of an Entrepreneur, is
a series of teachings from an up-coming book titled 'The kingdom Entrepreneurs' by Arinze Matthew.
Arinze Matthew is a Business consultant, a Life coach and CEO MATZILLA GLOBAL RESOURCES.
You can reach him on
Twitter - @MatthewArinze
Instagram- matthewarinze
Facebook- Matthew Arinzechukwu
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