How to Successfully Invest into Private Companies

By Reuben Buchanan, Managing Director – Axstra Capital Pty Ltd

Whilst there is no shortage of information on how to invest into the stock market, there is however limited information on how to invest into private companies. This is especially more complicated if you are a minority investor and have no control in the company. The main difference between investing into public ASX listed companies and private ones is liquidity.

There is no ‘ready’ market for private companies should you – as the investor/shareholder – wish to exit your position. The only way you can really get out is when there is a liquidity event, such as a trade sale or IPO. This may take years, if ever, so there are certain steps you should take prior to investing into your neighbours “exciting new venture that’s sure to go global”.

How can I become a private investor?

Anyone can become a private investor, but in order to be successful one, here are some tips:

  • You need to have capital that you can invest and a willingness to accept risk with the investment. I.e. only invest money you can afford to lose
  • It’s best to have some experience in running your own successful business. This will help you to gauge the risks of the potential investment, the competence of the management team and how far away they might be from an exit
  • Do plenty of due diligence on the individual and/or organisation promoting the private company and its investment opportunity. These include ASIC, background searches and reference checks. Try to learn about the track record the promoter has behind them, and also if they are honest and trustworthy
  • Has the private company clearly justify the valuation to you? Question them on it. Ask yourself, is the business really worth what they are asking? Entrepreneurs      usually overvalue their business. If you are not sure, get a second opinion from an accountant, lawyer, business valuer or corporate transaction specialist
  • Get good legal representation. Make sure your lawyer has previous transaction experience and get them to review the shareholders agreement. Also, make sure you get a qualified accountant to go over the financial projections
  • Find out if there are any planned dividends to be paid once the company is profitable
  • Question the promoter on the exit strategy for the business. How will it happen, what is the timeframe, what is the potential return on capital?
  • Spread your risk across multiple investments. Don’t put all your eggs in one basket
  • Don’t get too excited about the first opportunity you see – be patient and be prepared to wait 3 to 5 years to get your investment back
  • Join a business angel group. There are many business angel groups and associations across Australia. Start with the AAAI – www.aaai.net.au – this will also assist you with finding new deals
  • Keep your money onshore. As soon as it leaves Australia, you have no protection under ASIC Corporations Law. If you lose your money, you are on you own and you can pretty much kiss it goodbye

And last but certainly not least, follow your gut instincts. If you don’t feel good about a deal, or an individual at the first meeting, or there is something not right about the deal, just let it go. There will be plenty more deals to look at. As a real estate agent once said to me, “the deal of a lifetime comes by almost every week”. The same can be said when it comes to private investing.

IMPORTANT: This information is general and should not be taken as specific advice. Readers should always seek their own professional advice. For more information, please email enquiries@axstra.com.au

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