‘In investing, what is comfortable is rarely profitable.’ – Robert Arnott
Last week, on my Instagram handle tolu_do, I wrote about the investment into a health food brand -‘SO FRESH’. If you are in Lagos or Abuja, maybe you have heard of them or tried their products out at their stores.
What caught my attention is that a brand, like many others around you, was ripe for investment. I say this because there might be businesses around you that require investment to expand their brand. But can you spot them?
Investments usually take 2 forms. Equity or debt, or a mix of both. But let’s keep this email simple.
The first and common type is the debt type of investment which you may be aware of. An example is: I will give you my money and you will give me a return (interest) of 10% in 1 month’s time. Have you done something like this before? If so, you have provided a service for a premium! What do you think the banks do when you apply for loans? Not very different is it?
Treasury bills, fixed deposits, bonds and commercial papers are examples of debt investment in a (government) regulated environment. You ‘buy’ or ‘invest’ in debt instruments, like your Treasury bills with N100,000 with an interest of 10% for 182 days. Notice it is called ‘debt instruments’. The risks vary, with government bonds (long term) and treasury bills(short term) being the least risky because it is backed by the government, and commercial papers and other promissory notes being more risky, because the business can fail and recovery may not be easy depending on if the debt is secured(have collateral) or unsecured(no collateral). Some of these debt instruments are rated to give an indication of the nature of the risk involved.
Borrowing your friend money or borrowing a business (Agric, fish farming, perfumery or trading business) some money at a certain interest is another example of debt investment but it is unregulated and also risker. The recovery can be harder except there is some form of collateral, and even then, there are often little or no guarantees. You recourse(solution) is to go to court and that depends on the nature of the agreement you have. If you are in lagos, there is a Small Claims court that was created earlier this year (2018) to help with such but the value must be more than N100,000 and less than N5million. I am yet to hear much else about the court but do share if you have had any experience with this.
Equity investment is a different ball game. What you are essentially doing is ‘paying’ money to become a part owner of the business, ideally, a business that has prospects to be successful and become a money maker. You can be a dormant business partner or active business partner. You could have a significant or a little share in the business depending on the value of the business and what you are offering. Usually, there is an agreement on the role and extent of input and control from the person offering equity investment. It essentially means that, you will share in the gains and the losses of the business, that poses a bigger risk to your funds, all things being equal.
Equity investments are by and large, unregulated by government, as it is a private business arrangement between persons or/and organizations as the case may be. Clear agreements are often necessary for this type of investment, especially where a large amount of money is involved. There are gentlemen agreements but its harder to enforce when the relationship goes sour.
There are many businesses around that are solely owned and also partnerships. If you are going to offer equity investment to a business, it is ideal to bring other skills/knowledge, etc to the table. More times than not, the business is looking for more than just money. If it was just money, there are several options to borrow the money as discussed earlier. There is also the resistance to share in ownership too, so do not be surprised by this.
Regardless, I must let you know that equity investment, especially private equity investment, requires a lot more attention to ensure the funds injected is used for the purpose agreed and required for the business to thrive. A business owner may not be transparent and accountable with their finances, which is one of the tenents for investing. Would you, give out your money with someone who says they don’t know what they made in sales, gross profit and net profit? Or someone who cannot explain how their business model makes money?
So before you go ‘giving’ your money to private businesses to invest in, be sure about the numbers, be sure about the opportunity in the market, which is hard facts of assessing the business; as well as the soft facts like the character and integrity of the business owner(s).
Share if have you ever invested in a private business before? Either as a lender or as a part owner?
Tolu Dima-Okojie.
Money Behaviour Strategist