My question concerns a potential invesmtent (made by my partner and me) in a young, but very profitable business (somebody else’s). Without going into excessive detail, we have met with owners, toured the facilities, discussed how their business operates, etc. We also personally know two of their employees.
The investment would be substantial for us, but comes with an attractive return. The investment would only be secured with a simple promissory note (to be reviewed by my atty), with personal gurantees by the owners.
Simply put - I’m worried about the lack of security with this investment, but am still enticed by the return. I don’t want to be too greedy (pig) and do something stupid, nor do I want to let a good opportunity pass by. I’m trying to get past the “too good to be true” factor.
Question: Does anyone have any suggestions for the types of documentation (i.e. company/personal credit reports, investor references, balance sheet, etc) that I should request before finalizing our decision? I want to make sure that I’m as thorough as possible with due diligence.
It’s a credit/cash advance business - they provide cash advances to merchants (anyone with a credit processing machine; convenience store, pizza shop, liquor store, etc.). The money is lent to individuals with poor credit - based on the amount of business they do with these credit processing machines. The advance is paid back directly from each swipe on one of these machines, with the total advance paid back in 6-9 months - with very high interest. Supposed default rate = 4%.
I dont’ know how much of that makes sense.
With this kind of business there doesnt’ seem to be very much in the way of hard assets to use as collateral - except for computers, call center equipment, etc.
Any other thoughts?
Generally speaking, you want validated information that proves the company makes what it makes and a strong record of growth. Start with their business plan and financial statements. If they don’t have either, run away quickly. Business usually fail because they can’t handle the growth effectively.
Once you decide to loan the money, you can put a lien on the shares of the owner. If they default, you can take the company via the shares. Unfortunately, you won’t have much in the way of physical assets, but you will get access to the recievables. You can also get the owners to pledge personal assets like their personal residence, cars, boats, jewlrey, etc. A condition of the loan could be a seat on the board of directors so that you can oversee what is going on and get access to the financial statements.