How do you invest in a private company?

You are considering investing in a private company or you’re already a private company investor.

The investor must think about their own personal situation and future before thinking about the business. e.g. When might they need to exit?  What happens if the investor suddenly dies or is incapacitated?  How much time and effort for how many years does the investor want to devote to their investment? Etc.

There are 7 sets of questions to consider, starting with questions regarding the future (and the potential for value growth), which are the foundation for the questions regarding short term actions.  It’s better to think through these questions BEFORE you invest your money.

#1 What will be the needs of the future customers?

  • Who are the target customers?
  • What problem or need do they have?
  • How will the company sell to them?
  • What will be the customer experience?
  • How will the customer perceive the competitively differentiated value proposition?
  • How will the company’s internal operations be competitively differentiated?
  • What are the potential sales and profits?

#2 How will you get value for your investment?

  • Eventual equity sale?
  • Management salaries?
  • Dividends?

Products or services provided by the company?

#3 Will you leave your equity in the company indefinitely, or do you plan to exit? Even if you have no intent to exit, there is one exit situation to think through – your death or incapacitation.

Let’s assume there is an eventual equity sale.

#4 Who will buy the company in the future (5-10 years time)?

  • Strategic buyer
  • Financial buyer?
  • Owner/operator?
  • Employees?
  • IPO?

#5 Why will they buy the company?

  • Leading and defensible market position?
  • Non-concentrated distribution?
  • Proven management team with successors?
  • Sustainable margins?
  • Growth potential for the future buyer?

#6 What might they pay for the equity?

  • Multiple of free cash flow or EBITDA?
  • Terms and conditions?

#7 How will decisions be made by the shareholders?

  • What decisions will be reserved for the shareholders rather than management?
  • What veto power will individual shareholders have?
  • What % of equity and % of shareholders will be required for a decision?
  • What decisions, if any, will be made by the board of directors

To enable discussion with your colleagues, download the following slide:

How do you invest in a private company?