7 questions every investor must ask before investing

7 QUESTIONS EVERY INVESTOR MUST ASK BEFORE INVESTING

www.dkwongassociates.com 2

Did�you�just�get�yourself�into�a�bad�business�deal?��

Was�there�something�you�could�have�done�to�help�avoid�it?��

Do�you�know�what�questions�to�ask�before�making�that�deal?�

7 Questions Every Investor Must Ask Before Investing

When you are planning on investing in a business, the last

thing you want to focus on is whether or not it will fail. But

reality dictates that you do need to take this possibility into

account. According to Industry Canada, about 96% of small

businesses (1–99 employees) that enter the marketplace

survive for one full year, 85% survive for three years and 70%

survive for five years.

(Key Small Business Statistics, January 2009)

As an investor in a new or existing business, you’re probably

asking yourself - how can I reduce this risk? At DK Wong, we

believe that by asking the seven basic questions that follow,

you can greatly reduce the chances of making a poor

investment decision.

BU

SIN

ES

S S

UR

VIV

AL

RA

TE


How Did You Hear About the Investment?

On average, most investment opportunities are referred by a

friend, business associate or an acquaintance. Depending on

the source, the level of reliability varies. Some people will have

the specific details, while others offering advice that is very

general and sketchy at best. Far too often we see people rely

on a person’s word alone when being sold a deal.

While a person’s word and reputation are valuable, like buying

a house or a car, you need specifics to know if the investment

opportunity is right for you. No matter who is making the

recommendation to you or how much you trust them, you need

to do your homework or what our investment industry calls

“due diligence”


What do You Know About this Business or Industry?

Are you able to help grow this business?

You need to think about whether your past experience is

relevant to the investment opportunity at hand.

You also need to consider whether you will you be a passive or

an active investor. This will dictate the extent to which you

need to have expertise in the industry you plan to invest in.


How Well is the Business Operating Under its Current Management Team?

Part of doing your homework involves getting into the details

of business operations…

Did you interview the management team and key employees?

Do you see any areas of weakness in operations?

What will they do with the money raised?

You need to have addressed the above questions before you can even think of moving forward.


What do the Financial Statements Tell You?

You must have a clear picture of where the business’ finances

lie…

Is the business profitable, breaking even or losing money?

Did you do a cash flow analysis?

Is the projected return high enough for you to take on this risk?


Are You Willing to Invest More Money into the Business?

Often times, a business will require more than one round of

funding to achieve its objectives.

Will you be able to step up if needed to keep the business

going?


What Type of Funding is Being Offered?

Funding will fall under either equity funding or debt funding.

You may also see a combination of the two.

Whatever type it is, you need to be comfortable with it.

You also need to carefully scrutinize the valuation. Is it

reasonable?

Does it justify the investment?


Do You have the Deal in Writing?

Over the years, we have come across a number of situations where investors have invested into deals with little or no agreements in place. Similar to when couples start dating, the excitement and euphoria of the deal may distract an investor from putting the details into writing, as the courting process is full of the promise of a trusting relationship being forged.

You’re not thinking about a breakup – you’re thinking about the (seemingly very promising) future. A handshake, while a nice symbolic gesture, is in no way a legally binding guarantee of your rights. If things go well – great! However, if the business gets into trouble, having nothing in writing ends up wreaking havoc and straining the relationship between both parties, regardless of how rosy the picture and the relationship seemed at first.

Another deterrent for putting a deal in writing is the legal costs to hire lawyers; both sides usually want to keep costs down. But these really are non-negotiable costs. You have to protect yourself. For the monies spent drafting a proper deal, it keeps both parties on a level playing field - specifying everyone’s understanding and responsibilities. This is especially crucial when things do not work out. You just never know what could happen.


If you have a project or deal you are looking to invest in and

you are unsure if it is right for you, DK Wong is here to help.

We believe investors need to ask these questions and know all

the risks involved before making an investment into any

business or venture. Let our broad industry experience and

screening process help you determine whether or not a

particular investment is suitable for you, potentially saving you

a lot of time, money and certainly headaches.

Contact us at [email protected] to find out

more about our services for investors.

Call to Action

The informa on contained in this report is for general informa on purposes only. The informa on is provided by DK Wong & Associates Inc. and while we endeavour to keep the informa on up to date and correct, we make no representa ons or warran es of any kind, express or implied, about the completeness, accuracy, reliability, suitability or availability with respect to the informa on, products, services, or related graphics contained in the report on the website for any purpose. Any reliance you place on such informa on is therefore strictly at your own risk. Through this report you are able to link to other websites which are not under the control of DK Wong & Associ‐ates Inc. We have no control over the nature, content and availability of those sites. The inclusion of any links does not necessarily imply a recommenda on or endorsement of the views expressed within them.

7 questions every investor must ask before investing

Documents