The concept of invest directly in a company is a bit foreign to people. I’ll show you exactly what you need to know to buy stock in privately held companies. Here is exactly how to invest in a company.
How to Invest in a Company (Step-by-Step Guide)
Investing in publicly traded companies is a bit more straightforward than private companies. It’s a bit foreign to a number of different people how to invest in a company without needing to use a broker or intermediary, so I’m here to help.
I love finding private investment opportunities to make money. It’s a great way to unlock additional income and capital appreciation potential.
There is more risk involved, but the opportunities usually involve less competition and rely solely on YOU to find above-market returns.
For public investments, we have it easy. We can simply buy the stocks on an exchange. Not much additional work required.
For me, I use M1 Finance to invest in company with no fees and on complete auto-pilot. I’m constantly putting more money into the market.
In the meantime, this gives me time to find private market transactions.
Opportunities are available every day.
You just need to be able to put in the dirty work to go out and find them.
Table of Contents
How Does Investing in a Business Work
Investing in a business is a different beast than your ordinary stock investment through the stock market. There are similarities but generally speaking, investing in a private business is a lot more work.
- If it is a public company, listed on a stock exchange, then its shares are available for any member of the public to buy or sell. To invest, you can simply buy some shares through a medium like a stockbroker or online trading service. It’s easy and simple to understand.
- If it’s a private company, on the other hand, the current owners are under no obligation to sell you any of their existing shares, and the directors of the company are under no obligation to issue any new shares for you. If you want to invest, you need to talk to them and persuade them to sell you some new or existing shares. Obviously, whether they agree to do this or not depends mainly on how much money you are offering for the shares, but also to some extent on whether you are a person that they want as a shareholder.
Depending on if you own a controlling or noncontrolling interest in the business, you can make more or fewer decisions on the direction of the company.
Reasons Why People Invest in Companies Directly
There are plenty of reasons why people invest in companies directly rather than just investing in public stocks.
Here are some of my favorite reasons:
- Your returns could be uncorrelated compared to the public stock market
- You look incredibly smart if you invest and grow a business that addresses a hot topic or future trend
- By investing in a company and maintaining control, you are creating history and bringing new solutions to the table
- You can potentially achieve outsized returns while achieving market diversification
Investing in a company is a great way to build yourself personally while also enhancing your financial future. Even if things go the wrong way and you lose money, you’ll end up learning a lot along the way.
How to Invest in a Company (With Steps)
Here is a step-by-step guide to investing in a company no matter if it is private or public. If the company is private, it’s likely going to be very hard to invest in giants like Cargill or large conglomerates.
But who says you can’t invest in a local business that is thriving?
Don’t be afraid to do some outreach to invest in a private business you like. You never know what might come out of it.
Step 1: Conduct Industry Research
I like the idea of conducting industry research to find attractive, growing industries with a tailwind for growth. There are a variety of ways to get industry research for completely free.
- Use Google Trends to see hot topics or trends within an industry
- Validate the market size and future market opportunity
- Read free articles about who the key players are within a given industry
- Do a market share analysis to determine who’s vulnerable to lose market share and who is gaining market share
Finally, if you like the industry find out the top market share companies within that industry as prospective investments.
Step 2: Do Company Level Due Diligence
Industries can be the same, but companies are not. Each company is different through its business model, values, philosophy and more.
You need to validate everything you know about the company. Without it, your potential investment could go to $0 instantly.
How do you go about conducting due diligence on a potential investment?
- Validate the product, test it out and try it
- Review financial statements and supporting information to ensure they are accurate
- Ask for financial projects, including a 5-year plan and a budget for next year
- Conduct legal due diligence to ensure company agreements are satisfactory and protect against harm
- Vet our the suppliers and customer relationships
These are just a few key items that you’ll need to explore in your pursuit of investing in a private (or public) company.
See Related: Best Robinhood Alternatives to Invest for Free
Step 3: Find a Way to Purchase Shares (Public or Private)
If there are a few companies that stand out to you in a particular industry, you can outreach to ways to invest in the company.
Think about your investment amount. If you are acquiring a controlling interest in the company, you’ll likely need to pay a control premium.
This results in a premium valuation because it reflects your ability to make operational and financial decisions of the company. You are in control and call all the shots.
See Related: Alternative Investments 101
Step 4: Negotiate the Purchase Agreement and Price
The negotiation stage is obviously very important. You’ll need to hash out very important things like:
- Price and valuation for your investment
- Governance and control rights
- Ongoing management
- Financial reporting
- Legal agreements between suppliers and customers
- Capital spending and budgeting needs
If you are investing in a private business, ensure you keep in mind that any change in commercial terms out of your favor should result in some compensation to you. That means you should either get a reduction in the purchase price or something similar.
It’s a negotiation at the end of the day, so you should know the art of winning at the negotiation table.
Step 5: Monitor Your Investment
If you want to be the one in control, you’ll be calling the shots and controlling the operational decisions. Unless you find an operator that you trust.
You should always keep a close eye on your investments to ensure everything is running smoothly and according to plan. Private company investments are not passive investments by any means. They will require more hands-on work. If you can get the right people in place, you’ll be able to scale back your involvement over time.
A smart way to monitor your investment in a company is to lay the groundwork upfront. Ensure you have the right people reporting the right information to you. This will make your life significantly easier.
With a public company, you don’t need to do much. They have thousands of investors and are required to report financial statements quarterly as well as provide an earnings call.
Additionally, public investments are highly liquid investments.
Private company investments are not and usually require a broker or larger fees to sell your position.
See Related: How to Invest in Options for Income
Conclusion on How to Invest in a Company
Investing in a company can be an outstanding way to build wealth or achieve above market financial returns. If you like investing in index funds, this probably isn’t the best route for you.
Investing in a company allows you to be in control of your outcomes. It’s like investing in a rental property but with a going concern business.
You can evaluate more income-oriented companies like a laundromat or you can focus on growth with a Software as a Service (SaaS) company.
You have no downside to at least reaching out to a business to invest in. You have a 100% failure rate if you don’t ask or try.
Try reaching out to a business in your local area that you want to either buy or invest in. See what happens…