How to avoid a bad investment deal

Perhaps more important than spotting a good investment deal is avoiding a bad one. Look for red flags when discussing any potential terms with a business investor and take the following steps. Have your team review the terms of the deal. Your team of professionals and advisors should always review any deal before you sign. They are your team for a reason, and their input could raise questions that would otherwise go unaddressed. Any investors who try to prevent you from collaborating with your team should not be trusted. “Any investor who coerces you or bullies your business plan into working with their advisors and legal team only, usually under the guise of saving money and time, should be shown the door,” Hanson said. Avoid unreasonable ROI demands.


Investors expect a return on their investment; it’s why, after all, they are investing in businesses in the first place. However, small business owners need to understand what reasonable expectations are and what are just greedy money grabs designed Honduras Telemarketing Data to pull the rug out from under founders. “It is not unreasonable for an investor to get back their invested capital and a reasonable return upon a sale before the common shareholders get paid, but terms that insist investors get multiples of their investment back (i.e., two or three times their investment) just about guarantee nothing for founders,” Toomey Davis said. Avoid excessive fees or commissions. If you are looking for investors, be sure you are talking to someone ready to write the check themselves.



Plenty of middlemen and brokers will attempt to insert themselves into the process to siphon off funds in the form of excessive fees and commissions. “Any seemingly high fees or commissions or ‘points’ just to raise or broker initial and subsequent funds upfront — especially from ‘other investors in their exclusive network’ — is typically suspect and nothing more than a dangerous broker situation,” Hanson said. Beware of “vulture investors.” Not all investors operate in good faith. A true business investor wants you to succeed and will work with you to craft a mutually beneficial deal that supports your business’s long-term growth. Another class of investors, called vulture investors, are more interested in creating untenable situations that result in their takeover of your company.