Is a Bad Investment the End of Your Business?

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Is a Bad Investment the End of Your Business?

Building a company and growing it to high levels of success is the aim for every business, and it’s not easy to get to the stage where you have money to manage your growth. For many, investments – especially early in the company’s history – can mean the difference between trading or failing, and even as a company grows, how and where you invest your funds matters significantly and no one wants to make a bad investment.

There is a lot of pressure to carefully research and evaluate every opportunity – but sometimes, there isn’t time to do this, or there’s a narrow window of time to make a choice and it doesn’t go according to plan. Even the most secure looking and promising investments can sometimes fail, and depending on the size of the investment, how it’s linked to the rest of the business, and the terms which need to be negotiated to handle it, the outcome can be catastrophic.

Bad investments are going to be a part of business (even though we’d prefer that they weren’t) – most of the time, experience and advice can help you to avoid them, but sometimes they just happen.

Common Investment Mistakes

Although there are a huge number of reasons and situations in which bad investments may occur, there are a few common mistakes that investors can be aware of, in order to minimise their chances of committing them:

  1. Not understanding the information – Financial and investment information is frequently detailed, expansive, and extremely complicated. The investment team should either be working with a qualified third-party who can fully explain the ins and outs of the opportunity, and how it relates to the company, or should have someone who can do so in-house.

  2. Mistiming the market – Whether it’s making an investment in a new product, service, or technology, there are going to be ups and downs on the market, and knowing when to strike is vital – this applies to both buying and selling. There are always peaks and furloughs, and if you mistime your investment, you could lose a lot of money.

  3. Not having enough information – If an investment opportunity is presented without a very clear strategy and plan, then you should be extremely wary – there is after all a lot of truth to the old adage, “if it seems too good to be true, then it probably is.”

Identifying a Bad Investment

As we mentioned, bad investments can range from problematic to absolutely catastrophic for a business, and it’s absolutely vital that every investment is monitored and reviewed on a regular basis, so that action can be taken at the earliest opportunity – which will hopefully prevent catastrophic level consequences from occurring.

When reviewing your investments or potential opportunities, ask yourself:

  • Are we being pressed to ‘buy, buy, buy’?
  • Is it being marketed as the ‘next big thing’?
  • Are you being told that it’s ‘risk free’?
  • Does it align with your business goals?
  • Does the opportunity have endorsements or references that you can contact?
  • Have there been red flags related to the opportunity or company behind it?

Do your due diligence before investing but continue monitoring once the investment is made – never leave it to simply ‘tick over’.

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Managing the Fallout of a Bad Investment

If you’ve made a bad investment, then the consequences will largely depend on your circumstances, the size of the investment, and whether your company is capable of absorbing the damage.

For some businesses, this could be the end – they may have exhausted their financial support options or be unable to pick themselves up from the resulting damage (this could be to consumer support and trust, product sales, etc).

But closing down and stopping is always the last resort. Ideally, before investing anything, companies should do a comprehensive risk analysis and ensure that every investment works towards a single goal, and that the level of risk for every investment is acceptable both as an individual investment, and as part of the entire portfolio.

Should a bad investment occur, time is of the essence, and it’s important to seek qualified advice from experts who can provide you with advice on minimising the damage, reclaiming any reclaimable assets, and potentially looking at financial support to weather the storm.

As with most things in business and life, a solid foundation is the best defence against bad investment – so take the time to research, make sure you understand the risk, and ensure that any options for insurance and mitigation are covered appropriately.

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