Not So Fast! Seeking an investor? Slow down and take five steps to protect your company from making a bad choice.

Bob Shallenberger knows time is money. He talks fast and makesdecisions quickly. By all accounts, Shallenberger's need forspeed has made him a highly successful BIZ Experiences. But last year,when his home-building business needed an investor,Shallenberger's rapid-fire approach to decision-making almostburned the house down.

Being in real estate, Shallenberger finds that investors are notshy about offering him their money. Says Shallenberger,"Having an investment that returns 30 percent annually and isbacked by real property, it's pretty easy to get peopleinterested."

For Sale
Shallenberger's company, Highland Homes of Saint Louis, neverneeded an investor until, early this year, with two $500,000 homesalready under construction, his banker pulled the plug. "Whenthe bank said we were already overextended, we decided to take onan investor," he recalls.

With hardly a second thought, Shallenberger, 33, reached out toa casual acquaintance who had previously indicated an interest ininvesting. Immediately, it seemed like a good fit, so Shallenbergerclosed the deal. "We shook hands and next met at the titlecompany," says Shallenberger. "But did we have a writtenagreement? No. Did we research his background? No. We just knew hewas a partner at a respected law firm."

Shallenberger soon regretted shooting from the hip. He quicklydiscovered that the investor expected to be consulted on everythingfrom the exterior landscaping to the interior paint color. As aresult, the home that was supposed to take five months to buildinstead took 10.

In hindsight, if Shallenberger had slowed down to betterevaluate his investor, he might have seen the warning signs beforeit was too late. Before you jump the gun with an investor, workthrough the following five steps:

1. Know the investor'spersonality. According to attorney Marc Morgenstern, whoadvises both investors and BIZ Experiencess in private equity deals atlaw firm Kahn Kleinman in Cleveland, there are some people anBIZ Experiences should simply avoid. "For example, I try to neverlet a client take money from lawyers; they're the worst,"he says, without a hint of irony.

More generally, different kinds of investors have differentreasons to invest. Shallenberger thought his investor simply wanteda good return on his money. In fact, it was probably more about thestatus of building expensive homes, he says.

To glean personality clues, Morgenstern advises clients tolisten to the questions investors ask. An obsession withoperational detail is often a sign an investor will worm his wayinto day-to-day company management. If you need additionalmanagement help, that may be to your advantage. But it can easilyspiral into a case of too many chefs spoiling the stew.

2. Do background research.No matter how badly you need investment money, there's noreason to get it from a deadbeat or felon. Internet-based referencesearch companies, such as ChoicePointOnline.com, LocatePLUS.comInc. and USSEARCH.com Inc., provide quick and easy ways to know ifyour investor has any skeletons in the closet.

Reference search services access databases of business licenses,criminal records, bankruptcies, real property transactions, civilcourt judgments, even utility bills. A basic search throughLocatePLUS.com costs less than $8 but could save you thousands inthe end.

"Within the search results, look for inconsistencies,"advises Jon Latorella, president of Beverly, Massachusetts-basedLocatePLUS.com Inc. "A lot of times, the absence of data ismore important than the info itself. If very little is available ona person, it could be that they simply pay cash for everything-orit could be more insidious, like their whole personality isfabricated." Likewise, multiple occurrences of differentnames, or different spellings of the same name, may indicateprevious fraud.

Morgenstern also uses background reports to look for someoneinvolved in multiple lawsuits. "People who have been inlitigation tend to end up in litigation," he warns. "Theycould be someone who seeks litigation or simply someone who doesnot know how to resolve conflict. Either way, avoid thosepeople."

3. Get help. Taking on aninvestor is like getting married: It's an emotion-filleddecision with long-term consequences. That's why consultantMike O'Malley, who provides due diligence services through hisChicago company, The O'Malley Group, recommends getting anoutsider or a consultant to look over the deal. "A consultanthas no stake in the deal and can operate at a level above anyparticular self-interest," he says. "We can ask the toughquestions that other people are unwilling to ask because it makesthem uncomfortable."

If a paid consultant isn't in the budget, look within yourown network for a person whose judgment you trust. Ask them to lookat both the investor and the players in your company to assess thefit. "The whole system has to work together," saysO'Malley.

4. Set expectations. Perhapsthe most overlooked aspect of taking on an investor is settingexpectations. Even when a formal contract or subscription agreementexists, it rarely addresses issues like mentoring and management.Do you expect your investor to help manage the business or to keephis distance? Let him know in advance. Morgenstern puts itsuccinctly: "An expectation unarticulated is a disappointmentguaranteed."

One key expectation is reporting: How much are you obligated totell the investor about your finances and operations? "Mostinvestors will ask for monthly financial statements," saysattorney Beth Wilson of business law firm Shaw Pittman in LosAngeles, "but there could also be some requirements thatshould give you pause, either in terms of the frequency orrelevance." Wilson advises BIZ Experiencess to be sure thatonerous reporting requirements don't distract them from the jobof running the business.

5. Tackle problems quickly.If there's one area that deserves rapid action, it'sdealing with a potential problem investor. At the first sign ofthings going awry, begin a clear and professional dialog.

"These conversations are hard because they'reconfrontational," says Morgenstern. "But the investor isa permanent part of your life, and it's not acceptable to havea bad relationship."

If you explain to an investor that his actions arecounterproductive, you may not only change his behavior but alsowin his respect. If you are less fortunate, you will end up with anangry investor-but you may save the company in the meantime.

Sale Pending
Bob Shallenberger is still waiting to sell the home he built withhis first financial investor but insists he has already profitedfrom the experience. By having worked with a problem investor, hesays, he now knows how to recognize an excellent one. "Justbecause you get one lemon doesn't mean you'll never buyanother car," he laughs.

Shallenberger continues to accept new investors for his realestate dealings, but these days, he looks before he leaps. He findsreputable investors he can work with, and he clearly articulatesboth his obligations and his expectations through a writtencontract. Says Shallenberger, "We'll never again be forcedto make a bad decision because we weren't prepared."

David Worrell is the author of the e-book FindingFunding, available at www.dworrell.com. Contact him at david@worrell.com.