Evaluating Companies: 7 Key Questions for Direct Private Investments


Private investors play a crucial role in providing capital to businesses, supporting their growth and innovation. However, choosing the right opportunity can be difficult.

Before getting too deep in the weeds in your analysis, Bruce Roberts, CEO of Carofin, an investment bank, recommends using a framework developed over two decades to efficiently guide a prospective private investor to a basic, but more comprehensive picture of an operating company. While not exhaustive, these questions provide a clear perspective from which to conduct more detailed due diligence.

Question 1: What Does the Company Do?

Understanding the core reason a business exists is fundamental for investors. A clear and concise explanation of what a company does will not only allow investors to assess the potential value of the business but also indicate its ability to attract customers, employees, and other investors. The company’s mission, products or services, target market and why customers will be motivated to buy those products or services should be clearly communicated to demonstrate a strong value proposition.

Question 2: “Who” is the Company?

The success of a business most often depends on its leadership team. Have the managers built smaller businesses and managed to make them profitable before? In the same industry? The success of the Issuer is more dependent upon the management’s skills, industry knowledge, work ethic and moral values of the company’s leaders than any other factor. Investors should become familiar with the background and expertise of the individuals behind the company and, if not comfortable, should walk away from the investment (see “Is this the entrepreneur’s first rodeo?” for more insights).

Question 3: In What Stage is the Issuer?

Early stage companies present far different opportunities to investors than do later-stage ones. Their funding requirements, growth potential, and risk levels will differ. For example, many young companies don’t have an established customer base; the business model may still be untested or unproven; and revenue projections are just that – the company cannot draw upon previous years’ results. Whereas growth-stage or later-stage companies are generating revenues, may be profitable, and may have an expanding base of repeat customers. Appropriate security structures for one stage of a company may not be suitable for a different stage Issuer.

Question 4: Who are Their Customers?

Knowing the target market and the purchasing process is essential for investors. A B2B company’s sales cycle may take months – even years. A B2C consumer product company, for example, may generate new customers daily. How large is the market and, importantly, what motivates the customer to purchase this “new” product or to switch from one product or service to another? Can new competition enter the market easily, or are there barriers that will protect this Issuer? Understanding the customer profile, including their decision-making process, motivations, and preferences, will provide valuable insights into the company’s potential for success (see “Customers, or a lack thereof” for more information).

Question 5: How is the Product or Service Produced?

To begin, considerations vary widely for service businesses versus product manufacturers. If an early stage company, execution at the pre-production stage is going to heavily affect the success or failure of the company. Is the management team in place, or is the capital being used to build the team? Is the company in a heavily regulated industry like financial services or healthcare, or are government approvals needed to bring products to market? Are suppliers local, and can geopolitical events disrupt its supply chain?

Investors need to grasp how a business operates. Understanding the company’s operational mechanics and competitive advantages will enable investors to assess its potential for growth and long-term success.

Question 6: How Does the Company Make Money?

Just as a family watches its bottom line, so should a business. No matter how much the wage earners deliver, if their expenses exceed revenues, the family’s finances are not sustainable.

Likewise, a company needs to generate positive margins to succeed. If an Issuer can’t clearly communicate what it generates per unit or per contract, an investor cannot understand whether the company has a viable business model. The gross margin percentage equals (total revenues minus the cost of goods sold (COGS)) divided by revenues. The higher the margin, the more positive the model. This formula helps explain how big the business needs to grow to be profitable. It also can help illustrate whether it will be able to pay dividends to investors.

Before considering making an investment, investors should have a clear view on the company’s profitability. A company should utilize invested funds to advance that same profit margin.

Question 7: How Will Investors be Paid Back?

Investors, in the end, are interested in private investments to make money. That means a return of and return on their initial investment. An Issuer should be able to provide a clear picture of how that’s expected to happen, depending on whether it’s a debt or equity investment. A Note will have a fixed schedule for the payment of interest and return of principal. It will also define the maturity date (when the principal will have been repaid). On the other hand, equity investments have no fixed maturity and won’t necessarily generate current income. However, an Issuer should provide investors with insight regarding a potential liquidity event, potential IPO, and/or possible suitors for the company. Before conducting deeper due diligence, make sure the Issuer has set clear expectations.


By asking these seven key questions, private investors can gain a clear but more comprehensive perspective of an enterprise and determine whether the investment is worth further consideration. These questions enable investors to evaluate the core of the business, its leadership, stage, target market, business model, profit margins, and investment return expectations.

This framework, which has served Carofin well, should help simplify the decision to pass or to go deep.

Please enjoy our latest episode of the Direct Private Investments Show here. Feel free also to read a companion white paper, “Seven Key Questions for Evaluating a Private Company” and another relevant piece called “What’s a Good Deal.”

If you’re interested in considering direct private investments, please go here.

Thank you for your support, and feel free to reach out with comments and suggestions to our Knowledge Base materials.





In the interest of accessibility, here are some terms that any investor should be familiary with.