Sometimes I find the stock market to work a bit too slow for my personal speed. I like investing in businesses as a strategy for building wealth and income. However, this approach may not work best for everyone depending on their long-term financial goals.
Even though owning or investing in a business can make you a lot of money, there is also a lot of risk involved. An investment into the stock market will not usually result in a complete loss of your funds. This can actually happen with business investing though, so you have to be prepared for that possibility before you decide to try it. I’ve put together this guide to help you decide if investing in a business will be right for you and to give you some tips to get started.
Complete Investment Risk & Financial Liability
One thing that is very important to understand before you invest in any business is that there is a lot of risk involved. The first part of this risk is your initial investment amount. No matter how great a business opportunity sounds, you have to consider that it is possible for you to lose 100% of your investment. If losing all of that money will completely bankrupt you or put you in a position where you can’t pay your bills, don’t invest.
A second aspect of business risk is liability. A business can be held liable for damages in a wide variety of situations. Employees or customers can get hurt and sue. Your company may simply not be able to pay an invoice for inventory that was already received. I’m not a lawyer and won’t advise you on legalities (I get help from professionals for those matters), but you need to be aware of whether you can be held personally liable for business losses.
These risks are not deal breakers and can be managed to obtain the potential huge rewards that can come along with owning a business. However, you must be aware of them so you can be proactive to face potential issues that could arise in the future. Only invest what you can afford to lose entirely. Get insurance and/or set up the proper legal protections to help protected against a variety of potential losses.
I also believe it is important for you to identify your personal financial goals with business investing. Do you want to get rich as fast as possible, or do you simply want to build a legacy to pass along to your family one day? Some businesses can provide short-term wealth while others are more of a long-term investment that you won’t see a penny from for years.
You also need to be aware of whether you need an investment to make you an income each money. If you do work for the business, you may be able to get a paycheck. However, withdrawing a sum of money from the business profits as a part owner can only be done if you have those arrangements in your contract ahead of time. Do not make the mistake of conducting a blind investment and then trying to tell them after the fact that you need a certain amount of money each month.
Many business investments are considered more long-term. If you ever see money from them, it will be years down the road and sometimes even a decade or more. Buying part ownership of a business may give you shares that you will be required to hold for a certain period of time. You may even need to wait until the company goes public before you can cash out your investment. Be aware of the terms of the deal you are arranging and make sure they will work for your personal financial goals.
Choosing a Business Industry
The general industry of the business you decide to invest in can easily make or break your chances of success. Unfortunately, there isn’t a magical way to solve this problem either. With a business, you have to think long-term. One industry might be thriving today, but the chances of it still being in that same position 5 or 10 or even 20 years from now may be poor. You have to try to decide what be successful today but can also grow as times change to stay successful in the future.
Even when you do the best possible research to make this decision, it can all come crashing down in an instant. The COVID pandemic has taught this lesson to many businesses the hard way. Things happen and people change their buying habits. Technology can be another major factor to radical shifts in business. Blockbuster used to be everywhere and made a ton of money. Today there is only one left, and it isn’t even owned by the original company. New technology killed that business, but it also could’ve been a frontrunner in that new technology if it had been smart.
Most people create a business that reflects their interests and passions. There’s certainly nothing wrong with that but be sure to consider how things might change in the future before you decide to bet your life savings on an idea. Choose wisely and a business can reward you for the rest of your life.
Silent Partners vs Hands-On Investors
Going into a business investment, you also need to figure out if you want to be involved in the business or if you’re just contributing money. Some people want to actually be a part of a business or maybe even the founder / co-founder. Others just want to invest and reap the financial rewards.
It honestly doesn’t matter which one you prefer since you can find business deals that will work for either situation. However, each individual business opportunity is likely only after one or the other type of investor.
The amount of your investment can play a major role too. If you’ll only own 1% of a company, you probably won’t be allowed to be hands-on. Someone that owns 50% of a company can demand to be hands-on whether the company likes it or not. Ask yourself what you want from a business investment and then seek out an opportunity that will match those goals.
Invest to Run Your Own Business
Anyone that insists on being hands-on is usually better off being an equal partner starting a company or even starting a business by yourself. There can be huge positives and negatives about running your own business though, so you need to be able to handle them before you choose this route.
When you’re the sole owner, you put up all of the investment capital and bear all of the risk. All decisions land on your shoulders unless you delegate those responsibilities to an employee. If it all fails and causes you to lose everything, you likely have no one to blame but yourself. You’ll also reap all of the rewards from the business if it succeeds though.
For some people this may sound like a nightmare of a situation to be in, while others live for this adventure in life. Personally, I like business investing and am a big risk-big reward kind of guy. However, I also don’t put all of my eggs into one basket either, so I’m cautious about the big risks I take. Never depend on a big risk working out or you may find yourself in a really tough situation to escape.