If you don’t want the day-to-day headaches of being directly responsible for owning and managing a business but you do like the idea of profiting from a successful one, then investing in someone else’s small business may be for you. Although this route may seem easier, few people are actually cut out to be investors in other people’s businesses. The reason: Finding and analyzing opportunities isn’t easy.
Are you astute at evaluating corporate financial statements and business strategies? Investing in a small, privately held company has much in common with investing in a publicly traded firm (as is the case when you buy stock), but it also has these differences:
- Private firms aren’t required to produce comprehensive, audited financial statements that adhere to certain accounting principles. Thus, you have a greater risk of not having sufficient or accurate information when evaluating a small, private firm.
- Unearthing private, small-business investing opportunities is harder. The best private companies that are seeking investors generally don’t advertise. Instead, they find prospective investors by networking with people such as business advisors. You can increase your chances of finding private companies to invest in by speaking with tax, legal, and financial advisors who work with small businesses. You can also find interesting opportunities through your own contacts or your experience within a given industry.
Remember:
Consider investing in someone else’s business only if you can afford to lose all of what you invest. Also, you should have sufficient assets so that whatever money you invest in small, privately held companies represents only a small portion (20 percent or less) of your total financial assets.
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