Sunday, January 1, 2023

Small Business Investments

Small Business Investments

Small Business Investments

State laws have been relaxed to make it easier for small businesses to raise start-up and growth funding from the public. Many investors see this as an opportunity to "get into the ground floor" of an emerging business and "win big" as small businesses become big.

Statistically, most small businesses fail in the first few years. Investments in small businesses are among the riskiest investors can make. This guide suggests factors to consider when determining whether to make a small business investment.

Risks and investment strategy

A basic principle for investing in a small business is: Never make investments in small businesses that you cannot afford to lose! 

Instead, use funds that would otherwise be used for a consumer purchase, such as a vacation or a down payment on a new boat or car.

Above all, never let a commissioned securities dealer, office or company directors convince you that the investment is not risky. Small business investments are generally difficult to convert to cash (illiquid), although the securities may technically be freely transferable. Therefore, you will usually not be able to sell your securities if the company goes downhill.

Also, the fact that the state has registered the offer does not mean that the particular investment will be successful. The state does not evaluate or endorse any investment. If someone suggests otherwise, they are breaking the law.

If you plan to invest a large amount of money in a small business, you should consider investing smaller amounts in multiple small businesses. A few very successful investments can offset the unsuccessful ones. However, even when using this strategy, only invest money that you can afford to lose.

Analyzing the investment

Although there is no magic formula for making successful investment decisions, professional venture capitalists consider certain factors to be important. Some questions to consider are:

Ø How long has the company been in business? If you are a new company or have only a short operating history, are you being asked to pay more than the shares are worth?

Ø Consider whether management is treating investors unfairly by taking salaries or other benefits that are too high in view of the company's stage of development, or by retaining an excessive amount of company stock compared to the amount they will receive The investors. For example, does the public contribute 80 percent of the money but only receive 10 percent of the company's shares?

Ø How much experience does the management have in the industry and in a small company? How successful were the managers in previous businesses?

Ø Do you know enough about the industry to be able to evaluate the company and make a smart investment?

Ø Does the company have a realistic marketing plan and does it have the resources to market the product or service successfully?

Ø How or when will you get a return on your investment?

Earn money with your investment

The two classic methods of making money from a small business investment are reselling shares on the public stock markets after a public offering and receiving cash or marketable securities in a merger or other acquisition of the business.

If the business is not likely to go public or be sold within a reasonable time (i.e., a closely held or family corporation), it may not be a good investment for you, despite its prospects for success, because to the lack of opportunity to profit from the investment. The management of a successful private company may receive a good return indefinitely through salaries and bonuses, but there are unlikely to be enough earnings to pay dividends in proportion to the risk of the investment.

Other suggestions

Investors must receive an information document, a prospectus, before making a final decision to invest. You should read this material before investing.

Even the best deals from small companies are very risky. If you have a nagging sense of doubt, there's probably a good reason for it. Good investments are based on solid business criteria and not on emotions. If you're not entirely comfortable, the best approach is often not to invest. There will be many other opportunities. Don't let a stock seller pressure you into making a decision.

It's usually a good idea to see company management face-to-face to assess them. Focus on the experiencence and history of achievement rather than a smooth sales presentation. If possible, bring along a sophisticated businessperson to help you with your analysis. Beware of any information that differs from or is not included in the disclosure document. All material information is required by law to be in the disclosure document. Immediately report any problems to your state's Office of the Securities Commissioner.


More public investors are "getting into the ground floor" by investing in small businesses. When successful, these businesses improve the economy and create jobs. They can also provide new investment oppo