What Can You Expect as an Investor in a Small Business?
Successful investors are able to recognize which investment opportunities are worth the risk and which are not. When you invest in a small business, the risk is typically greater than it would be for a larger business, especially if the small business is in the beginning stages of development. You should expect that your chances of receiving a timely return on your investment are slimmer when you invest in a small business.
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Expectations
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When you invest in a small business, there is a higher chance of losing all of your money than there would be if you had invested in a large business, according to the federal Small Business Administration (SBA). When you invest in a larger business, you can usually sell your securities if the business is going under. However, small businesses don't typically offer liquid securities like stock, so if the business shows signs of decline, you may not be able to recover any portion of your investment.
Investment Analysis
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Before deciding whether to invest in a small business, you must analyze the amount of risk associated with the investment. If the business hasn't been in operation for long, consider whether the shares are fairly priced. You must also consider whether the company's management personnel are receiving reasonable salaries for the business's stage of development. If you believe their salaries are too generous in comparison with the benefits investors are receiving, your investment may not be worth the risk. The state of Wisconsin publishes a consumer guide that encourages investors to investigate a business in great detail, warning them to "never make a small business investment that you cannot afford to lose entirely."
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Earning a Profit
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You can typically earn a profit on your small business investment by selling your shares in the public market or by receiving cash or securities when the business merges with or is acquired by another company. If you analyze the business and determine that it isn't likely to go public, merge or be purchased in the near future, it may not be a worthwhile investment.
Considerations
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Because of the risk associated with small business investments, you shouldn't invest any money that you may need for other purposes, such as healthcare or retirement. To increase the likelihood of choosing a good investment opportunity, consider investing in an industry you understand well. Investors with a large amount of available capital sometimes make smaller investments in multiple companies to increase their chances of success.
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