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Investing in a small business

Investing in a small business has always been, is currently, and most likely always will be one of the most popular ways individuals and families begin the journey to financial independence; a way to create, nurture, and grow an asset that, when intelligently run under the right conditions, throws off surplus cash to provide not only a good standard of living, but to fund other investments.  Still, it isn't uncommon, at least in nations with an entrepreneurial history such as the United States, for a small business owner to have never owned a publicly traded share of stock or a mutual fund, opting, instead, to put everything into their own restaurant, dry cleaning business, or sporting goods store.

 Frequently, this small business grows to represent the most important financial resource the family owns, other than their primary residence.  

In today's economic and political climate, these types of small business investments are often structured as either a limited liability company or a limited partnership, with the former being the most popular due to the fact it combines many of the best attributes of corporations and partnerships.  In years past, sole proprietorships or general partnerships were more popular, which provide no protection for the owners' personal assets outside of the company.


Whether you are considering in a small business by founding one from scratch or buying into an existing company, there are typically only two types of positions you can take: 1.) Equity, or 2.) Debt.  Though there may be countless variations, all investments come back to those two foundations.

 

Equity Investments in Small Businesses

When you make an equity investment in a small business, you are buying an ownership stake.  Equity investors provide capital, almost always in the form of cash, in exchange for a percentage of the profits and losses.  The business can use this cash for a variety of things, including funding capital expenditures to expand, reducing debt, buying out other owners, building liquidity, or hiring new employees.

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