INVESTING IN A SMALL BUSINESS

What important disclaimer must every investor in a small, privately held business consider before making an initial investment?

The disclaimer considered by many experts to be essential is that an investor should not make any investment of this type without being prepared to lose all of his investment. Although the potential for gains may be very high, the potential for losses is also very high for a variety of reasons, as described in earlier answers above.

What must an investor first consider before deciding to invest in a small, privately held company?

When deciding to make any investment, an investor must first specifically determine his principal motivation to make the investment. Is it to earn current income? Is the investment expectation to generate long-term capital gains? Is it to free yourself from the confines of your previous career? Is it to work with someone with whom you wish to work? Each individual investor is unique, and has unique reasons to make an investment. By looking at your motivations, you may create filters that enable you clearly to find the target company that makes the best fit with your investment goals.

After I decide my motivations for making the investment, what is the next logical step in deciding to invest in a small, privately held company?

The next logical step is to decide what area of competency is best suited for you by answering many questions. Some typical questions might include: What experience in specific verticals match my experiences? What industries inspire in me the most passion? What industries do I wish to avoid?

What are some important dynamics of investing in a business that every investor should consider before making the investment?

A component of both the downside and upside risk is that when you invest in a small company, you are actually making an investment in and with the business's founder or partner, who may remain, so the financial success of the company may be heavily dependent upon this person's personality, and the dynamics of your relationship. Of course, as a new partner, after making the investment, you hope to add some value to the business and assert changes that might make the business more profitable over time. But the dynamics, positive relationship, and communication abilities of the partners is important to the success of the new entity. Partners need to share the same or similar short- and long-term goals for the business. If these goals are not shared and explicitly stated and agreed upon, risk of financial underperformance increases. It is very important to consider with whom you are partnering as much as what you are buying.

 
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