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If you want to buy into a business, there are a number of ways you can do it. When deciding how to invest, first familiarize yourself with these common business investment structures: equity investment, debt investment and partnership investment.
Each of these investment structures offers advantages and disadvantages; understand those details so you can better decide if investing in a business fits into your financial plan. The best choice to grow your money in this arena depends on what type of business investor you are, whether you have investment partners and your overall investment strategy. Here are seven ways you can invest in a business.
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1. Ownership Investment
If you make an equity investment in a company, you receive shares of stock that represent your ownership. For example, if you buy 10,000 shares of stock in a company that has 100,000 outstanding shares, you own 10 percent of the company.
If you become a majority owner of a company — meaning you own more than 50 percent — you might have total control over its operations. Your majority of owner's equity can be an asset if you're experienced in your field because you can use your expertise to help the company's value grow.
The downside of equity investing is that you aren't guaranteed any capital returns. You're entitled to share in company profits, but you might not receive any interest payments.
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2. Debt Investment
A debt investment is essentially a loan. Because businesses need capital to operate, they accept loans from investors in exchange for interest payments.
As a debt investor, you won't directly share in a company's profits. You will, however, receive regular payments until the maturity date of your loan, at which time you'll receive your original investment back. Although there's no guarantee of returns on a debt investment if the company fails, you'll rank above equity holders in terms of distributions. If there aren't any assets left to distribute, however, you'll get nothing.
It's crucial to assess a private company's creditworthiness before you invest, which can be tough. Although independent rating services like Moody's provide ratings on the credit quality of publicly traded companies, they aren't always accessible for private credit investments.
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3. Investment Partners
An investment partnership consists of a group of investors that pools its money for investment purposes. Each partner shares in the company's profits or losses based on his percentage of owner's equity.
You can be a general partner or a limited partner. As a general partner, you're in charge of the partnership — you can direct how the investments are utilized. You're also liable, however, for any decisions you make, including financial obligations. As a limited partner, you typically serve as a passive participant in the partnership and have no financial obligations other than your original investment.
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4. Public vs. Private Investment
A public company has its common stock shares available for purchase by anyone on the open market, such as through The New York Stock Exchange. Although private companies' structures usually mirror public companies', investing in them can be more difficult because they don't offer publicly traded shares. Private equity investments are also less liquid than public investments because you can't sell your shares on a public exchange.
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5. Venture Capital
Venture capitalists invest in startup companies, getting in on the ground floor and hoping for a big payoff if the company goes public. Venture capital is inherently risky, however, because new companies have a high risk of failure.
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6. Angel Investors
Angel investors typically invest in private companies right before venture capital investors. Angel investments generally run from $25,000 to $100,000, and investors receive shares of stock in return for their money.
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7. Franchise Opportunities
If you want to buy a business that already exists but make it your own, consider a franchise opportunity. When you invest in a franchise, you benefit from the name recognition of an established brand — like McDonald's — in exchange for offering specific products and services. You own the specific franchise business you open, but you must adhere to the restrictions of the parent company.
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About the Author
John Csiszar
After earning a B.A. in English with a Specialization in Business from UCLA, John Csiszar worked in the financial services industry as a registered representative for 18 years. Along the way, Csiszar earned both Certified Financial Planner and Registered Investment Adviser designations, in addition to being licensed as a life agent, while working for both a major Wall Street wirehouse and for his own investment advisory firm. During his time as an advisor, Csiszar managed over $100 million in client assets while providing individualized investment plans for hundreds of clients.
