Small Business Investing

Investing in a Small Business

Why is the acquisition of a company a highly risky form of investing?

Acquiring a private company is a highly risky form of investing because such investments offer nearly no protection to the downside risk of owning a business. If the company has a bad month and requires additional capital to stay afloat, owners of the business typically must provide this capital immediately. If the company is not making a profit, and therefore is not distributing earnings to shareholders, the new owner will not generate any return on the initial investment. Private ownership may also require an inordinate amount of time to see returns, much more than usually assumed when analyzing the transaction. Depending on the unique circumstances of the company, it could run out of cash and file for bankruptcy. In this case, the investor loses all of his initial investment.


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