This article are provided for information purposes only, and are not intended as legal advice.

If you are sitting on cash, should you buy a business or invest in the stock market?

September 28th, 2009

A recent report indicated that Canadians are sitting on a lot of cash and investing it in very liquid type of investments.  They are being extremely conservative.  Are you waiting for the market to improve and will only invest in a sure thing or do you buy a business and build up a business to a larger entity?  Many entrepreneurs tend to reinvest in their own businesses over the years – why?  They can control their own destiny and they can control to a certain degree the amount of risk that they are willing to take.

If you are invested in the stock market, you are hoping that the CEO of the public company operates the company profitably and there are no external factors which would then affect the stock price if they are doing a good job.  If you own your own business, you do not have to rely on a third party to operate a business where you have no say or idea what happens on a day to day basis.  If you own your own business, you may either operate it yourself or you can then have someone you appoint operate the business for you.  You are very aware of every major decision that your company makes.  The larger the company, the less risks there are as long as the company is diversified.  If the business only have three customers, then you are considerably more risky than a business with thousands of customers and compared to a business where no one customer generates more than 5% of the total revenue of the business.

Your risk tolerance will determine the size of the business that you want to buy, the amount of debt that you would like to use to finance the business.  The more debt you use, the greater the potential rewards and leverage that you can enjoy.  Keep in mind, the more debt you have, the riskier your investment will be if there is a downturn in the economy.

You can control to a certain degree the amount of risk by looking at the type of business and categorizing it into risky, moderate risk or low risk.  Then you can control the way that you purchase it, with debt, no debt, and you can control the rate of growth that the company is experiencing.  These are all the things that you cannot do if you invest in a public company.  Which one is better?

Each is the right investment for the right investor.  There is no right or wrong.  It also depends on your age.  A 95 year old widow should not be investing in private companies but a 40 year person may.  Ask your accountant, lawyer or financial planner for assistance in making your investment decision.

Filed under: Buy a business — Gary Landa @ 9:55 am

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