Investing In Business

You will commonly hear this refrain from successful business owners: nobody ever got rich working for somebody else. Working for somebody else means that you’re always capped by what they are willing to pay you. Work for yourself, and the limit is only what you’re willing to work for.

Businesses possess high value and low liquidity, property is of medium value and medium liquidity, while stocks are strictly a low value, high liquidity asset. Each of these investments requires you to take a different approach in order to have them serve as suitable assets rather than liabilities. Understanding where businesses fit into that triad will better equip you to maximize its value. It’s difficult to understate the importance of this: businesses have the potential to contribute far more than property and stocks combined with your overall net wealth.

Because businesses possess a low level of overall liquidity, they are not suitable as quick sources of income. While businesses add the most overall value, they cannot be sold quickly. A business takes an average of ten months to sell, whereas a piece of property might take a little more than a single month. Stocks can be sold in the space of an instant. This is why wealthy people typically keep a healthy assortment of properties and stocks on hand; businesses add the most value, but they cannot be liquidated as easily. If you find yourself in sudden need of cash, you need an asset with a higher level of liquidity to meet that crunch.

The flip side to this is that businesses add more value than anything else you can own. You have virtually no control over the price of a stock (unless you own a substantial stake in the company), and the price of property is largely dictated by market forces. Businesses are unique in that you have the power to directly add value to them. This is why having businesses in your portfolio are so important during recessions! You have little control over the value of your stocks and properties, but you can always continue to add value to a business regardless of economic conditions.  

The most difficult part of investing in businesses is that it requires you to actively invest a large amount of time and money into it when it is new. Your properties and stocks can be passively managed, but extracting the most value from your businesses requires you to get your hands dirty, so to speak. Only after you have achieved the point at which the business sustains itself can you begin to treat it as a true asset; business owners that fail to do so continue to pour money into what is essentially a liability. Remember: assets feed you, while liabilities eat you.

The endpoint of your investments in your businesses is achieved when they generate income without your direct involvement. This is the key behind the success of franchisees: they “own” their own businesses and generate continuous cash flow from them, but they don’t have to put in all the work into developing a recognized brand name and product. Once they put qualified people into their roles, the business sustains itself and maintains its value even when times are bad.

As far as assets go, businesses are the only one of the three that will actually create wealth. Nobody became a billionaire through stocks or property alone. The more value you add, the more your business is worth. Maximizing the value of your business will make it an asset that will continue to feed you until the end of your life, but you must be willing to invest the necessary time and money into making it happen! Balance your portfolio as needed, but understand that you must have a business to create true, enduring wealth.