3 Ways to Ensure Buying a Business is Less Risky than Other Investments

‘But isn’t this too risky? Why didn’t you put this money in index funds or something?’

This is what my friend Tom said after I told him that we bought 50% of a MOT and motor service garage.

(Before I go any further, I’d like to explain for the benefit of my readers outside the UK that ‘MOT’ is an annual vehicle safety, roadworthiness and exhaust emission test.)

Tom is a very financially literate guy; he knows a lot about investing. In fact, I can safely tell you that I wish my son grows up to be like Tom (and hope that this doesn’t sound spooky). Still, there was a bit of explaining to do; on my side, of course.

Why would a university professor be buying a business? And why would she be buying a business that has nothing at all in common with her core competence and expertise?

Frankly, I know next to nothing about cars; can’t be bothered to learn either. I suppose if I were to be buying a business you’d imagine it would be an academic journal; or a publishing house. Or even a blog.

Today, I’ll tell you why buying a business – in my case buying an MOT and motor service garage – is potentially less risky than almost any other investment around.

Okay, correction. This is potentially less risky than any other investment with the exception of the investment you make in yourself.

Now, we all know that investments vary immensely according to the level of risk they entail.

On the one hand of the risk spectrum, we get FX trading and spread betting. These are generally seen as fairly high risk; so much so that many people would tell you that FX trading is a big gamble and you should never do it. My take on this one?

Well, the difference between gambling and investing is about ‘knowledge and discipline’. FX trading can be high risk and you can lose a lot. You could also lower the risk by: a) not risking too much (remember that there is a very large margin); b) select a reliable platform and read carefully all the rules; and c) never trade currencies that are exposed to direct politics (like the Swiss franc).

Next you have the moderate risk and return investment instruments like stocks and shares, investment trusts and index funds.

On the other hand of the risk spectrum, you get the investment instruments that carry very low level of risk. These include certificates of deposit, different kinds of bonds and annuities. The problem with these is that they are low risk but also (usually) very low return. In most cases it really doesn’t matter whether you keep your money in a savings account or in one of these instruments.

And do you know what?

Buying a business that meets the three conditions I’ll tell you about – in our case, buying a MOT and car service garage – doesn’t fit anywhere in this groups of investment.

This is because it is very, very low risk and (potentially) very high return investment.

Here are the three ways in which you can ensure that buying a business works the same way for you as well.

Buying a Business Rule 1: Make sure the business meets at least one of The Money Principle Criteria

Do you remember when I told you about the three kinds of (nearly) fail-proof business?

Well, you probably don’t remember so if you’d like a refresher check it out here. To recap the three kinds of fail-proof business:

• Turn rubbish into value (and get paid at both ends);
• Provide the conditions for success (functioning) in another sphere or occupation; and
• Ride on dreams, aspirations and vanity.

The MOT and car service garage we bought fits in the second group: it matters little what happens to the car industry or the economy there will be technical safety and other requirements that cars will have to meet. And it doesn’t matter whether the economy is in recession and people’s pockets are getting less deep: they’ll have to have their cars checked and mended if these are to stay on the road.

Buying a Business Rule 2: Keep maximum control

You know what usually bothers me with investing?

That apart from investing in myself, I have very little control over what happens to my investments.

For example, I take great pride in my Exelixis shares doing so well (approximately 75% up since I bought them four months ago) but let’s face it: I just chose a company with promise and was lucky that their trials turned out good.

When buying a business – or a considerable share of it – you have maximum control over how it develops. Growing it may take some learning, you may make some mistakes but it is up to you.

Remember that no one else will look after your business, as you can look after it.

Buying a Business Rule 3: Get all the help you could get

When buying a business – or buying into a business – you need to make sure that you identify what help you need and where best to get it if this investment is to be a great success.

And remember that it is not absolutely necessary that you know the business to invest in it. In my case, when I bought an internet based business I already knew how it works (and I still had people to help me figure it out) – this business returned the initial outlay in eight months (and have been making steady money since).

I don’t understand, or have any interest in, cars and we own 50% of an MOT and service garage. Mental?

Not really. We bought the garage in partnership with someone who knows everything about cars and is as eager as we are to grow the business and make it a great success. We contribute to the best of our competence. For instance, John deals with IT systems and regulation and I beautify the business.

Okay, just kidding – I contribute ideas and financial control.

Finally…

Investing today is hard and the chances are most everyday investors will lose money. (I’m talking about the ‘traditional’ investment vehicles here.)

And while many would see buying a business, or starting one, as very risky I hope to have convinced you that it is much safer than most other investments: you just have to do the right things by keeping in mind the three ways to ensure that.