Millions Of People Are Investors In Stocks And Bonds, Or Mutual Funds, So It Must Be Easy.
Stocks and bonds will remain the preferred investments of some who examine your business. Even after all their due diligence, and many hours of your time, some will still follow the line of least resistance, and put their capital into stocks, bonds, and mutual funds. It is easy to do, and anything else will require more effort from them. They will not buy your business because doing so will mean too much work for them. They will invest there and continue with whatever work they are doing.
Investing in stocks and bonds directly, or indirectly through buying mutual funds not only involves one or more easily executable transactions. It is also something familiar to most prospective buyers, so it will be a comfortable thing to do. Despite the fact that most people at one time or other have lost money on one or more of these kinds of purchases.
Investing in stocks and bonds is easy and simple for a couple of reasons. First of all, it involves no negotiation of any kind. So for people that don't like negotiation, it is an advantage. Transaction fees are relatively modest so people can convince themselves that most of their money will go to buy what they intend to buy. These are not necessarily reasons for this type of investment. More probably they help people rationalize what they had intended to do out of laziness.
Another advantage favoring investing in stocks and bonds, is their liquidity. This is not merely a rationalization. It is a real advantage. Not only is there liquidity, but on direct investments in stocks and bonds, there is very little difference between the price for buying and for selling. Liquidity is significant. Consider the overriding rationale for this website.
It is intended to help you sell your business, and do so in a manner that is free of stress for you. Your business is not liquid. In fact it is quite illiquid. And understanding the difference and the liquidity advantage enjoyed by stocks and bonds will be useful to you.
If you wanted to sell 5% of your business, how would you do this? Depending on the type of business you have, it could be impossible. Or very close to it. In fact, regardless of the type of business, it would be very difficult. Forgetting the various reasons for the difficulty, they make your business illiquid, and make partial liquidity pretty much impossible. And there are times when people need some money, in amounts easily satisfied if they could partially liquidate their investments.
Investments in stocks and bonds routinely facilitate partial liquidity. The caveat is that these investments are not large ownership positions in small cap stocks. Some of these are easy to buy, but much more difficult to sell, unless over a relatively long time. So under ordinary circumstances, when an investor offers to sell 1,000 shares of ABC company at the market, no one cares whether he is liquidating 1% or his investment portfolio, or 50%. The buyer doesn't need to know anything about the seller. This is what happens when an investment is highly liquid and facilitates partial liquidity.
Something else you probably noted is that price is not negotiated directly between the stock or bond buyer and seller. It is established by the interaction between many buyers and sellers. So everything happens quickly and conveniently. If someone with this type of investment portfolio is suddenly faced with an emergency need for cash, that person can just sell that amount of his portfolio needed to meet the requirement. No need for any kind of debt.
All of this speaks to the convenience of stocks and bonds as an alternative investment to your business. It does not address the question of whether the investment made represents real value in the underlying business. That is a topic that is outside of the scope of this discussion. Just accept that you can't fool all of the people all of the time. That means that the prevailing price will be a reasonable reflection of the belief of many investors about the value of the underlying business at that time.
Investments in stocks and bonds have performed reasonably well when held over a fairly long period. However, there have been times when their performance has been awful. Investors have lost large amounts of money when they bought at the peak of business cycles. Although these passive investments have historically performed acceptably, they have not added to individual wealth the same way as owning a business has.
Most prospective buyers of your business will be aware that running most businesses involves a substantial time commitment. It is not as convenient as passive investment in stock or bonds. So, at the risk of sounding like a broken record, you job is to help them understand how your business can be run with a smaller time commitment than most others. Because you have developed, implemented, and documented cost effective business systems and processes. These enable less skilled people to accomplish what would otherwise require specialized knowledge or expertise.
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