re: Searching for yield

I'm just saying, investing in a small business isn't exactly something I'd call focusing on preservation of capital. Unless you're talking really small sums like $5-10k it seems like outsized risk imo (read the block of rambling below if you want to know why I think that, otherwise just ignore it).


Block of rambling:
Their books are likely close to useless so the bulk of your diligence is simply figuring out if the guy isn't a thief and if his business plan is reasonable (of which I don't think you could reasonably expect to do without being somewhat involved in the day to day operations of the business, especially given the accounting records), you're going to have some relatively large amount of transaction fees hiring a lawyer to draw up an agreement or loan doc, you're completely and totally illiquid whether its equity or debt financing and undoubtedly a long and potentially difficult to define payback period (just cause the note is 5 years today doesn't mean you're getting it back in 5 years), and even then its not likely you'd be able to recover anything in the event the thing goes belly up. Its definitely an outside the box idea but it seems way more risky than something I'd want to be in as a retiree, unless I was trying to start my own business. I mean we're effectively talking about angel investing.

What kind of yield would you want on something like that, debt or equity? I mean if a bank won't give them debt financing what are you going to demand? Certainly more than the bank would. One of the businesses we worked on last week is completely upside down after a management buyout + merger 3 years ago (D/A of 151%, yes, A, not E) and they just managed to refinance secured debt into an unsecured revolver to the tune of almost 50% of their entire balance sheet. Cash flow is mediocre, the audit (not comp, not review, AUDIT) makes me ashamed to be a cpa its so thin. and the projections they gave us, while full f/s, I find incredulous [especially given their track record]. shite they were in default of the major debt piece just 2 years ago. Its not 2007 but people can get financing. A lot of small businesses simply don't want it.