Q: I am interested in purchasing a partnership in an ongoing small business and/or being hired at a company and using part of my compensation to purchase equity. What channels can I use to seek such an opportunity?
--J.D., Randolph, N.J.

A: Networking with small-business owners informally will give you a start if you're looking for a promising venture to invest in. If you are interested in finding a business in your area, join some local business organizations and chambers of commerce and ask members which companies seem to be doing everything right -- that is, those that are profitable, have growth potential, and sell promising products. Then, check out several of these businesses yourself. Visit the companies, talk to the owners, and ask customers what they think of each company.

But purchasing a minority interest, especially in a small company, is risky. Your funds will be tied up in an enterprise that you won't control. Your partners will make all the crucial decisions, such as location, hours, and employee compensation. That could be particularly awkward if you're a part owner, with few decision-making rights, or an employee. And selling your interest in the future may not be an easy proposition.

No matter which strategy you choose, before you invest in a small business, by all means get in touch with a business broker, who handles purchases of very small businesses, or an intermediary, who works with medium-size businesses (in the $1 million to $20 million range). The International Business Brokers Assn. in Washington, D.C., has affiliations with brokers' groups in various states and should be able to refer you to a broker in your area. You can reach the IBBA at 703 437-4377 or www.IBBA.org. A list of brokers and of businesses that are for sale by their owners can be found at the IBBA Web site as well.

Why call a pro? A broker will have the savvy and research skills to do the due diligence that should be mandatory before you invest in a business. A broker can verify the perceived profitability and potential future of a business, and then let you know whether the asking price is justified. He or she can also devote the time required to conduct a thorough search for the right investment for you.

Robert Gurrola, immediate past president of the IBBA, says it's common for investors to spend two years or more searching for the right investment. "When you meet with a broker, spell out your acquisition criteria for him. Be as specific as possible, including your personal and financial goals and the types of businesses you would be interested in investing in," says Gurrola. "Also, prepare a statement on your own financial background and how much you are willing to invest."

Adds Gurrola: "Buying an interest in a business -- say a $3 [million] to $5 million company with good growth potential and new product development -- can be very rewarding financially if the company takes off and goes public down the road. But it's a high-risk proposition, and you need to get an expert opinion in your corner."
 

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