Physicians: Beware of Investing in a Side Business

May 11, 2015

The stock market has significant scrutiny and regulation. Side investments, however, are a different story, so be careful where you invest your money.

Many of the families I work with are asked to invest in a side business that is different than the one that provides their primary income. When asked what I think about it, my answer is usually, "If you control the business and have the time and interest, it is worth considering." I go on to say, "If it is a business in which you are in essence a silent partner and you just expect to be paid back your money with a nice rate of return, I would be very cautious."

Investing in another business that you have some experience in and the time to watch it carefully is fine. One of the most common such ventures that I see is to own some commercial real estate, some of which is occupied by your practice and the rest rented out. Many small businesses succeed (although the majority of them fail). Depending on the business (e.g. rental property, a franchise restaurant, or another venture), the investor/owner must obviously do a great deal of due diligence. There must also be some questioning as to the motivation for starting the new business. If it is due to a strong interest or a challenge, so be it. If it is to get rich, I'm pessimistic. I often discuss with many of my families that they have the ability to be financially comfortable by just doing what they are already doing well over a long period of time while simultaneously living well within their means. Why take on an additional user of time with financial risk when monetary success is likely already with some discipline?

If the other business means having a third party take your money with the promise to reward you from profits, there are many hurdles. Even the majority of honest, hard working individuals that run small businesses fail. What's the chance of someone else succeeding, doing all the work, and still be willing to give you a fair share of profits? I don't mean to be excessively negative, but I know of literally dozens of "blind side business" ventures that have lost their investors a great deal of money. A good question to ask is: "Why does this person want my money?" If the idea is a good one, then it should attract sophisticated investors in the know, or be lent money by an institution of some sort. If you, who knows nothing about the business and has no controlling interest is asked for money, bells should be ringing in your head.

One of the tenets of investing in businesses through the stock market is that the more concentrated the portfolio, the higher the risk. At least in the stock market, you have some significant scrutiny and regulation of what a public company is doing. A side investment in a private venture is truly blind.