Everyday everyone is making investments. It may be an investment in your future. It maybe the purchase of a commodity. It may be an investment in a business opportunity.
At its most basic level, an investment is an action where you give something with the expectation, but not the certainty, of getting back something of greater value in the future.
An investment has three primary components:
- A change of value
- A period of time
- An uncertainty as to the outcome.
An understanding of these three components is necessary to making an investment decision: to invest or not to invest in a craft brewing business?
It is not an investment when you give up something of value and get something of equivalent value. This is a purchase. You may get a good deal on your purchase and you may be able to resell what you purchased for more money, but still that is not an investment. This is inventory.
It is not an investment when you give up something of value and get something of greater value immediately. This is a gambling bet.
It is not an investment when it’s “a sure thing”! Since very few things in life are guaranteed, this component is the hardest thing to wrap your mind around. Every investment has a ‘risk’ that things will not work out as planned. In some cases, the risk is managed by spreading the risk over several opportunities (this is called insurance) or the risk is covered by something else of value (this is called collateral).
As you can see, whether something is an investment or not is open to interpretation and debate. However, this post and the other posts in this series are focused on craft brewing businesses. This will help simplify our analysis.
What you give up of value when making an investment may be your money, your time, your reputation or anything else that you have of value.
A common example of investing in a craft brewing business would be for you to give up cash for an equity ownership position. At some time in the future, you may receive back cash in a greater amount than you invested. In making the investment decision, you must ask:
- How much to I give up and how much may I get back
- When do I get my money back
- What are the chances that I do not get all of the money I expect or that I may possibly lose some of my money
A craft brewing business seeking your investment should be able to clearly and concisely answer these questions.
You will have more questions to be answered. These questions and preferred answers will be the subject of future posts.
Karl Dakin, Executive Director
Brewing Investors Guild